You may be surprised which industries and businesses are considered a tax scam by both the IRS and many Secretaries of State. If your business falls into this category, it means you have to work harder to appear to be legitimate. That may mean audio and video testimonials on your website, recommendations by top professionals, great customer service… When you go to the California Franchise Tax Board Website, they have a link for the Top 12 tax scams. Here is the link:
The California Franchise Tax Board is aggressive. They claim to be losing between $600 million and $1 billion through tax scams and may be a big reason the state is going bankrupt. Let’s consider some of the areas that are considered tax scams by the California Franchise Tax Board:
1. Tax Shelters. These are the structures whose primary purpose is to reduce taxes with no economic loss possibilities.
2. Phony Home-Based Businesses. I am a huge fan of the home-based business owner, but California is looking at it differently. This is where a promoter (and there are lots of them) will promote a business opportunity by telling you that with a business like this, you now can write off a lot of expenses against your new business. Instead of people focused on growing a business properly, they are focused on how to use this “phony home-based business” as a tax shelter. Not good.
3. Internet Business. Are you kidding? Nope. Falls into the same category as the “phony home-based businesses.” You must run the business as a business and take necessary and ordinary expenses and document them properly.
4. Offshore accounts. This goes without saying, if you live in the U.S. you are paying tax on worldwide income. Stay away from offshore accounts as a way to lower your U.S. taxes.
5. Moving a business out of state without really moving. This is where someone will form a holding company in another state like Nevada and have it do business with the California entity to help move expenses to a lower tax state like Nevada. All transactions have to be arm’s length and legitimate.
6. Disguised Corporate Ownership. Trying to hide the ownership of your entities is bad news. The tax board or IRS may look at it as just an attempt to hide money and not pay taxes. It is always best to be up front with who the owners are and rely upon asset protection strategies to protect yourself , not hoping that privacy works (it rarely does).
Make sure if you fall into one of these categories that you take the extra steps to be viewed as a business and not as a hobby! If you are offered an opportunity in one of these categories, realize that not all home-based businesses and internet businesses are scams, that is not the point. It is that some organizations that promote those opportunities push the envelope to help “sell” their opportunity by telling you that it is all a write-off on your taxes and you should have a home-based business (a good idea), but they don’t provide the direction to actually run a business.
As the economy is challenging for many, we are hearing more people saying, “I need to make some extra money” vs. “I want to start a business.” Both are a night-and-day difference and the mindset going into any opportunity and the focus is a major challenge. The goal should be, in our opinion, to start a business, one that can operate without you at some point and create recurring income and profits for you and your family.
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About The Author: Scott Letourneau is the CEO of Fast Business Credit, Inc. When it comes to securing cash and vendor lines of credit and avoiding costly mistakes his company is the authority. For further assistance regarding the development of business credit go to http://www.FastBusinessCredit.com or call FBC at 1-888-313-6333 or 702-977-5246.