How To Avoid an IRS Audit When You Claim a Home Office Deduction
If you use a dedicated area of your home to run your business, you can claim a home office deduction. Before you start subtracting those deductions from your self-employment taxes, make sure your working space qualifies as a home office or you could be under the scrutiny of an IRS Audit. On the other hand, if you qualify, go ahead and claim it.
Here are the requirements for a home office:
Beginning on January 1, 2013, for tax returns filed during 2014, you no longer have to use the regular method for itemizing home office deductions. (The regular method remains in place for those taxpayers who can benefit from larger deductions based on higher expenses or larger home office spaces.)
Here are the simplified options for taxpayers who don't want to do all the calculating and records keeping:
Does claiming a home office deduction make your return vulnerable to an IRS audit?
The answer to that worrying question is "It depends." One Forbes Magazine contributor Robert W. Wood, puts it this way:
"Actually, there's nothing wrong with claiming [the home office deduction] but the rules are tricky and good substantiation is a must."
Using the simplified method, of course, requires less "substantiation," and the audit triggers center on the amount of home office space claimed for the deduction. Wood cites one example of an accountant who claimed one room in his home, along with an adjacent hallway and bathroom. Since the accountant's family also used the bathroom from time to time, the bathroom and hallway space could not be claimed as part of the home office deduction.
Finally, there are advantages of continuing to claim the home office deduction under the old method. Use it if:
The bottom line on the IRS audit issue, according to Barbara Weltman in an Entrepreneur Magazine online piece is this:
"[T]he fact that now more than half of all small businesses operate from home and that the IRS has created a new simplified deduction would belie the audit trigger belief. … If you're eligible for the deduction, take it!"
If you have any other questions about an IRS audit, the home office deduction, or how the IRS Fresh Start Initiative can help you, give Optima Tax Relief a call today.
Here are the requirements for a home office:
- You must use that space regularly and exclusively to conduct your business. For example, using an extra room in your home for nothing except running your business meets the exclusivity criterion.
- Your principal place of business must be your home, but...
- You can also have another location away from home for business purposes, but the IRS says that you also must use your home "substantially and regularly to conduct business."
Beginning on January 1, 2013, for tax returns filed during 2014, you no longer have to use the regular method for itemizing home office deductions. (The regular method remains in place for those taxpayers who can benefit from larger deductions based on higher expenses or larger home office spaces.)
Here are the simplified options for taxpayers who don't want to do all the calculating and records keeping:
- Multiply the square feet of your home office -- not to exceed 300 -- by five and add a dollar sign to the result. That is your deduction. (The amount cannot exceed $1,500.)
- Claim all home-related itemized deductions in full on Schedule A:
- Do not claim equipment depreciation as is still allowed on the regular method.
- Do not claim a deduction in excess of your gross income from your home business, less business expenses -- unless, of course, you want to be audited.
Does claiming a home office deduction make your return vulnerable to an IRS audit?
The answer to that worrying question is "It depends." One Forbes Magazine contributor Robert W. Wood, puts it this way:
"Actually, there's nothing wrong with claiming [the home office deduction] but the rules are tricky and good substantiation is a must."
Using the simplified method, of course, requires less "substantiation," and the audit triggers center on the amount of home office space claimed for the deduction. Wood cites one example of an accountant who claimed one room in his home, along with an adjacent hallway and bathroom. Since the accountant's family also used the bathroom from time to time, the bathroom and hallway space could not be claimed as part of the home office deduction.
Finally, there are advantages of continuing to claim the home office deduction under the old method. Use it if:
- your home office space is greater than 300 square feet
- because of high home expenses, you know that your home office deduction will exceed the simplified $1,500 maximum
- you moved during the tax year
The bottom line on the IRS audit issue, according to Barbara Weltman in an Entrepreneur Magazine online piece is this:
"[T]he fact that now more than half of all small businesses operate from home and that the IRS has created a new simplified deduction would belie the audit trigger belief. … If you're eligible for the deduction, take it!"
If you have any other questions about an IRS audit, the home office deduction, or how the IRS Fresh Start Initiative can help you, give Optima Tax Relief a call today.
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