Nothing strikes fear into the heart of a small-business owner like a tax audit notice. (Think Darth Vader lumbering into a meeting with a briefcase and government ID.) Too many self-employed folks have felt the heat and will warn newbies: If you want the IRS to flag your return, deduct the costs of a home workspace.
Nonsense, say some accountants and tax prep companies. Many self-employed taxpayers can happily benefit by claiming a legitimate home site. Intuit’s TurboTax, the do-it-yourself software folks, says that the IRS has loosened eligibility rules to include, for instance, plumbers who make house calls, but handle their appointments and billing from home.
Still, some accountants are plenty cautious. “It’s my favorite subject,’’ says Andrew J. Mason, a certified public accountant with offices in Brighton, Mass., and Boca Raton, Fla. “There’s no question it’s an area that can be abused.
"I have no problems with it if it is properly done and you’re entitled to it," he says.
The IRS says that filers may deduct expenses for a home office if part of the home is used “regularly” and “exclusively” for conducting business. In addition, a filer can deduct expenses for a separate free-standing structure, such as a studio or garage, if it’s the only place where a businessperson meets clients or customers.
The IRS is serious about “regularly and exclusively,’’ says Mason, who represents many writers and independent workers. The filer can make the most compelling case if he or she is self-employed and has no other workplace. “Occasional incidental use’’ of a space will not meet the criteria, he says.
To be legit, the space “has to be a specific part of the home,’’ Mason says. “It should be a separate room’’ where everything in it is work-related. Auditors frown on rooms that include a bed, or where someone stores exercise equipment. It’s best if the space has its own walls, but a partition can denote a separate work area, too. Some tax agents will want to see pictures of the space, he says.
There are exceptions to the exclusive-use rule, Mason says.
The IRS allows a businessperson to store work inventory in a nonexclusive area, for instance, a home’s basement. And it’s OK if the basement also has other objects, such as a TV.
It’s not just the home space that can be written off. The tax filer is entitled to write off a portion of home expenses as work-related, based on an office-size-to-home-size ratio. Let’s say a home office is 20 percent of a 1,000-square-foot apartment. (For safety sake, a filer should not claim that the space is more than 25 percent of the home’s total square footage, Mason says.) The filer could then claim up to a fifth of the costs of rent, utilities and insurance, he says.
Homeowners can deduct a portion of the mortgage interest and the real estate taxes, as well.
Mason says prudence in this area is wise. "Once you put a Schedule C in there and a home office, the chances of an audit goes up tremendously,’’ he says.
That being said, Mason adds, a taxpayer who qualifies under the law should take advantage of the deduction as it can save a significant amount of money.
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Suzanne Sataline is an independent business writer, who has been writing for newspapers and magazines for 25 years, most recently on the staff of The Wall Street Journal. Her work has appeared in The New York Times, The Washington Post, Popular Science, and Washingtonian magazine, among others.
Please note that this is general information and that you should consult a tax professional for specific questions and advice regarding your situation.
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