But Isn’t a Home Office Deduction a Red Flag?

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There seems to always be a lot of confusion about the home office deduction. If you have a business or work as an independent contractor (which means you have a business), you can likely take the deduction.

First, let’s look at what you need to take this deduction. There are two requirements. You need to (1) regularly and (2) exclusively use the space for your business.

It’s okay to have another space for business. It’s okay if you don’t see customers or clients there. It’s okay if you don’t have a separate entrance.

You do need to have a business, of course. And the space needs to be used regularly and exclusively for business purposes. Don’t read anything else into it. That’s all there is.

In 1997, the IRS solidified the rules and made it even easier to take the deduction. Yet, still, over 20 years later some people think that the home office means an audit.

It does not.

In fact, let me tell you about a conversation I recently had with a new client. He had a home office. In fact, he did a lot of work in that space and recently spent over $10K renovating it.

His CPA told him it would be a red flag.

My question was, “How would the IRS know?”

You see, my new client had an S Corporation for his business. The office expense would be reported as “rent” on the corporate tax return. In fact, a recent Tax Court ruling stated that not only was how a corporation would report the home office expenses for a stockholder but that there needed to also be a written rental agreement.

If it shows as a rental expense on an S Corporation, how could the IRS even differentiate it between any other rental? Remember, you were being told that this is suppose to be a red flag. Not an issue during an audit, but before. But if it’s not shown differently, does that even make sense?

I’ll leave it to other blog posts to explain how to calculate the home office. There is even a simplified calculation the IRS has given you to make it easier to take this deduction. The point is that not only is it not an IRS red flag, in the case of my new client, it wasn’t even logical way that could be.

Think twice before you take advice from someone who doesn’t really understand your situation. That’s especially true when the advice is about the home office deduction.

The IRS encourages you to take the deduction. They don’t penalize you with increased audits.

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