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Bad Idea: Mixing Business and Home Expenses for Tax Deduction Purposes

April 5, 2017

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While some combinations, like peanut butter and jelly, seem to go together naturally, others, for example oil and water, do not mix well. For some self-employed or home-based workers, intermingling business and home expenses may appear to be a beneficial way to manage what can turn into a complex web of financial transactions. However, when expenses that are clearly for the home are written off as business purchases, taxpayers and any involved legal or tax professionals quickly cross over the line between right and wrong.

How to Lose a Mansion

One couple who chose to leap over the line of legal tax deductions was Kevin and Whitney Witasick of Stanleytown, Virginia. The couple previously owned the famous Stoneleigh mansion and its over 50 acres. The mansion, which was built by a former Virginia governor and is still on the National Register of Historic Places, was recently purchased in a foreclosure auction after the Witasicks lost it because they defaulted on their mortgage. The main force behind their financial woes was Kevin Witasick’s dishonest tax practices.

In 2009 he was convicted of two counts of tax evasion, two counts of perjury on his 1999 and 2000 tax returns and one count of failing to file taxes for 2001. The perjury occurred when Witasick claimed that 100 percent of his home and surrounding property was used for his law practice business, when in reality investigations by the IRS, USPS and FBI found that only 11 percent was actually used in his law firm’s business activities. While Kevin Witasick serves time in federal prison, he also serves as an example of what not to do.

Exaggeration is Tax Fraud

Regardless of how confusing both state and federal tax laws can be for many people, most of the general public knows that claiming 100 percent of a home and its related expenses were used for businesses purposes is not just an exaggeration, but a blatant act of tax fraud. According to the IRS, home expenses claimed as business deductions are generally denied. However, self-employed workers, as well as employees who work at home, may be able to claim business-related expenses as deductions on their taxes.

If part of a home is used “regularly and exclusively” as a principal place of business, to conduct business with customers or in relation to a business that is not specifically performed in the home, some expenses for business use of the home may be deducted. The trick here is that if any of these conditions apply, business expenses cannot be deducted for any rooms in the house used for both business and personal activities. Expenses that may be deducted are utilities, mortgage interest, insurance, repairs, and real estate taxes.

Finding a Good Mix

When it comes to taxes, mixing business and pleasure is a bad idea. To find a good mix, however, people should be diligent about separating what is wholly or partially used for directly conducting business versus what is also used for personal purposes. Use Kevin Witasik as an example of how to not end up paying court costs, legal fees and back-taxes while also serving time in a federal prison. Be sure to consult with a tax or legal professional before filing taxes that have home expenses listed as business deductions. This could help to ensure that you are not committing tax fraud, and that you remain in good standing.

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