Do you use part of your home for your business? Questions about home office deductions come up all the time with new tax clients. The topic also came up at last month’s IRS Tax Forum in Washington, DC.
A home office deduction is a potential IRS “red flag” because of how often it is abused. IRS audits find some taxpayers who inflate home expenses or take a deduction that isn’t allowed. Home office audits were described at the IRS Tax Forum, and it didn’t sound like fun. IRS auditors come to your home and use a tape measure on your home office. For real!
So how do you follow the tax rules and avoid the tape measure? A home office deduction can be taken for:
- Regular and Exclusive Use
You must regularly use part of your home exclusively for conducting business. Generally, deductions for a home office are based on the percentage of your home devoted to business use. Keep in mind that the IRS is strict about exclusive use. That means no personal items in the home office. No shared spaces like hallways or bathrooms, either.
- Principal Place of Business
You must show that you use your home as your principal place of business. Your home office must be used to substantially and regularly conduct business, such as in-person meetings with patients, clients, or customers in the normal course of your business. It’s okay if you also carry on business at another location.
If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. In addition to the tests discussed above, you must:
- Use the home office for the convenience of your employer, such as teleworking to reduce the employer’s real estate footprint. If you work at home to perform tasks around your personal schedule, a home office deduction is not allowed.
- Not rent any part of your home to your employer and use the rented portion to perform employee services for that employer.
If you qualify, the home office deduction can reduce your tax liability. Follow the rules and the IRS tape measure won’t stress you out.