In these strained economic times we are again inundated with books that advocate going into a self-employed business as a terrific way to pay no tax. Think of it as, self-employment as tax shelter.
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, Jeff Schnepper, author of How To Pay Zero Taxes, who glibly promises that “you can magically turn personal expenses into tax deductions.” His online 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 as a tax-avoidance device — promising that with a little ingenuity one can reduce taxes down to zero.
In more than one book the authors’ contrivances feature a W-2 person who creates a self-employed sideline that allows him to convert personal expenses into business write-offs. An alternative scenario has one spouse with a W-2 job and the other spouse fabricates the self-employed job. As to which spouse is self-employed, it is determined exclusively by 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 or Mark Zuckerberg got started in business in order to deduct their personal expenses?
The Schnepper approach is blatantly recommended in Robert A. Cooke’s book, Doing Business Tax-Free. He writes on page 3:
“How then can you reduce your taxes to zero? You will need to operate your own business. Then you will need to operate that business in such a way that expenses of operating the business will offset all other income, or a substantial part of it. As this is the only method of tax elimination that is practicable and legal for most of us, it is the method to which most of the rest of the book is devoted.”
Cooke’s advice appears to violate the IRS rule that in order for you to be engaged in a business rather than a hobby the goal must be to make a profit. It sounds, however, like Cooke does not have profit in mind, but tax avoidance.
It’s the glib but muddled counsel of the tax shelter promoters that gets the IRS breathing down our necks and gives us, the legitimate self-employed, 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.