Tax Strategies That Sound Like Audit Bait but Are in the Tax Code on Purpose
Some of the strategies that sound the sketchiest are written into the code. And some that sound clever are on the IRS's list of schemes.
“What are tax strategies that sound like you'd get audited for, but are actually built into the tax code on purpose?”
The short version
- Accelerated bonus depreciation and cost segregation catch a lot of people off guard.
- Section 280A(g): renting your primary residence for 14 days or less, with that income tax-free.
- Business owners can take a home office deduction and deduct vehicle, travel and cell phone expenses.
- Not legitimate: the pitch that allocating income to a corporation makes it non-taxable.
The short answer
Accelerated bonus depreciation and cost segregation. I've seen both catch people off guard.
Strategies that are built in on purpose
Section 280A(g) lets you rent your primary residence for 14 days or less and receive that income tax-free. Business owners can potentially rent their home to their own business.
Business owners can also take a home office deduction and deduct vehicle expenses, some travel and their cell phone.
And one that isn't
The IRS keeps a list called the Dirty Dozen, covering abusive tax schemes built on misreadings of the tax code and presented as legitimate advice.
One pitch going around online claims that income allocated to a corporation isn't taxable. That's taken out of context. The tax is still paid. It's a misinterpretation of the code, not a way to avoid taxable income.
Be very careful with pitches like this. The IRS is watching them. Work with a tax advisor you can trust.
Frequently asked questions
Is cost segregation legal?
Yes. Accelerated bonus depreciation and cost segregation are in the code on purpose, and they catch a lot of people off guard.
Is allocating income to a corporation a way to avoid tax?
No. It's a misinterpretation of the code. The tax is still paid, and it's not actually a way to avoid taxable income.
What is the IRS Dirty Dozen?
It's where the IRS lists abusive tax schemes, where people take misinterpretations of the tax code and try to apply them as if they're legitimate.