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The Home Office Deduction: Still a Red Flag? July 2003 For many tax advisers it is standard operating procedure for their clients to work from a home office. But many clients won't deduct a qualified home office because they are concerned it is a red flag and an invitation for an IRS audit. Not so, tax attorney William Fishman told SmartPros in a recent CPE segment. In fact, just a few years ago the tax law changed to make it easier for taxpayers to claim home office deductions.
To deduct part of your home as a business expense, the home office must be used regularly and exclusively in one of two ways:
In 1997, Congress amended the tax code so that individuals can take a home office deduction so long as they:
Fishman, a former litigator for the Internal Revenue Service, explained that IRS auditors can often pick up on an inaccurate home office deduction when it finds a loss on a Schedule C. "That might trigger an audit much quicker than simply claiming a home office deduction," said Fishman.
Of course, the IRS does not come to the person's home to ensure the space is used solely for business, but that doesn't mean the physicality of the space won't be litigated if it goes to court. Fishman recommends that clients take a photograph of the office. "When you take photographs, I would advise the client to make sure there's a desk, a bookshelf, and whatever equipment is needed for a small little office. That's the only thing that should be in the photographs," he said.
More insight on the home office deduction can be found through the SmartPros interactive self-study segment, Individual Tax Update: Home Offices - the Best of Times, the Worst of Times (2 credits, $44.99).
2003 SmartPros Ltd. All Rights Reserved.
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