Home office deduction = one-way ticket to being audited?

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tidalwave10
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Home office deduction = one-way ticket to being audited?

Post by tidalwave10 »

For a micro business, taking a home office deduction (esp. a room 100% dedicated to biz use) is evidently perfectly legit. However, in a book on Startups I'm reading, the Author claims that *others* say taking such a deduction can be a one-way ticket to being audited. Do folks agree or disagree with that statement. And if so, why or why not?

Is it true that the mere act of claiming a home office deduction significantly raises the chances one will be audited? While I'm trying to set-up operations in the most transparent and correct way possible, I'd rather err on the side of not taking deductions that might subject me to a greater probability of being audited--audits do not sound like a whole lot of fun.

In this same line of thinking, what other deductions commonly taken by micro businesses significantly increase one's chances of being audited? Not concerned about any potential audit findings themselves. Just don't relish the thought of having to go through the auditing process. And I suspect certain deductions just don't pass the risk/reward ratio test, e.g. not worth the potential trouble.

Finally, TurboTax always offers me some sort of Cross Sell while finishing my return--some sort of audit representation insurance / service, where they would assign someone to work an audit case should one find oneself in that situation. Is this a service Bogleheads have ever bought or think worthy? Or is it, like so many other Up Sells and Cross Sells, a "junk" service / pure profit to Intuit, Inc?
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Re: Home office deduction = one-way ticket to being audited?

Post by ajcp »

tidalwave10 wrote:For a micro business, taking a home office deduction (esp. a room 100% dedicated to biz use) is evidently perfectly legit. However, in a book on Startups I'm reading, the Author claims that *others* say taking such a deduction can be a one-way ticket to being audited. Do folks agree or disagree with that statement. And if so, why or why not?
Don't have a business, but that has always been my understanding. I think the problem isn't that the deduction is legit, it's that it's something less common that can be easy for someone who doesn't have one to lie about, so they flag a lot more of them.
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Re: Home office deduction = one-way ticket to being audited?

Post by PaddyMac »

We've been self-employed for two decades and have always take a sizable home office deduction (33% of space is offices and studios). We've never been audited (touching head now). Our CPA says that the it may have been a red flag years ago but that so many people are working from home now that it's not a big issue. It's a very valuable deduction to us, as it reduces your business profits BEFORE the SS and Medicare taxes. So you are not just saving Federal & State taxes, but the 15.3% Self-employment tax as well. If you have a mortgage, be sure to move a percentage of the mortgage into Business Use of the Home Form, even though it is tax deductible normally - again, this percentage reduces SE tax.

Anyone who doesn't claim a tax deduction that they are entitle to imo are either (a) nuts or (b) have books they don't want audited... :P

This year there is also a simplified home office deduction, but we use too much space to use it.
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Re: Home office deduction = one-way ticket to being audited?

Post by rustymutt »

PaddyMac wrote:We've been self-employed for two decades and have always take a sizable home office deduction (33% of space is offices and studios). We've never been audited (touching head now). Our CPA says that the it may have been a red flag years ago but that so many people are working from home now that it's not a big issue. It's a very valuable deduction to us, as it reduces your business profits BEFORE the SS and Medicare taxes. So you are not just saving Federal & State taxes, but the 13.3% Self-employment tax as well. If you have a mortgage, be sure to move a percentage of the mortgage into Business Use of the Home Form, even though it is tax deductible normally - again, this percentage reduces SE tax.

Anyone who doesn't claim a tax deduction that they are entitle to imo are either (a) nuts or (b) have books they don't want audited... :P

This year there is also a simplified home office deduction, but we use too much space to use it.
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Re: Home office deduction = one-way ticket to being audited?

Post by Rob5TCP »

If your home office is smaller than 300 square feet -- you can use the new easier home office deduction: $5 per square foot up to 300 square feet:

http://smallbusiness.foxbusiness.com/fi ... read-this/



IRS, Internal Revenue Services, taxes, tax day, tax, tax filing
REUTERS

The IRS says it is making it easier this year to file the home-office deduction.

