Home Business Deductions Made Simple

There are many traps for the inexperienced business person, and unfortunately the IRS will not accept ignorance as a defense for fraud when they are evaluating your home business expense deductions.

This article addresses many accounting and tax related concerns by offering smart suggestions and detailed explanations. You may find however that the information given here leads to more questions, and as you certainly know, tax regulations are not for the faint-hearted or the dull-witted.

We could simply provide a list of links to IRS articles and forms, or give you the contact telephone number and address to order these documents from the IRS. But, all of that dry reading will fail to give you the simple, understandable, everyday explanations you need for your business.

Instead we have developed a short list of allowable and important business related deductions for you. You can read only the relevant sections as you need them, or you can browse the entire article for a fuller picture of home business related expenses and applicable deductions. You might be surprised at what deductions you are allowed to make!

This article will be a valuable weapon in your fight with the taxman, as well as an invaluable resource when planning your business activities, and we hope you will enjoy this reference tool enough to recommend it to others.

Home Business Related Deduction Schemes

The Internal Revenue Service has issued a variety of consumer alerts regarding home based business schemes that appear to offer relief from taxes.

Unfortunately, the reality of this is that the promoters of these schemes provide bad advice to unwary taxpayers, which if followed, can result in fraudulent business deductions and criminal tax avoidance.

Taxpayers, who own a home based business, have been warned to carefully consider the consequences of filing a federal tax return filled with unallowable deductions.

Initially, many of these tax schemes appear quick and easy. Yet, crossing the line with bogus business or non-existent business expenses will eventually result in the business owner paying interest and penalties on top of the taxes they owe. It pays to take the time to get it right the first time!

Some examples of personal expenses that are not deductible, but, are commonly claimed as home business related deductible expenses include the following:

1. Deducting all or most of the cost and operation of a personal residence. For example, placing a calendar, file cabinet and telephone in every room does not increase the amount of the home space that can be deducted.

2. If the business is not real, deducting any portion of the total home mortgage or rent is not allowed.

3. Paying children a salary for services, such as answering telephones, washing cars, running errands and other such tasks and then deducting their salaries as a business expense is not a legal deduction.

4. Deducting educational expenses from the salaries wrongfully paid to children as employees is also not acceptable.

5. Excessive car expenses when the vehicle has been used for both business and personal matters are a common deduction that are not allowed.

6. Operating under the mask that "everyone is a potential client" does not allow for deducting personal travel, meals and entertainment.

The IRS has also seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is based on an incorrect interpretation of Section 861 and other parts of the tax law and has been refuted in court. Employers can be held responsible for back payments of employment taxes, plus penalties and interest.

It is worth noting here that employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.