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Also, be mindful of where the deduction is placed on the tax form. If someone wrongly places a particular deduction as a miscellaneous item on the front of the tax form instead of on schedule C and doesn't pay the social-security tax on it, the form will likely be flagged by the IRS automated computer, says Andrew Biebl, a CPA and principal at LarsonAllen CPAs, Consultants & Advisors. "The IRS is looking for both income tax and self-employment tax," he says.
Then there are the deductions themselves, and the dangers they entail.
Home-office deductions are the most popular write-offs, as they allow business owners to deduct a portion of their rent, utilities, home insurance, property taxes and maintenance. But don't get greedy. "If you deducted 50% of the cost of your house, I think that the IRS would look at that extraordinarily closely," says Walbert.
Vacation trips, meals and entertainment can be deducted if they're tied to a business meeting, but make sure details and the meeting's purpose are documented in the company's records. "You could go to Disneyworld for a week — four days of classes and the weekends on each end — and you can write off your Disneyworld trip," says Bob Jennings, a certified public accountant, financial planner and owner of Hurst, Jennings & Co., in Clarksville, Ind.
But don't go overboard. "I had a client a couple of weeks ago, where his business was a family business with the father, mother and son, and they decided that they'd have a business meeting in Hawaii," says Biebl. "That [deduction] would fail and the IRS is all over those little scams."
Then there's car travel, where 55 cents a mile can be deducted for business travel. "If you work from home and drive 20,000 miles a year, that's an $11,000 deduction right off the top of your taxes," says Jennings.
Even the purchase of a new car — if over 6,000 pounds — can be deducted for up to $25,000 a year. "Let's say you purchased a truck that cost $50,000 and your income that year was $100,000, you'd be able to take $25,000 as a tax deduction and only pay taxes on the other $75,000," says Gold. And the following year, the person could take the remaining difference — $25,000 — as a deduction, he says. If the car is only used half the time for business, then only half the purchase price can be deducted, he says. The sales tax on new cars purchased in 2009 can also be deducted, noted Biebl.
In 2009, the self-employed businessperson can deduct up to $250,000 related to the purchase of office furniture, equipment and other business items. Even a big-screen TV could fit into this deduction, but the business better have a good reason for it.
"Yes, you better have a good case for that one," says Perlman. "That 75-inch flat-screen TV you just had to have in your office? You never watch the football game on it — never — and you never let your kids use it," she quipped.
The one comforting thought in all this is that no matter how sloppy your records or how crazy your claims, the IRS will be seeing much worse. "We occasionally get someone trying to write off their dogs and calling them security," says Jennings.