Avoid Tax Scams and Tax Schemes in Your Home Business

You may have heard that the IRS frowns on the practice of trying to avoid taxes by setting up an illegitimate home business and taking unqualified tax deductions. It is true that the IRS is always watchful for people who attempt to use home businesses as "tax scams" and for companies that try to persuade home business owners to sign up for "tax schemes" to avoid taxes. If you have a home based business and you want to be sure that your business expenses are qualified as being tax deductible, here are some tips to help you avoid problems with the IRS:

• Establish a legitimate business. Go through the process of creating a real business with a legitimate purpose. Obtain an Employer ID Number, get a business bank account. Set up the business as a limited liability company, corporation, partnership, or other legal entity in your state. It is much easier to justify your business to the IRS if you have gone through the process of creating a real business.
  
  
• Create a record keeping system to keep good records of income and expenses. Show that you are taking in money as income and paying bills in your business name. Be careful not to mix business and personal expenses, and don't pay business bills with your personal checking account (and vice versa).
  
  
• Set aside a place in your home for "exclusive and regular" business use. Don't do any personal business in this space, no matter how tempting this might be. In other words, if you have a business office in your home, don't use this area to pay personal bills or do personal work on the computer. If you have an "exclusive and regular" business area, you can deduct a portion of your home expenses.
  
  
• Keep records of travel, entertainment, and meals expenses, to show that these are legitimate business expenses. Don't try to "pad" your entertainment spending with personal stuff.