Home-Based Business Tax Avoidance Schemes

We are all entitled to take advantage of every legal exclusion, deduction, and credit to reduce our federal income tax liability. However, we must, as taxpayers, be aware of bad advice that could result in improper and costly tax avoidance.

The taxation of home-based businesses is an area that seems to breed tax avoidance schemes. Promoters of these schemes often advise and encourage taxpayers to deduct most, if not all, of their personal expenses by setting up a fake home-based business. The Internal Revenue Service warns taxpayers that no matter how convincing the claims found in marketing materials might be, there is no legitimate way to transform non-deductible personal living expenses into deductible business expenses. In order to generate and claim business deductions, a taxpayer must have a clear business purpose and a profit motive in establishing a business. The avoidance of tax definitely does not qualify as a clear business purpose in the eyes of the IRS, and creating a bogus business can result in interest and penalties in addition to any owed taxes.

The IRS has found some common characteristics in home based business tax avoidance schemes and warns all taxpayers working from their homes to beware of the following "tax savings:"

• Deducting all or most of the personal expenses involved in operating a residence. Scheme promoters often tell unwary taxpayers that placing a piece of business equipment or a telephone in any room makes the room eligible for home-office treatment.
  
• Creating a fake home-based business to deduct a portion of the house payments.
  
• Putting the kids on the payroll. Promoters advise taxpayers to pay children a salary for minimal services and then to deduct these salaries as a business expense, but the IRS will disallow these deductions. The IRS will also not allow a taxpayer to deduct educational expenses from these wrongfully paid salaries.
  
• Taking excessive deductions for car and truck expenses for vehicles that are used for both business and personal reasons.
  
• Deducting anything and everything personal, including but not limited to the kitchen sink. Personal furniture, televisions, entertainment centers, toys, etc. are not deductible items.
  
• Tax scheme promoters love to tell unsophisticated taxpayers that there are potential clients everywhere to rationalize the deduction of personal travel, meals, and entertainment.

The IRS encourages taxpayers who encounter possible tax avoidance schemes to report them.

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