- Another technique for trying to evade taxes
involves claiming personal expenses
as tax deductible business expenses.
Now, this is not a how to lesson.
I'm telling you what not to do.
Now, this issue can be particularly difficult
with small businesses in which it can be messy
to separate personal activities from business activities.
Two common abuses here involve
first, the cost of an office in the home,
and second, the cost of using a personal car
for business purposes.
In general, the tax rules are quite restrictive.
With regard to a home office, the IRS rule
is deduction for home office use
of a portion of a residence is allowed
only if that portion is exclusively used
on a regular basis for business purposes.
Remember, exclusively used on a regular basis,
not partially used on an occasional basis.
The home office deduction is only for people
who have their own business.
And is not generally available
to people who are paid wages,
but then work from home, telecommuters for example.
Now, a deduction is available to telecommuters
if working from home is for the employers convenience.
Such as if the employer doesn't have office space
for the employee at the regular business location.
Now, with regard to using a personal car
for businesses purposes, the IRS rule is as follows,
if you use your car for both business
and personal purposes, you may deduct
only the cost of its business use.
Now, you can compute your business deduction
using a standard mileage rate.
Be very careful here.
The Internal Revenue Service is quite good
at detecting abuses in these areas.
Another common tax evasion strategy
is paying above market compensation
to children or other relatives
working in a family business.
Now, working together in a business
is a great way to solidify family ties.
However, for income tax reporting,
the compensation must be reasonable.
For example, for tax purposes,
you can't claim a business deduction
of 30 dollars per hour when the family member
who did the work, should typically only
be paid about 15 dollars per hour.
In addition, you must keep routine
family chores separate from business work.
You can't claim a business deduction
when paying children to mow the family lawn,
or clean the family house.
Finally, and it always amazes me what people
will try to get away with,
you cannot deduct the routine cost
of supporting children, meals, education,
and stuff like that.
Don't try this and expect to get away with it.
If in your small business, you employ relatives,
the burden of proof is on you
to demonstrate that your family members
working in the business were being
compensated a reasonable amount.
Now, as you might imagine, finding
and prosecuting all cases of tax evasion is impossible.
An income tax system works only if there's
a high level of voluntary compliance.
Now, how big of a problem is unreported income?
In Panama for example, the World Bank estimates
that the unreported income is estimated
to measure 64 percent of the gross domestic product.
In Zimbabwe, the percentage is 59 percent.
In Russia, this shadow, untaxed economy
is estimated to be 46 percent of GDP.
In Italy, 26 percent, Germany, 17 percent.
In the United States, it's estimated
that just 8.6 of a percent of GDP
goes unreported as income for taxing purposes.
Who pays when others do not pay their taxes?
Well, the rest of us do.
Now, remember structuring your activities
to pay the minimum amount of tax required
by the law, is good tax planning.
Concealing income or falsifying deductions
in order to pay less tax than legally
required is tax evasion.
Tax planning, that's smart.
Tax evasion, that's a crime.