The best advantages of owning a home-based business are you can turn non-deductible expenses into tax deductions. The deductions you create for your Schedule C have a more significant impact on the total taxes you pay than do deductions on Schedule A. Schedule C deductions not only reduce federal income tax, they also reduce self-employment tax, Medicare tax, and state and local taxes.

Some favorite tax deductions for home-based businesses include the following:

• Meals and Entertainment can be 50% deductible when you are with prospective or existing clients, vendors, etc. If you are in a service business or sell products, most everyone is a potential client. It is important to follow the simple documentation guidelines issued by the IRS and to understand there are limitations. An example of a deduction you cannot take is dining out with your spouse. Even if you are business partners, the IRS says no to this. If together, you take a potential client to lunch then the meeting expense is deductible.

• Trips must be mostly business-related to be deductible. If a small element of fun is involved, you will most likely have a completely deductible trip. The deductions will not apply to a spouse who tags along, unless it is also a working trip for the spouse. Compliance with IRS regulations can be tricky, so it is best to check with your tax advisor before assuming your trip to Hawaii will be deductible.

• Utilities and other expenses for the portion of your home or apartment you use exclusively for business are powerful deductions. Without a home-based business, the most one can deduct is interest and property taxes (on Schedule A). In relation to a home-based business, a portion of utilities, maintenance, cleaning, lawn service, pest control, etc. can be deducted on a Schedule C.

• Income Shifting. Let us say you have three kids who are ages 10, 12, and 14. You can pay them to work in your business. (Children must be eight years old to be paid for working in a family-based business.) Each child can earn up to $4,700 in 2002 without paying income tax. You also have the advantage of not paying Social Security or Medicare taxes on your dependent children who work in your business. In this example, you have shifted $14,100 tax-free dollars to your kids. This is clearly better than allowance! There are rules, however. The kids have to actually work and be paid fair (not excessive) wages for their services

These are just a few of the many tax advantages available to owners of home-based businesses. It is strongly recommended you enlist a qualified tax advisor to help you learn how to document your expenses and how to legally take every deduction to which you are entitled.