If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. The home office deduction is available for homeowners and renters, and applies to all types of homes, from apartments to mobile homes.
However, the Internet may provide a new medium for promoters to sponsor illegal tax avoidance schemes. Many of these schemes involve the use of fictitious online businesses including online retail and services, online auction sales, and bartering. Some of these tax avoidance schemes suggest the conversion of a hobby or recreational activity into a “business” in order to claim personal expenses improperly as business expenses.
Taxpayers should regard as highly suspect 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. As always, a business must truly exist prior to claiming any business expenses.
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, your use of the business part of your home must be exclusive, regular, for your trade or business,
The business part of your home must be one of the following:
- Your principal 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.
- 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 unscrupulous promoters advise taxpayers incorrectly that they can operate any type of unprofitable “business” out of their home and claim personal expenses as business expenses. Taxpayers cannot transform nondeductible personal living expenses into deductible business expenses, regardless of how convincing the information in the promoter’s marketing materials may seem.
These 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.
- Paying children a salary for answering telephones or washing cars.
- 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 or children’s toys.
- Deducting personal travel, meals and entertainment under the guise that everyone you encounter is a potential client.
- Taxpayers should also be aware of depreciation recapture rules when assets are later sold.
If you have questions on how to amend your return, please contact the Internal Revenue Service at 800-829-1040.
For questions regarding specifics on tax schemes, or to report a possible scheme, call 866-775-7474 or send an e-mail to the IRS Tax Shelter Hotline.
- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- IRS.gov :: (keyword search Business Expenses) for more information on deductible home business expenses.
IRS Tax Shelter Hotline :: For questions regarding specifics on tax schemes
- IRS Criminal Enforcement :: additional information on home-based business tax avoidance schemes and other related issues.
- IRS Publication 587 :: Business Use of Your Home
- IRS Publication 463 :: Travel, Entertainment, Gift, and Car Expenses
IRS Publication 334 :: Tax Guide for Small Business
- IRS Publication 17 :: Your Federal Income Tax for Individuals