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The IRS applies 9 standards to see if a business is really the taxpayer's hobby. [Treasury Regs §1.183-2] If the business truly is a business and the portion of the home used for business qualifies as a home office, the IRS allows certain expense deductions. To qualify as a deduction, the expense must be:

•  ordinary (normal, customary or usual);
•  necessary (appropriate or helpful for the particular business, such as property insurance for a home office), and
•  reasonable—e.g., family members’ salaries must be reasonable for the level of work that they do for the business.

The IRS will let you deduct:

• proportional home mortgage interest expenses;
• proportional property tax expense;
• pharmaceuticals and most medical expenses;
• state and local income tax expenses;
• charitable contributions; and
• some investment expenses.

The IRS will not let you deduct:

• personal residence operations costs;
• salaries paid to children for answering phones, washing cars and related tasks;
• education deductions from wrongfully paid salaries;
• excessive car and truck expenses for vehicles driven for business and personal use;
• personal furniture, home entertainment equipment, children’s toys, etc.;
• personal travel and entertainment where the rationale that everyone is a potential client.

Fast-buck shortcuts for cutting income can cost you more in interest and penalties than they are worth. 

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