Tales of the Home Office Deduction

Recently, I was at a local establishment with a friend. My friend the Candle Maker mentioned that as soon as her candle making becomes a business rather than just a hobby, she will write off her work area as a home office deduction.

The proprietor of the local business went into detail of the horrors of the home office deduction: It’s a red flag to the IRS.” “If you have one thing in your office that is not business related, they take away all your home office deductions forever.”

I had visions of a world like Terry Gilliam’s Brazil. While the horrors were listed, I pictured IRS agents in faceless black gear descending down ropes from holes they cut through my roof. The agents land and begin to rummage through my home office leaving a path of destruction. Enter the IRS bureaucrat who asks for my TIN, BIN, and DBA. “What IS this Ms. Thaw? What is THIS?” “My name is Shaw not Thaw!” If we truly lived in the world of Brazil, it would now be appropriate for me to be shoved in a sack!

The March 17th IRS newsletter included IRS Tax Tip 2010-53 titled What You Need to Know about the Home Office Deduction. You can click on the link below to review this tax tip after you have finished reading this article on the home office deduction. What does the IRS tell us about this deduction?

Let’s start with the top 10 things the IRS does NOT say about the home office deduction:

1. They will not tell you that IRS actually stands for Inquisitions, Raids and Surveillance.
2. Nor will they say that the sole purpose of Form 8829- Expenses for Business Use of Your Home is to find out if you are a liar.
3. They will not tell you that they have a budget for roof assault equipment.
4. Nor that they admit to having faceless black ninja-like uniforms.
5. They will not tell you that IRS agents drop by unannounced.
6. They will not tell you that they scour home offices in search of that which does not belong per IRS Publication 587.
7. Nor will they tell you that they provide no assistance in helping you understand the home office deduction.
8. They will not tell you that they take all your home office deductions that you ever took away if you are audited.
9. Nor will they tell you that Google loves it when you have `Top 10 things’ lists on your website. That I learned from Caroline Cummings (You can click on Caroline’s link below after you have finished reading this article.)
10. They will not tell you that they carry a human sized sack in their briefcase.

The reason they will not tell you these things is because they are not true. The IRS has a goal to ensure that everyone follows the same rules. They prefer educating the tax payer over sacking them.

What the IRS DOES say:
“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.
For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.”

So what advise can we give my friend the Candle Maker?

We start with the golden rule: Ordinary and Necessary.

As a manufacturer, a candle maker needs a production area. Candles as a hobby can be done at the kitchen table, but that does not allow for mass production and quick turn custom orders when her family likes to use the kitchen table too.

The Candle Maker needs a workbench, storage for candle making supplies and storage for finished goods. She also needs enough square footage to work at her bench.

Exclusively: Camping gear stored on the candle making workbench is a no-no as is using the bench for gardening supplies. These things are not necessary for candle making.

If the Candle Maker uses the family computer to keep track of her business expenses, she cannot write off the computer room. Why? Because the room is used by the entire family for non-business purposes, it does not meet the exclusive rule.

Regularly: What’s the square footage of the part of the house you conduct business in? Really. Claiming 50% of your home as a web designer means you either you have a very very small house or a really really big computer system.

If the Candle Maker still uses the kitchen table to manufacture her product once in a while so she can cook dinner at the same time, she cannot write off the square footage of the kitchen or even the table. This area does not meet the regular or exclusive rules.

Do not fear the Home Office Deduction. You are entitled to reduce your income by all ordinary and necessary business expenses. Create a space in your home that you use exclusively and regularly for your business. Creating and maintaining this space is a key to being organized!

IRS Tax Tip 2010-53 titled What You Need to Know about the Home Office Deduction

Caroline Cummings- Things that make ya go hmmm…