When I first started preparing tax returns there were far fewer professions that warranted a home office. Lawyers, dentists, accountants and many manners of sole practitioners constituted the clientele.
With more people joining the work force as “entrepreneurs” or “solopreneurs” — quotes added for emphasis and some skepticism — I see more and more itemized deductions on tax returns that wouldn’t qualify as business expenses. As people get more creative with their titles, they think they can get equally creative with their home office deductions, which the Internal Revenue Service would say is no bueno. This past tax season was no exception.
Here are some quick tips on legitimizing your home office and its deductions.
First, consider: How do you make your home office legitimate?
The quickest, most basic answer is that it needs to be segregated from the space in which you live. The front door of your house, for example, is the entrance to the dwelling, where the side entrance or door should/could lead right in to your office. Clients should know the difference between the two so that no awkward encounters occur in your home.
Now that we can safely assume that your office is the real deal, categorizing your deductions is next.
There are two main categories to consider when itemizing your deductions: The items you use when conducting business — like a computer, printer, router, paper, etc., and the things that contribute to the cost of operating the business, like utilities and insurance. You’ll need a separate rider, called the home office liability, for insurance. If someone comes in to your home office and trips on the carpet, do you want them to sue you or your insured business?
Consider what’s appropriate to deduct. Don’t try to get away with too much, because the IRS will eventually pay you a visit. If you are in the import/export business, your Netflix account would not qualify as a reasonable deduction. Be pragmatic. You cannot claim backyard expenses typically. Personal expenses that are items you don’t use for business, like the furniture in the house, also don’t qualify.
Indirect expenses that do apply are the gardener, mortgage interest real estate tax, and home insurance, among others. The way it works is based on how much of the house is being used as a business. If it’s 10% then you can claim 10% of those expenses. That’s where your utilities costs come in. Subscribing to your cable provider’s business option/plan, helps prove the separation of home and business.
It all depends on what you do for a living.
Complete Form 2106 to itemize your employee business expenses. Be sure to check the IRS site’s page regularly, as the rules are always changing. This way, when you walk in to your accountant’s office — which could be at his/her home — to file in 2017, you’ll be completely updated.
You will get audited if you claim a home office. They are red marks on the IRS’ radar. Be honest, don’t try to get away with expensing things that don’t belong, and you’ll be in fine shape. Contact Brinen & Associates for more details about home office deductions.