Instead of filling out the long and complicated form 8829 as in the past, taxpayers can now take a standard deduction, according to the IRS. The standard deduction is equal to the square footage of the home office multiplied by $5 for a maximum deduction of $1,500.
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Re: Home office deduction = one-way ticket to being audited?

Post by stan1 »

Deleted, out of date.
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tidalwave10
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Re: Home office deduction = one-way ticket to being audited?

Post by tidalwave10 »

stan1 wrote:Hard to say but I would expect many people who got audited were claiming 100% use (possibly for most if not all of their house).
If you are claiming 100% use of an office and computer equipment, where are you sitting when you post to Bogleheads?
If you have a storeroom does it have Christmas decorations in it as well as supplies/merchandise?

80% of 200 square feet in a 2000 square foot house seems reasonable for a knowledge worker.
100% of 1000 square feet in a 2000 square foot house for a knowledge worker probably is an audit trigger.
Thanks Stan for the distinction. In my case, if I decide to take a home office deduction, I'd be dedicating 100% of a single spare bedroom, 100% dedicated to business use. Not only would it be the correct thing to do tax-wise. I think it's also good practice to only conduct business in a dedicated space carved out for that purpose--helps with focus, etc. For example, when you enter that space, you are At Work. Good separation between Work Life and Home Life, no? Since both would be conducted under the same roof.
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Re: Home office deduction = one-way ticket to being audited?

Post by steve r »

PaddyMac wrote: Anyone who doesn't claim a tax deduction that they are entitle to imo are either (a) nuts or (b) have books they don't want audited... :P

This year there is also a simplified home office deduction, but we use too much space to use it.
Or, just do not want to be audited ...... not because of the books but because of the hassle. Their power is enormous.

Thanks though for the simplified "small" home office deduction info.
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Re: Home office deduction = one-way ticket to being audited?

Post by KyleAAA »

If you show a business profit on Schedule C, it's probably far less common and far more suspicious NOT to have a home office. It's 2014. Everybody works from home these days. It would only be a potential red flag if you took the home office deduction but didn't fill out Schedule C, and even then, it would only take a simple letter from your employer explaining you often work from home.

Besides, the vast majority of audits are just a letter in the mail asking you to submit documentation of some kind. If everything is in order, this won't take you long. Maybe 15 minutes of your time, max. If you don't have anything to hide, you'd be insane to not take the deduction. An audit is not worth fearing.
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Re: Home office deduction = one-way ticket to being audited?

Post by placeholder »

I don't think it would suspicious to not have an office deduction as many will run small businesses from non dedicated office equipment because even with the new simplified method the #1 rule is "You must regularly use part of your home exclusively for conducting business" so if you're using the same room and equipment to surf the web or play games it's not eligible.
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Re: Home office deduction = one-way ticket to being audited?

Post by tidalwave10 »

KyleAAA wrote:If you show a business profit on Schedule C, it's probably far less common and far more suspicious NOT to have a home office. It's 2014. Everybody works from home these days. It would only be a potential red flag if you took the home office deduction but didn't fill out Schedule C, and even then, it would only take a simple letter from your employer explaining you often work from home.

Besides, the vast majority of audits are just a letter in the mail asking you to submit documentation of some kind. If everything is in order, this won't take you long. Maybe 15 minutes of your time, max. If you don't have anything to hide, you'd be insane to not take the deduction. An audit is not worth fearing.
Thanks, sounds good Kyle. But hold up. I already *do* work from home, at least some of the time, for my present employer. I'm a Database Administrator and have VPN access to all our servers. When I have On Call duty, I'm certainly working from home. And some days I'm able to choose to work from home. So to declare a home office, you don't actually have to operate a business? News to me. Now, I mostly work on-site at the employer's office. But that's mostly due to the (antiquated in my opinion) organizational culture there. With teleconferencing, I see no real reason for there to be Butts In Seats. Except for Management's seeming unawareness of, or disregard for, Results Only Work Environments (ROWE). And also perhaps an atavistic need to conduct MBWA--Management By Walking Around.
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Re: Home office deduction = one-way ticket to being audited?

