First, let's look at the tax issues for anyone who has a business at home. Here are a few of the tax breaks that I've found that are available to the home based business. This is not intended to be an exhaustive list nor are these items in any particular order.  And, please note that this article is a very brief and non-technical summary of some tax rules that are very complicated. And, there are substantial restrictions on some of these deductions.

1.  A deduction for home office expenses for an area used only for business. This includes depreciation plus a portion of the utilities, property taxes, insurance and home loan interest.

2.  A deduction for auto depreciation or a mileage deduction for a car used for business.

3.  A deduction for 70% (2002) of your medical insurance costs. (The rest is deductible as an itemized deduction.)

4.  A deduction for various business expenses that must be itemized if incurred by an employee.

5.  A deduction for any phone lines in excess of the first one -- if used for business.

6.  A deduction for any computer equipment, fax machine, etc. -- if used 100% for business.

7.  A deduction for any wages paid to a child for work that is actually performed. The child can then put some or all of that money into a Roth IRA that will be tax free many years from now.

8.  A larger retirement plan deduction than the IRA deduction for an employee.

9.  A medical reimbursement plan and other benefits for a spouse who is a bone fide employee.

10. Some educational expenses are fully deductible for the proprietor - but with limits.

11. Expenses for attending many kinds of seminars and conferences would be deductible.

12. A home based business is not limited by the "hobby loss" rules that only allow you to deduct losses in two out of any five consecutive years -- so long as it is a bone fide business.

These deductions are for a business owner who is organized as a proprietorship rather than as a corporation.

If a home based business is making a profit in excess of what is required for living expenses, a taxable corporation can help to reduce the total tax burden substantially. Up to $50,000 of corporate profits each year are taxed at a maximum federal tax rate of 15% -- with no self employment taxes on that retained profit. The corporation can establish a medical expense reimbursement plan to deduct 100% of any medical costs for the family. The corporation can buy term life insurance on the employees on a tax favored basis and can provide for other employee benefits such as tax free child care costs and retirement savings.