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Deduct Your Home Office!

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Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Note, however, that qualifying for such deductions became harder under the Tax Cuts and Jobs Act of 2017 (TCJA). If you previously claimed a home office as a miscellaneous deduction on your individual income tax return, the TCJA eliminated that deduction for tax years 2018-2025. You must now file a Schedule C on Form 1040 to be eligible for the home office deduction.

What Space Can Qualify?

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet

You May be in Danger of an IRS Audit

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The last thing you want is to receive a letter from the IRS saying that you are being audited. For many, just the thought of being audited sends them into anxiety mode. Most taxpayers who are audited are selected randomly, but there are some mistakes you do not want to make that can trigger an audit. This is why it is important to get your tax return prepared accurately and timely by a trusted tax professional rather than prepare it on your own. Some of those triggers that put you in danger of an audit include:

  •  Obvious or Almost Obvious Outliers – Refrain from being an outlier without substantiation. The IRS has software that holds data typical for a number of professions and income levels. Your return is typically run through that software. If what you have on your tax return is significantly not within those typical limits, it can be flagged. Some of those items include business expenses, charitable contributions and itemized deductions. In cases where these amounts are valid but flagged, the key is being able to substantiate the numbers. The burden of proof will be on you. If you do not have the support to substantiate those numbers you will be in danger of losing the related deduction or tax benefit AND will have to pay retroactive taxes and related penalties based on the amount of the deduction you lose.
  • Incorrect calculations – This is most common among people who do their taxes on their own. The errors may occur in deductions, taxes due qualified business income etc. just to name a few. These could trigger an audit. In fact a large portion of the examination letters the IRS sends out are related to miscalculations.
  • Incomplete or Undisclosed Information – Always keep in mind that the forms you receive each year like your W2, 1099s and other tax documentation are also provided to the IRS. If the data included on those forms are not reflected on your tax return there is an automatic trigger.

The key to breezing through an audit is to keep proper documentation in an organized manner. When you have proper documents any audit issue can be resolved speedily. When you do not, the process could be a very stressful nightmare. You must maintain documents in support of ALL the deductions you take. Documentation should include receipts, charitable donation statements; mileage tracking (that meets IRS guidelines), business meals documentation (that meets IRS guidelines), credit card statements, canceled checks to name a few. Being ready for an audit with the right records at your fingertips will significantly reduce your stress if you are ever selected. Depending on how good your record-keeping is, it may even turn out to be quite a seamless process. If you need assistance deciding what documentation you need to keep, feel free to give us a call at (540)-538-6995 to schedule a time to chat with one of our trusted tax professionals.

Natasha Dornbush, CPA

www.youraccountingrelief.com

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