Post by tj »

IMO, I'd go out of way NOT to have a room exclusively for business use. Once you do that, that portion of your property is business use and is subject to capital gains tax when you sell as well as depreciation recapture. Of course, if you know that you'lll never sell, then maybe that's not so bad.


Now, if you were RENTING, the home office deduction would make a lot more sense to me, as it would have no effect whatsoever on your real estate, and turns your rent from non-deductible to deductible.
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Re: Home office deduction = one-way ticket to being audited?

Post by Cuzz35 »

Depreciation recapture is a non issue when using the simplified home office deduction method. Of course if you choose the standard method your not required to depreciate your home. Unlike normal depreciation rules it is my understanding that your not required to treat your home as if you took a depreciation deduction as long as you didn't take a depreciation deduction in a prior year.
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Re: Home office deduction = one-way ticket to being audited?

Post by KyleAAA »

tidalwave10 wrote: So to declare a home office, you don't actually have to operate a business? News to me.
Correct, although if you don't operate a business it gets a bit hazier. For example, I believe if you have a desk at the office and just choose to work from home most of the time, that probably wouldn't count. But some people don't have an office space at all and work from home full-time. Those people clearly qualify.
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Re: Home office deduction = one-way ticket to being audited?

Post by KyleAAA »

tj wrote:IMO, I'd go out of way NOT to have a room exclusively for business use. Once you do that, that portion of your property is business use and is subject to capital gains tax when you sell as well as depreciation recapture. Of course, if you know that you'lll never sell, then maybe that's not so bad.
Yeah, but you'd still come out way ahead by taking the home office deduction. There's no situation where you'd be worse off except MAYBE if you're in the 15% tax bracket (but still probably not).
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Re: Home office deduction = one-way ticket to being audited?

Post by stan1 »

From the horses's mouth (http://www.irs.gov):
http://www.irs.gov/uac/Work-From-Home%3 ... -Deduction
Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction. Here are six things the IRS wants you to know about the Home Office deduction

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly: as your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business, or in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
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Re: Home office deduction = one-way ticket to being audited?

Post by pshonore »

If you're a W2 employee working at home, I believe any unreimbursed business expenses are subject to a 2% AGI floor and itemized deductions. And it does require regular AND exclusive use. On the other hand, if it is a valid deduction, there's really no reason not to take it. And for those who claim a large percentage, you may want to let your insurance company know.
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Re: Home office deduction = one-way ticket to being audited?

Post by scouter »

tj wrote:IMO, I'd go out of way NOT to have a room exclusively for business use. Once you do that, that portion of your property is business use and is subject to capital gains tax when you sell as well as depreciation recapture. Of course, if you know that you'lll never sell, then maybe that's not so bad.


Now, if you were RENTING, the home office deduction would make a lot more sense to me, as it would have no effect whatsoever on your real estate, and turns your rent from non-deductible to deductible.
There's a loophole that gets around this. As long as you don't claim the home office deduction for two years before you sell your house, you won't owe the IRS. Problem would occur if you suddenly decided to sell your house and couldn't wait two years...
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Re: Home office deduction = one-way ticket to being audited?

Post by tidalwave10 »

tj wrote:IMO, I'd go out of way NOT to have a room exclusively for business use. Once you do that, that portion of your property is business use and is subject to capital gains tax when you sell as well as depreciation recapture. Of course, if you know that you'lll never sell, then maybe that's not so bad.


Now, if you were RENTING, the home office deduction would make a lot more sense to me, as it would have no effect whatsoever on your real estate, and turns your rent from non-deductible to deductible.
Thanks again to all. Great info. Not renting, but have a brother-in-law who is, who's doing the home office deduction. All good stuff to know.
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Re: Home office deduction = one-way ticket to being audited?

Post by White Coat Investor »

tidalwave10 wrote:For a micro business, taking a home office deduction (esp. a room 100% dedicated to biz use) is evidently perfectly legit. However, in a book on Startups I'm reading, the Author claims that *others* say taking such a deduction can be a one-way ticket to being audited. Do folks agree or disagree with that statement. And if so, why or why not?

