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Should You File For A Home Office Deduction?

It’s not necessarily the Audit Red Flag it used to be.

Many employees and small businesses owners qualify for a home office deduction (HOD), but avoid claiming it for fear of being audited. Is filing for an HOD like painting a target on your back? Let’s consider…

The IRS Made Filing for an HOD Even Easier.
Filing for a HOD is not necessarily an automatic red flag for the IRS. Tax rules changed in the late 90’s to make it easier for those who work from home to qualify for the deduction. As an added bonus, beginning with 2013 tax returns, there is a simplified option for claiming a HOD. If you’re careful to make sure you’re in compliance and filing correctly, the HOD may be right for you.

Are You Running a Business In the Eyes of the IRS?
Not only must you be generating earnings from your business; you must also show that you’re investing substantial time and effort in your enterprise.

Is Your Office…Just an Office?
If you have a dedicated office space in your home that is used exclusively and regularly as your principal place of business…that’s considered a home office by the IRS. The office should generally be in a separate room, or group of rooms, or a section of a room that is clearly partitioned. You must be able to show that personal activities are excluded from the office area, and that you’re actively running your business from that space (so you might want to think about moving your elliptical machine to the basement). The IRS allows an exception to the exclusive-use rule if you use part of your home to run a day care facility or to store inventory or samples.

What about outside salespersons, tradespeople, or professionals who conduct most of their income-earning activities away from their home office?
The requirement is that the office be the principal place of business, not your principal office. As long as you at least use your home office for administrative and management purposes and you do not make substantial use of any other fixed location to conduct those tasks, you can qualify for the HOD even though you deal with clients/customers elsewhere.

And it’s even easier to meet the HOD requirements if your home office is in a separate, unattached structure (a guesthouse, for example) in that you don’t have to pass the principal-place-of-business or the deal-with-customers tests. As long as you meet the exclusive-use and regular-use criteria, you can qualify for the HOD.

Should You File For The HOD?
There are many aspects to consider and potential tax savings to be derived; so don’t leave the possibility of a HOD to chance. If you think you may qualify, consult with your tax accountant to do a risk/reward analysis and see if the HOD is right for your business.

 

Contact Victor C. Belgiorno at 516-861-3704 or  or Bob Jahelka at 516-861-3707 or .

 

 
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