Home Based Business

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Home-Based Business Tax Avoidance Schemes - Beware

Home-Based Business

Facts About Home-Based Businesses

In order to deduct expenses related to the business use of your home, you must carry-on a "bona fide" business, as well as meet other specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for the business use of your home, you must meet both of the following tests:

Your use of the business part of your home must be:
  • Exclusive

  • Regular, and

  • For your trade or business.

The business part of your home must be one of the following:
  • Your principle place of business,

  • A place where you meet and deal with customers in the normal course of your trade or business, or

  • A separate structure you use in connection with your trade or business.

Home Based Business Tax Avoidance Schemes
Scam home-based businesses and tax avoidance promotions have gained popularity over the last few years for a variety of reasons, including:

  • The desire of individuals to reduce the amount of taxes they pay.
  • Unscrupulous promoters selling tax avoidance and audit assistance packages.
  • Taxpayers being advised they can deduct all or most of their home and other personal assets as business expenses.

Personal Expenses or Business Expenses?
Most taxpayers with home-based businesses accurately report their income and expenses, while still enjoying the benefits that a home-based business can offer.

However, some individuals have received advice that they can operate any type of unprofitable "business" out of their home and claim personal expenses as business expenses. Nondeductible personal living expenses cannot be transformed into deductible business expenses, regardless of how convincing the information in marketing materials may seem.

The following are a few examples of items that are generally not deductible as business expenses:

  • Deducting all or most of the cost and operation of a personal residence. For example, placing a calendar, desk, file cabinet, telephone or other business item in each room does not increase the amount that can be deducted. Taxpayers should always be aware of depreciation recapture rules when assets are later sold.
  • 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.
  • Deducting personal travel, meals, and entertainment under the guise that everyone your encounter is a potential client.

Click here for more information on home business expenses that are deductible, and search for: business expenses.

Any investment scheme or promotion that claims to allow a person to deduct what would normally be personal expenses and not ordinary and necessary business expenses should be considered highly suspect. As always, a business must truely exist prior to claiming any business expenses.