Is it true that the mere act of claiming a home office deduction significantly raises the chances one will be audited? While I'm trying to set-up operations in the most transparent and correct way possible, I'd rather err on the side of not taking deductions that might subject me to a greater probability of being audited--audits do not sound like a whole lot of fun.

In this same line of thinking, what other deductions commonly taken by micro businesses significantly increase one's chances of being audited? Not concerned about any potential audit findings themselves. Just don't relish the thought of having to go through the auditing process. And I suspect certain deductions just don't pass the risk/reward ratio test, e.g. not worth the potential trouble.

Finally, TurboTax always offers me some sort of Cross Sell while finishing my return--some sort of audit representation insurance / service, where they would assign someone to work an audit case should one find oneself in that situation. Is this a service Bogleheads have ever bought or think worthy? Or is it, like so many other Up Sells and Cross Sells, a "junk" service / pure profit to Intuit, Inc?
I used to worry about this, but then I thought, "Would I do my taxes any differently if the auditor were sitting there next to me while I did them?" The answer is no. So what am I afraid of? Now I claim all deductions I can legitimately claim. Unfortunately, at this point in time that doesn't include a home office, despite the fact that I run a business out of my home. It has to be exclusively used and I haven't roped off any significant portion of my home for that exclusive use.

But if you qualify? Sure, claim it.
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Re: Home office deduction = one-way ticket to being audited?

Post by JonnyDVM »

To give you a professional's opinion to your original question: our CPA told us point blank that taking the home office deduction is a huge trigger to get audited. He said many people that want to take the deduction pass if the amount of money saved is small simply to avoid the hassle. He did say that if you legitimately have a claim to the home office (and we don't because I do non work stuff on the computer in the office sometimes) then you should take the deduction as long as you have evidence to be able to back up your deduction in the event of an audit. For what it's worth- In our meeting this was the only potential deduction where he specifically said "if you take this, there is a good chance of getting audited".
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Re: Home office deduction = one-way ticket to being audited?

Post by deanbrew »

I've taken the home office deduction for the past nine years and haven't been audited. I use one room exclusively for business, and rightfully claim the deduction. The new simplified method is certainly something to look at, though I come out better using the older, more detailed method.

As PaddyMac posted, "Anyone who doesn't claim a tax deduction that they are entitled to imo are either (a) nuts or (b) have books they don't want audited... :P "
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Re: Home office deduction = one-way ticket to being audited?

Post by bhsince87 »

My wife has a small ebay business ($30-40k per year sales) in addition to her day job, and we've been deducting home office expenses (including a portion of utilities, home repairs, internet access, etc) for 12 years, and have never been audited.

I don't really care if we are though, because IMO, it is 100% legit. And we're much more "legal" than folks who aren't reporting ebay type income.

I think a lot of people get into trouble by trying to spin a hobby (by IRS definitions) into a business. It's different set of rules for hobbies.
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Re: Home office deduction = one-way ticket to being audited?

Post by gunn_show »

deanbrew wrote:I've taken the home office deduction for the past nine years and haven't been audited. I use one room exclusively for business, and rightfully claim the deduction. The new simplified method is certainly something to look at, though I come out better using the older, more detailed method.

As PaddyMac posted, "Anyone who doesn't claim a tax deduction that they are entitled to imo are either (a) nuts or (b) have books they don't want audited... :P "
+1 - 7+ years and not audited, knock on wood.
+1 - if you have the deduction ability and don't, you're nuts
KyleAAA wrote:
tidalwave10 wrote: So to declare a home office, you don't actually have to operate a business? News to me.
Correct, although if you don't operate a business it gets a bit hazier. For example, I believe if you have a desk at the office and just choose to work from home most of the time, that probably wouldn't count. But some people don't have an office space at all and work from home full-time. Those people clearly qualify.
I am a remote sales rep, no office to go to, work from home 100%, and rightfully claim my home office and all expenses.
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Re: Home office deduction = one-way ticket to being audited?

Post by Barefootgirl »

I always wonder if these stories about home office deductions and charitable deductions triggering audits aren't myths intended to intimidate people into not claiming them, lol.

