SELF-EMPLOYMENT AS TAX SHELTER Tax season is upon us and we are again inundated with books that advocate going into an indie business as a terrific way to pay no tax.
Promotions for these worse than worthless and wrongheaded books are all over the web and at supermarket check-outs.
The epitome of this approach to self-employment is a self-appointed money guru who glibly promises that "you can magically turn personal expenses into tax deductions." His on-line bag-of-tricks invariably shows that outsmarting the IRS is a piece of cake and that any taxpayer armed with his book and some wit can't lose.
Writers and pluggers of these books are more interested in tax consequences than in an indie business. That's putting the cart before the horse, at best. At worst it may suggest to gullible readers that they can set up a sham business to cut taxes -- a move that could be a big mistake.
These books advocate self-employment solely as a tax-avoidance device -- promising that with a little ingenuity one can reduce taxes down to zero.
In more than one book the author's contrivances usually feature a W-2 person who creates a self-employed sideline that allows him to convert personal expenses into business write-offs. As an alternative scenario he has one spouse with a W-2 job and the other spouse fabricates the self-employed job. "Which spouse should create the deductions?" is one of the questions the author asks, exclusively from the point of view of which spouse can generate higher deductions.
In real life, decisions about self-employment are not made that way - one spouse may have a W-2 job for the sake of regular and steady income or health insurance coverage while the other tries a hand at the riskier and more irregular income of self-employment.
Don't get me wrong -- I'm for taking every deduction legally possible, but going into business for that purpose is not what made America great or made any business succeed. Do you think Bill Gates or Oprah got started in business in order to deduct their personal expenses?
It's the glib but muddled counsel of the tax shelter promoters that gets the IRS breathing down our necks and gives us legitimate self-employeds a bad name. Remember, for the IRS to consider your activity a business you must have a profit motive not a tax reduction motive!
If you want to learn more, here are some related posts from my blog.
