Just because you occasionally work from home doesn’t mean you should necessarily try using the home office deduction on your federal taxes, says Alex Zorab. Zorab, a certified public accountant and partner at First American Tax Services in Chicago, explains that claiming the home office deduction can be a red flag to IRS auditors looking for people who are trying to take advantage of the system. In this article, Zorag explains his reasoning for not taking the home office deduction and tells us why he thinks most taxpayers are better off not taking it even if they might qualify.
My best recommendation to taxpayers thinking about taking the home office deduction on their federal income taxes is to be cautious about this point in the tax code. And when I say cautious, I mean very, very cautious with it, because this is one of the very auditable points with the IRS right now. Here are my five best pieces of advice for anyone deciding whether or not to take the home office deduction.
One: Ask a CPA for help.
The home office deduction can be a red flag that tells investigators at the IRS to take a closer look at your return, which is why I tell people to make sure that they have a certified public accountant take a very close look at their tax return — and whether they actually qualify for the deduction — before going ahead with the filing. This is the number one thing to make sure that you do before trying to take this deduction.
Two: Be conservative with financial estimates.
If you have looked at the tax code and determined that you qualify for the home office deduction, and you have decided to take the deduction no matter what, then my next piece of advice would be to be conservative when you take into account these numbers and closely follow the schedules on the tax returns that detail what is allowed. When someone takes the home office deduction, the IRS will take a very close look at that, so it is better to play it safe and stay conservative with the financial figures that are used.
Three: Keep meticulous records.
Anyone who is planning on using this deduction should make sure to have a backup of any numbers that he lists (that is the documents that could prove anything that was put down as a deduction). As an example, if somebody purchases a desk for the home office, then he had better make sure he has all the receipts that document how much it cost and when it was purchased. Here in my office, we even recommend that these business owners purchase dedicated cabinets to be used in their home offices for nothing but work files, since keeping personal and professional lives separate is important.
In addition, if you are trying to deduct the cost of a phone line for the office, then you should make sure that the phone line is a dedicated line for the purpose of your business only. It needs to be a special phone line for the business, not one that is ever used as a personal or family line. Every receipt and bill that goes along with expenses for a home office needs to be saved and organized, because you are putting yourself under the lights, or under scrutiny basically, when you try to take the home office deduction on your taxes.
Four: Avoid the deduction when possible.
So if you don’t have to take that home office deduction, then my advice is to just avoid it and don’t take it. That is one thing that I tell people when they come into my office and ask about whether they should take the home office deduction. If it’s not worth it, then just don’t bother with it. If it will make the difference of $100, $200, or $300, then it’s not worth the agony of worrying that you may be audited.
What is the difference of $300 or $400 if you are more likely to get into an audit, where you’ll end up spending $5,000 or $10,000, at least, trying to protect yourself anyway? The analogy I use when talking about this is that it’s like dropping a quarter on the floor and then losing a $100 bill while you were trying to look for it. It’s just not worth the expense it’s going to cost you.
Five: Try a different route.
What we can usually do for people rather than having them deduct a home office is to find them other tax credits and deductions that they might qualify for instead. Using the example of a freelance writer who shares a home office with his wife, then, I would recommend to that client that instead of trying to deduct a home office with his spouse, that he becomes a corporation and hires his wife to work for it. Then he would save money on income and expenses, and in that situation, he would be avoiding using anything like Schedule C, which is very auditable.
So what we advise clients here at First American Tax Services to do is to take a good look at their deductions and make sure they aren’t claiming anything that makes them especially susceptible to an IRS audit unless they absolutely need to claim it.