As others have mentioned, it's 2014 - fewer employees are now given assigned space and are primarily working from home. The simplified formula is likely a result of this increase and trying to find a better way to address the issue.

My hunch is that if the IRS does have a question, it may be handled via a letter of explanation.

Turbotax, (FWIW) claims a home office deduction, property documented, is a very low audit risk.

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Re: Home office deduction = one-way ticket to being audited?

Post by pshonore »

Employees paid on W2 can take a deduction for unreimbursed business expenses including business use of a home. If you go that route be sure to get an letter from your employer stating it is for the employer's convenience. Also remember that those expenses are an itemized deduction on Schedule A subject to 2% of AGI. Depending on your AGI, that small tax benefit may not be worth the extra hassle.
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Re: Home office deduction = one-way ticket to being audited?

Post by Aptenodytes »

Aren't you being a bit paranoid worrying about a one-way ticket? I think most people physically survive the ordeal, regardless of the financial outcome.
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Re: Home office deduction = one-way ticket to being audited?

Post by tidalwave10 »

Aptenodytes wrote:Aren't you being a bit paranoid worrying about a one-way ticket? I think most people physically survive the ordeal, regardless of the financial outcome.
Quite possibly! :-) Paranoid or prudent, guess that's subject to interpretation. To each his or her own. I think of it in terms of an Ounce of Prevention. Like with Legal issues--the best case scenario is to not run afoul of the law and to never need the services of a lawyer in an actual case. Don't at all mind being faulted for research.

One reason I'm especially interested in this topic: one of my former bosses got audited based on some bum advice from a CPA. While I don't know all the details, it didn't sound pleasant. And my boss was a standup guy with a great deal of integrity. He may have erred in following the wrong advice, even though sourced from a "professional." He survived and his business survived. But he sure didn't seem happy.

If an audit is simple, then I suppose I have nothing to worry about. Think it's an "ignorance of the law is no excuse" sort of thing. I'd like to learn as much as a I can about the tax code (at least as much as is reasonable) so I do things right the first time and never have to worry about these sorts of things. Rather than criticizing my research, can anyone recommend a single good book on learning the tax code, generally? I want to be sure I'm not leaving money on the table in terms of paying more tax than necessary. But I also don't want to take any risks. I'm interested in tax avoidance, not tax evasion.

As far as the anecdotal reports about claiming a home office deduction for X years and never being audited. With all due respect, is this at all analogous to people who refuse to purchase health insurance, reasoning that "it worked for me--X years so far and I've never gotten into an auto accident, had a chronic illness. etc." I don't know if that's a fair analogy. Can't help but wonder though. We have a small sample size here and, at least in Science, anecdote is not evidence.

If there are any CPAs here willing to chime in--ones who deal with a large number of micro businesses and folks who work from home--I'd like to hear from those people.
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Re: Home office deduction = one-way ticket to being audited?

Post by Aptenodytes »

tidalwave10 wrote:
Aptenodytes wrote:Aren't you being a bit paranoid worrying about a one-way ticket? I think most people physically survive the ordeal, regardless of the financial outcome.
Quite possibly! :-) Paranoid or prudent, guess that's subject to interpretation. To each his or her own. I think of it in terms of an Ounce of Prevention.
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Re: Home office deduction = one-way ticket to being audited?

Post by deanbrew »

I'm sure some tax accountants and tax preparers can comment more authoritatively, but all audits are not the same. Most "audits" involve one or two issues, not an entire return. I've been "audited" a couple times for issues that raised a red flag (not the home office deduction). In all cased, I got a letter from the IRS and was forced to produce more documentation/evidence. One audit turned up a mistake my former accountant made, and we filed amended returns and I ended up getting thousands of dollars BACK from the IRS. So in the end the audit made me money. It still wasn't pleasant, and was very worrisome, but not the end of the world.

Having said that, I've heard that the "full audits", where the IRS basically asks you to fully support every line on every page of your return, are horrendous. Those are the big sticks that the IRS wields. I've (thankfully) never gone through one of those, and I don't think the IRS does many of those.
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tidalwave10
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Re: Home office deduction = one-way ticket to being audited?

