Home Business Tax Schemes to Avoid
If you have a small home-based business, you have the right to deduct legitimate business expenses for the use of your home. But many small businesses try to avoid paying taxes by trying to trick the Internal Revenue Service and creating "bogus" home business tax avoidance schemes. These companies may try to sell you a "tax toolkit" or "tax toolbox" to help you set up a "business" for the purpose of taking illegitimate tax deductions.
The IRS warns that unwarranted and illegal deductions can result in fines and penalties, in addition to the taxes owed. So what types of home business expenses are legitimate and what types are not?
Set up a Legitimate Home Business
In order to qualify for a tax deduction, you first must have a legitimate business set up. In other words, according to the IRS, the business must have a "clear business purpose and profit motive." The best way to assure that the IRS takes your home business seriously is to go through all the steps to set up your business:
- Select a business type, such as a sole proprietorship, limited liability company, corporation, or other entity.
- Obtain an Employer ID Number (EIN), even if you will not have employees, and use this number for all business transactions.
- Set up a business checking account and use this account for all business transactions. Don't mix business and personal expenses.
Next, making sure your home office is deductible:
This article was written for general information purposes only. I am not a tax professional or financial advisor, and the information in this article should not be relied upon as tax advice. Please consult a professional (CPA, tax preparer, or financial advisor) as you prepare your taxes.
