So you want to work from home huh? I don’t blame you. I enjoy working from home as much as the next guy. Yes I am responsible enough to handle it. But just because you work from home, does not necessarily mean you should take a home office deduction. Why? Well, allow me to make this first point abundantly clear. Taking the home office deduction is one of those items that can very easily raise red flags with Uncle Sam. He may come out of that big government building guns blazing. The home office deduction can warrant an audit pretty easily compared to other credits and deductions. If your home office is legitimate and passes all the “tests” then take it. But know that it can cause more headaches than it relieves. Here’s a few of the rules:
1. Use your office often. Use your office exclusively. Basically, if you claim a home office deduction, you had better have a space in your home that you use exclusively to conduct business. In other words, your office should serve as your office and not your office and your den and your man cave and your bowling alley and your gift wrapping room. Further, this space should be used on the regular to conduct business.
2. Principal place of business. Your home office should be a principal place of business. You can still have another office by which you conduct business but this gets back to the point of conducting business regularly out of your house. So let’s say you are a psychiatrist meeting patients in your home but also have an office in a medical building. You may deduct the home office space used regularly and exclusively for meeting your patients. Maybe you work in a garage that is separate from your domicile. You may deduct that space that is used regularly and exclusively to conduct business. Are you seeing this regularly and exclusively language trend?
3. Employees can too. Maybe. Employees can take the home office deduction as well. But there are even more rules. So you first must pass the #1 and #2 test (see above). Further, you must be using a home office for the convenience of your employer. It can’t merely be helpful or even worse appropriate.
A general note
Audits of home office deductions can become very cavil. For example, your home office should not have any personal items in it. We have seen problems arise when clients hang photographs of themselves and their significant others inside their home office. Further problems can arise if the home office does not have a separate entrance. Among many, many other complications that can come up. There is a lot of grey area in the code that can create a lot of problems for you.
In conclusion, the home office deduction has been risky business in our experience. No not the movie with Tom Cruise. It is one of those deductions that can easily raise red flags and we often discourage taking it. Many a times the small impact it has on your tax liability results in a big headache when the desk audit letter hits your mailbox. If you legitimately pass all the “tests” then you should not feel discouraged. But the tests are hard. The tests are the final exam on quantum physics. Be sure to consult with us about it. Feel free to contact our offices if you have any questions or concerns regarding the home office deduction. Until next time folks.