Post by tidalwave10 »

deanbrew wrote:I'm sure some tax accountants and tax preparers can comment more authoritatively, but all audits are not the same. Most "audits" involve one or two issues, not an entire return. I've been "audited" a couple times for issues that raised a red flag (not the home office deduction). In all cased, I got a letter from the IRS and was forced to produce more documentation/evidence. One audit turned up a mistake my former accountant made, and we filed amended returns and I ended up getting thousands of dollars BACK from the IRS. So in the end the audit made me money. It still wasn't pleasant, and was very worrisome, but not the end of the world.

Having said that, I've heard that the "full audits", where the IRS basically asks you to fully support every line on every page of your return, are horrendous. Those are the big sticks that the IRS wields. I've (thankfully) never gone through one of those, and I don't think the IRS does many of those.
Thanks deanbrew. Glad to know full audits are rare. Still looking for a good basic book--preferably not a terribly long or complicated one--on getting to know the tax code better and taking a conservative approach to tax avoidance. Something appropriate to a person with total household annual income of around 100K. In other words, don't have deep pockets. So I don't know where there's a point of diminishing returns. I have a general goal in 2014 to become better educated on the tax code and seeing what, if anything, I'm doing wrong. Keep making this pledge to myself around tax time each year--a bit like unfulfilled New Year's Resolutions. But want to stay the course this time.
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Re: Home office deduction = one-way ticket to being audited?

Post by cherijoh »

tidalwave10 wrote:
KyleAAA wrote:If you show a business profit on Schedule C, it's probably far less common and far more suspicious NOT to have a home office. It's 2014. Everybody works from home these days. It would only be a potential red flag if you took the home office deduction but didn't fill out Schedule C, and even then, it would only take a simple letter from your employer explaining you often work from home.

Besides, the vast majority of audits are just a letter in the mail asking you to submit documentation of some kind. If everything is in order, this won't take you long. Maybe 15 minutes of your time, max. If you don't have anything to hide, you'd be insane to not take the deduction. An audit is not worth fearing.
Thanks, sounds good Kyle. But hold up. I already *do* work from home, at least some of the time, for my present employer. I'm a Database Administrator and have VPN access to all our servers. When I have On Call duty, I'm certainly working from home. And some days I'm able to choose to work from home. So to declare a home office, you don't actually have to operate a business? News to me. Now, I mostly work on-site at the employer's office. But that's mostly due to the (antiquated in my opinion) organizational culture there. With teleconferencing, I see no real reason for there to be Butts In Seats. Except for Management's seeming unawareness of, or disregard for, Results Only Work Environments (ROWE). And also perhaps an atavistic need to conduct MBWA--Management By Walking Around.
I would recommend double checking on the deducting your home office for your main job (i.e., W-2 wages). I could be wrong, but I thought you could only do that if your employer did NOT provide an office for you. For example, I have a friend who works for a company based in a different state. When she isn't on the road, she works total from home and only travels to the main location for 1 or 2 days a month.

If you choose to work from home, but have an office in the same city, that might be an issue should you be audited. However, since the OP is on call at times he/she would reasonably be expected to be at home, a case could definitely be made that the employer is requiring a home office.

For the small business owner, the audit trigger would be whether the space deducted is reasonable based on the business type. Stan1 has it right in his post. However, keep in mind that any depreciation you recover will be deducted from the cost basis of your house when you eventually sell it.
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Lieutenant.Columbo
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Re: Home office deduction = one-way ticket to being audited?

Post by Lieutenant.Columbo »

stan1 wrote:Deleted, out of date.
what were you referring to? thank you
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FireflyGlow
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Re: Home office deduction = one-way ticket to being audited?

