Many small business owners are considering last-minute actions to reduce their tax burden. Most will do so using deductions allowed by the Internal Revenue Service. Some, however, may be tempted to succumb to home-based business tax schemes. The Better Business Bureau is joining with the IRS to warn that participating in such schemes may result in repayment of taxes owed, back interest, penalties and possibly imprisonment and fines.
Despite claims made by marketers of these schemes, personal living or family expenses cannot be transformed into deductible business expenses. It is equally troublesome to claim a bogus home business. Expenses must be “ordinary and necessary” in relation to a legitimate business activity, and satisfy all other requirements in order to be deductible business expenses on a tax return.
Beware of promoters who sell tax avoidance or audit assistant packages that make any of the following claims, which are generally not deductible as business expenses:
- Deducting all or more of the cost and operation of a personal residence. (Placing a calendar, file cabinet, telephone or other business-related item in each room does not increase the amount that can be deducted!);
- Deducting a portion of the total house payment if the business is not real;
- Paying children a salary (e.g. for answering telephones, washing cars, etc.);
- Deducting education expenses from salaries paid to children wrongfully claimed as employees;
- Deducting excessive car and truck expenses when the vehicle was used for both personal and business use;
- Deducting personal furniture, home entertainment equipment, children’s toys, etc.; and/or
- Deducting personal travel, meals, and entertainment under the guise that everyone is a potential client.
Taxpayers are further advised that keeping detailed records does not alone make an expense deductible. Abusive promoters who claim that maintaining detailed records of your activities and the expenses you incur will convert personal, living, or family expenses into deductible business expenses are wrong!
The IRS warns that even innocent taxpayers involved in these schemes can face a staggering amount of back interest and penalties. Taxpayers should seek independent professional tax advice if they have questions concerning deductible business expenses. Additional information on this and related issues can be found at the IRS Web site at www.irs.gov.