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The Home Office Deduction: Is This Really An IRS Red Flag?

During this time of tax season, we often find last minute filers asking questions about what deductions they can or cannot take based upon whether they think they’ll owe money or get a tax refund.   People will ask about charitable deductions, mileage expenses, and other miscellaneous items that they can write off.    With so many people having  jobs involving telecommuting, jobs that are part time businesses, or simply people who have become freelancers, the big question that is often asked is, “Is claiming a home office deduction really an IRS red flag?”

This was a tax tip offered on the IRS website on March 16th, 2011
(source: www.irs.gov)
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.

The important point to note here is that if your employer provides you a desk or a place to work out of at all, you simply cannot claim a home office deduction even if you work out of home more than you do in the office space that is dedicated for you by your employer.    Your home office also has to be a separate and distinct space.   It can’t be a room that is part playroom for the kids and part your office in the corner.  In fact, publication 587 specifically gives an example.   You are an attorney and use a den in your home to write legal briefs and prepare clients’ tax returns.   Your family also uses the den for recreation.  The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den.   This should be a good example for most of you wondering what kind of room would qualify in your house.

Look, at the end of the day if you are going to take the deduction, simply read the publications and the fine print.  It’s not like this tax law is some War and Peace novel.    However, avoiding taking a legitimate tax deduction is simply poor planning and just plain old silly if you really qualify to take the write off.    The only red flag you have at the end of the day is the one you stick in the ground.   No, the movie room/home office won’t likely qualify.  No, the recreation kids’ room/home office won’t likely qualify.  No, the new kitchen you put in/home office likely won’t qualify.    Tax deductions like these can often come down to common sense and most of us know the difference.     Make sure your home office really is a home office and it could be the best smart money move you make when you file your taxes.

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Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice

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About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

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My friends and family all think I’m a workaholic, but I say I’m just a guy that loves to help people do better in life.

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

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One Comment

  • Avatar
    April 9, 2012

    Honestly, I think that this is much less of an issue now that so many of us are working from home. When this part of the tax law was written, “location independent” work did not exist as it does today due to the advances in technology, so those people who took the deduction may have been overly scrutinized.

    That being said, I would suggest anybody who qualifies takes full advantage– because, once the powers that be realize there is another place they can get some additional tax funds from…this deduction may just go away.

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