Post by FireflyGlow »

JonnyDVM wrote:To give you a professional's opinion to your original question: our CPA told us point blank that taking the home office deduction is a huge trigger to get audited. He said many people that want to take the deduction pass if the amount of money saved is small simply to avoid the hassle. He did say that if you legitimately have a claim to the home office (and we don't because I do non work stuff on the computer in the office sometimes) then you should take the deduction as long as you have evidence to be able to back up your deduction in the event of an audit. For what it's worth- In our meeting this was the only potential deduction where he specifically said "if you take this, there is a good chance of getting audited".
This is also verbatim what our CPA told us as well. I am not too concerned about the outcome of an audit as we run a tight ship here and could back up 100% of our income and expenses. What I am concerned about is the expense and time involved and the energy of my spouse and I that would be sucked up. I took a look at what the deduction would be -- maybe a couple hundred dollars. For us, it was not worth it.
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Re: Home office deduction = one-way ticket to being audited?

Post by dodecahedron »

deanbrew wrote:
Having said that, I've heard that the "full audits", where the IRS basically asks you to fully support every line on every page of your return, are horrendous. Those are the big sticks that the IRS wields. I've (thankfully) never gone through one of those, and I don't think the IRS does many of those.
The "full audits" you refer to are known as Taxpayer Compliance Monitoring Program (TCMP) audits and the IRS has suspended that (enormously unpopular) program. TCMP audits were carried out for IRS research purposes on a random sample of taxpayers in order to help the IRS develop the statistical model used to select other returns for audit. They were extremely expensive and burdensome on the relatively small number of taxpayers selected for them. It was literally every line of the return (i.e., marriage certificates to establish marital status, birth certificates to establish dependents, and so on down the form.) Bank records, brokerage records, all kinds of receipts had to be assembled and organized to support every line on the return.

The IRS suspended those TCMP audits some years back because they represented such a huge burden on the (mostly compliant) taxpayers unlucky enough to be chosen for them. The IRS uses other methods to create its statistical models, methods that don't disproportionately burden a small group of randomly selected taxpayers.
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Re: Home office deduction = one-way ticket to being audited?

Post by john94549 »

From 1973 to 1978, we had one bedroom (of four) converted to an office. The IRS never blinked an eye.
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Re: Home office deduction = one-way ticket to being audited?

Post by texasdiver »

I did the home office deduction for 4 years from 2003-2007 when I was consulting and was never audited. With an upcoming relocation with my wife I may find myself back in a home office situation and will, of course, deduct everything I am entitled to.

I'm curious about the home office audits though. Does anyone know if the IRS actually does on-site audits of your home office (do they come inspect your home in person?) or do they just audit the paperwork and records. A lot of the issues with home office have to do with the exclusive use issues and perhaps the claimed square footage. Short of showing up to your house with a clipboard, camera, and tape measure I'm not sure how they would audit that sort of thing. Of course if one knew the date they were going to be audited they could purge the computer and office of non-business related stuff and have it ready for inspection.
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Re: Home office deduction = one-way ticket to being audited?

Post by MathWizard »

My wife ran a daycare from our house for several years when our kids were young.

There are special rules, and she got a book that explained these.
For the daycare, a percentage of utilities (heat, elec.) was allowed based on the use% of the house.
Trips to drop off/pick up kids from preschool were also allowed, as were costs of meals.

Lots of paperwork, but worth it. Possibly the detailed calculations we supplied in attached statements
may have helped.

We are never audited, but the amount of money was small, which is probably the deciding factor.
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Re: Home office deduction = one-way ticket to being audited?

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PaddyMac wrote:We've been self-employed for two decades and have always take a sizable home office deduction (33% of space is offices and studios). We've never been audited (touching head now). Our CPA says that the it may have been a red flag years ago but that so many people are working from home now that it's not a big issue. It's a very valuable deduction to us, as it reduces your business profits BEFORE the SS and Medicare taxes. So you are not just saving Federal & State taxes, but the 15.3% Self-employment tax as well. If you have a mortgage, be sure to move a percentage of the mortgage into Business Use of the Home Form, even though it is tax deductible normally - again, this percentage reduces SE tax.

Anyone who doesn't claim a tax deduction that they are entitle to imo are either (a) nuts or (b) have books they don't want audited... :P

This year there is also a simplified home office deduction, but we use too much space to use it.
is your "home office" deduction the same that your "business expenses" deductions?

like, if you buy a computer for your office, can't you deduct the cost of the computer EVEN IF your scenario did not qualify as "home office"?
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Re: Home office deduction = one-way ticket to being audited?

