Should You Take a Home Office Deduction?
Another tax filing season has begun and along with it the usual advice from tax experts, financial publications, and pundits of many varieties. I am sooooo tired of hearing and reading the conventional “wisdom” offered to home-based business owners advising them to avoid the deduction for business use of their home.
Today’s culprit was the Independent Street blog from the Wall Street Journal digital network.
The usual reason given for this advice is that taking the home office deduction raises a red flag and increases the chance of an audit. To which I say, baloney! There is no evidence that this is true.
Statistics from the 2007 filing season show that for individual taxpayers (this is the category that includes people with home-based businesses who file Schedule C) audits are up 7 % overall to 1,384,563. That’s out of 134,421,400 returns filed for a rate of only 1.03%.
The greatest chances for audit (9.25%) were taxpayers with incomes over $1,000,000. Returns with incomes over 200,000 were audited at the rate of 2.87% and incomes over 100,000 at 1.77%. So if you want to reduce your chances for an audit, don’t make a million bucks!
I wholeheartedly believe that you should take all the tax deductions that you qualify for. And that’s the key. You must understand the regulations and must absolutely have the necessary documentation to prove your deductions.
If you do, there’s no reason to fear an audit.
I’ve written a book that explains the rules and regulations in plain English. It has lots of examples to help you see if your situation qualifies and it includes information on relevant court cases. It also has sample filled-in forms. You can learn more about it here: How to Save $100’s With a Home Office Deduction.
After you read it, be sure to discuss your individual circumstances with a professional tax preparer.
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January 31st, 2009 at 12:56 pm
As a tax professional, I wanted to let you know. Well said. You are exactly right. Take all the deductions you are entitled to.
February 2nd, 2009 at 2:12 pm
Sheryl is correct. I agree that a home business owner should not be afraid to take the home office deduction, but there are many things to consider and you must be prepared. To get a picture of what needs to be done, look at my U.S. Business Law and Taxes Guidesite on About.com (www.biztaxlaw.about.com).
February 2nd, 2009 at 5:52 pm
@Bruce Thanks for your support. Unfortunately, many CPAs, EAs, and other tax preparers don’t fully understand this deduction and how valuable it can be for home based biz owners.
Too many entrepreneurs get wimpy tax advice.
My posture is that if you qualify and have the necessary documentation for this deduction, you should go for it!
Hope you have a great filing season this year.
Sheryl
February 2nd, 2009 at 6:02 pm
@Jean Thanks for your comment. Yes, there are lots of considerations and home biz owners need to study the available material to make sure they understand the rules.
Your site is a great place to start. There’s also an article with a deduction estimator here on my blog on the Articles page.
By the way, I’ve been a big fan of the About.com human-powered guides for many years. I still have one of their T-shirts from a promo they did early on…the one that asks “Is anybody out there?”
Sheryl
February 2nd, 2009 at 6:48 pm
[...] Right on, Sheryl of BUSINESS START-UP SUCCESS CLUB! Your post “Should You Take a Home Office Deduction?” falls under the heading of “you took the words right out of my mouth”. I certainly agree [...]
March 18th, 2009 at 4:16 pm
[...] I’ve written about this subject more extensively here: http://sherylschuff.com/blog/taxes/home-office-deduction-chance-of-audit/ [...]
October 23rd, 2009 at 4:04 pm
[...] One of the most baffling tax tasks many entrepreneurs face is claiming the home-office deduction. It involves calculating how much of the residence is used for exclusively for business, how much of the year it is used, and then deducting a percentage of expenses based on that. The instructions are 35 pages long. Lots of self-employed home-based workers who qualify don’t claim home-office deductions because the process is so complicated. Many also consider it an audit flag because of the potential for people falsely claiming home offices (though tax pros say that’s not the case). [...]
January 31st, 2010 at 8:06 pm
Hi,
My question is, if I started a blog 6 months ago, and have only made a few hundred dollars from freelance article writing, should I deduct for home office? For website development, etc over the past year I have spent roughly $1000 so I’m thinking that even if I have no profit this year, I should consider deducting. I’m interested in your take.
BTW, I have a full-time job as well and I do have deductions such as home mortgage interest, real estate taxes, college credit, etc.
Best,
Bob
February 2nd, 2010 at 5:20 am
@Bob
Thanks for your question. Unfortunately, the amount you can take for a home office deduction is limited to the profit from your business. You’ll see this if you go through the calculations on Form 8829 Part II very carefully.
Pay particular attention to the instructions for lines 8, 15, and 26.
As far as your other business expenses are concerned (the ones that go directly on Schedule C), the IRS requires you to report all of your expenses, not just the ones you want to.
This is because of past abuse of the Earned Income Credit. Lots of people were filing Schedule C showing earned income and not reporting any expenses. Not a good thing to do!
Sheryl