Throughout the unprecedented events of 2020, many individuals found themselves unexpectedly working from home. For some, it is a stepping stone to a permanent business transition while for others it is simply out of necessity. With the tax season in full swing, many people are looking to maximize their tax benefits and deductions; the home office deduction will likely become a consideration for many. However, the home office deduction is not for everyone and can in some situations trigger an audit on your return and business. The IRS has very specific regulations that must be met to qualify for the Home Office Deduction. It is a complex rule that ensures you avoid penalties and additional interest. With an influx of individuals working from home this past year, it is expected that the IRS will be taking a closer look at returns.
In some instances business owners understandably hesitate to take the home office deduction to avoid an audit risk, however, it is in fact a valid deduction that can be claimed successfully.
Common mistakes in claiming the home office deduction
The following are common errors made by individuals when claiming the home office deduction. The IRS provides guidelines for determining who can deduct the expenses for business use of your home.
You do not work for yourself
Much of the workforce in 2020 has been encouraged to work from home in some capacity and left many scrambling to set up their office space. However, if you are an employee of another company and receive a W-2 for tax purposes you are not eligible to take the home office deduction regardless of the additional expenses involved in your transition to work from home, according to the IRS. Only business owners and self-employed individuals are eligible to take this sought after deduction.
No clear separation of business from personal
This is likely the biggest culprit of invalid claims of the home office deduction. As part of the home office deduction rule, the IRS requires that the portion of the home used for business purposes be exclusively for that purpose. Any commingling of personal activities, storage of items, or shared use will disqualify the area as a home office for tax purposes.
Your principal place of business is not your home
If you own a storefront, other office space, or brick and mortar location for your business then you are likely not eligible to claim a home office deduction. The office in your home must be your principal place of business. This does mean you cannot work in the field or on the go but that your business’ primary base for conducting administrative tasks must be your home.
You have been notified of an audit, what steps should you take?
The first thing you should do when in receipt of notice of a pending tax audit is to remain calm. Avoid contacting the IRS immediately and take time to gather your records and devise a strategy for defending your audit. Oftentimes, audits are looking for precise documentation or records. However, if the wrong information is provided, you may be opening yourself up to further investigation or inquiry. Consider seeking the representation of a qualified and knowledgeable tax attorney that can guide you through the audit process and help you protect your rights and interest.