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TNL wrote:the deduction would be -- maybe a couple hundred dollars.
how come that little? would you mind explaining the reason for such low deduction?
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Re: Home office deduction = one-way ticket to being audited?

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I don't recall what the whole analysis was. At the time I was working 20% from home. I am a W-2 employee. It wasn't worth the risk to us.
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Re: Home office deduction = one-way ticket to being audited?

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JLMA wrote:is your "home office" deduction the same that your "business expenses" deductions?

like, if you buy a computer for your office, can't you deduct the cost of the computer EVEN IF your scenario did not qualify as "home office"?
No, the home office deduction is not the same as business expenses. If you buy a computer, or copy paper or staples, you deduct the whole amount as a business expense - if it is used strictly for business and is deductible by IRS rules (there are a zillion rules).

The home office deduction pertains to the real estate used for business use. The space, whether a room, several rooms or even part of a room, must be dedicated to business use, and not used for other purposes.

In my situation, I have one room that I use for a home office, and only for work purposes. I still deduct normal business expenses related to office supplies, licenses, car mileage, etc. But I also claim a home office deduction. This is calculated as a percentage of the property insurance, utilities, trash removal and general home maintenance (it also includes a percentage of real estate taxes and mortgage interest if you don't already deduct those for your home) in the same percentage that the home office represents. If you have a 250 square foot office in a 2,500 square foot home, you deduct 10% of the qualifying home expenses. If you are renting, you deduct a percentage of the rent and other housing expenses (utilities, trash, etc.).

I've claimed a home office deduction for more than 10 years, and have never been audited for it. I have been audited for real estate investments, but not the home office. As mentioned above, most (all?) audits are specific to certain issues, not your entire return. Even if you get audited for a home office, I imagine you will be asked to provide proof that you are complying with the rules, or that you calculated it correctly. I would never not take a deduction I am entitled to due to a fear of an audit. Take all that you are entitled to.
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Re: Home office deduction = one-way ticket to being audited?

Post by PatrickA5 »

texasdiver wrote:I'm curious about the home office audits though. Does anyone know if the IRS actually does on-site audits of your home office (do they come inspect your home in person?) or do they just audit the paperwork and records. A lot of the issues with home office have to do with the exclusive use issues and perhaps the claimed square footage. Short of showing up to your house with a clipboard, camera, and tape measure I'm not sure how they would audit that sort of thing. Of course if one knew the date they were going to be audited they could purge the computer and office of non-business related stuff and have it ready for inspection.
I've heard of auditors showing up and taking a look. Probably pretty rare, though. If you're using a bedroom, make sure you don't have a bed, TV, gaming system or anything else that makes it look like you could use it for personal use. I've got a bedroom that looks like an office, but it would be pretty easy for an auditor to tell I do all of my personal finance stuff in there. My guess is most office-in-homes wouldn't pass the "exclusive use" test if an auditor actually showed up wanting to look at it - unannounced.
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Re: Home office deduction = one-way ticket to being audited?

Post by S&L1940 »

never had an IRS issue with home office claims
for a good 12-15 year stretch in the 70's and 80's and again from 2004 through 2013, my home office was my single place of business and had no problem either with self filing or, more recently, using a CPA. as noted by others, a set percentage of cost for utilities, mortgage, taxes and maintenance were deducted along with traditional business expenses.
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Re: Home office deduction = one-way ticket to being audited?

Post by LeeMKE »

I've taken the home office deduction for over 20 years.

I have been audited in every flavor, letter, phone, office and full audit. Never once was my home office deduction even mentioned.

I take all deductions to which I believe I am entitled. In all these audits, the only time I owed money was when I "overrode" my tax software, certain it had incorrectly placed some things. My "Corrections" were flagged, and I was called in for an office audit. Sure enough, once everything was settled, I owed them $12.

Oh yeah. And I had to pay additional taxes for one year when I deducted my health insurance, which at the time, was a grey area with the IRS. I wasn't amused because the following year, congress clarified the legislation and everyone could deduct their health insurance, myself included.
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