DON’T WAVE a Red Flag at the IRS: Home Office Deductions

Be careful with home office deductions. Excessive or unwarranted deductions can raise red flags. In addition, large deductions in proportion to your income can raise the ire of the IRS as well.

For example, if you earned $50,000 as a Freight-Broker (operating from home), home-office related deductions totaling $30,000 will raise more than a few eyebrows. Trying to write off the value of a new bedroom set as office equipment could also draw unwanted attention.

Deduct only items that were used in the course of your business.  Okay, that said, consider the following to make sure you can avoid the nightmares of the home office deductions that may trigger an audit..

How Can I Make My Home Business Space more Audit-proof?

If the IRS decides to visit your home-based business, and they may very well decide to do just that for a Freight-Broker.  Maybe they think you are low hanging fruit… easy pickings.

The IRS agent will be looking to see if you comply with the “regular and exclusive” use test for your home office, as your principal place of business.  That is, you must use your office regularly for business and your use of the area must be exclusive to the business. You can do nothing else in that area and you can’t have anything personal there.

How serious does the IRS take the “exclusive” use test… very seriously.

How about personal photos, wall décor, things of a personal nature?

Such things sound innocent enough, but be careful. If the decoration is a putting green or a dart board, it can mean that you are doing something personal in your office space. You can argue that you might be allowed to have a putting green or dart board in a regular corporate office but it is viewed differently in a home office. Any personal use of the space even for just a few minutes during a day or week disqualifies the entire deduction.

This next one might cause you to blow a gasket.  The IRS may ask to review the contents of your filing cabinets.  Why on earth would that be important?  Its personal.  If you have business files mixed in with personal files in any storage facility could be a problem. The safe thing to do is to move personal files to your personal part of the house. The law states that there can be no other use of the declared business space.  Same rule goes for books, business books are fine; just nothing personal that does not relate specifically to business process and management.

This one will blow a few valuable brain cells, watch how you use your printer.  The safe thing to do is never print anything kids homework or personal items on the printer located in the home office area.  Be safe, get another printer. In order to deduct 100% of the printer, it has to be used 100% of the time for business.

How about entertainment devices in the home office area? 

After all, its nice to be able to keep up with the news of the day and maybe even watch a rerun of your favorite sports team.  Seems reasonable and fair, right? Not so clear-cut.  Here’s the skinny…under a 1994 Tax Court case, a home office deduction was denied for failure to provide evidence that an office containing a television and a VCR had no personal use.  Ask yourself… How are you going to prove that you don’t watch an occasional TV show or movie on this equipment?  Don’t risk this convenience which probably in no way impedes your business performance, but will certainly kill your home office deduction.

When the work day is done, lock the door to your home office!  What?  You will be denied the home office deduction  for that portion of your residence if the space is used after hours for any other purpose. While your residence is, in fact, the principal place of your freight-brokerage business, any space or portion used after hours for any personal use by you or anyone in your family after business hours and presumably on weekends and holidays kills the home office deduction. Ouch!  Wait… it gets even worse.

The Family pet, your beloved hunting dog!  Dogs sleeping in your home office space at night would disqualify the home office deduction. No personal use; same thing as allowing a kid to sleep there at night. A kid, a dog, uncle Harry… it’s all personal.

Gotta love the folks at the IRS.  As you begin your business or just need to conduct your own personal-use audit before the “big guys” show up, consider the aforementioned advice and save yourself the pain of losing the valuable home-office deduction for your brokerage business.

Steven Haught is the vice president of the JW Surety Bonds sales and business development departments. He specializes in ensuring our sales team is providing an excellent experience for our potential clients, and also handles unique business partnerships. He contributes his sales expertise to our surety bond blog.

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