John M. Hoffman & Associates CPAs
Home Office Expenses
"Does claiming a home office increase my chance of being
We wish we knew the exact formula for selecting
tax returns for audits. It would probably be more valuable than the proverbial
genieís bottle. It is our understanding that home office deductions do in fact
increase the likelihood of an audit. However, if a taxpayer is legitimately
entitled to a home office deduction, we suggest that they take it. If a taxpayer
has other issues on their tax return, (letís say they also have a business
unsuccessfully racing sail boats) we suggest they exercise caution.
"Do home office deductions work well for everyone?"
Home office deductions work better for some than
others. For example, a self employed taxpayer who rents their home gets a better
tax benefit than an employee sales representative working out of the home they
own. The reason for this is that for self employed taxpayers, home office
deductions reduce self employment tax (the social security equivalent). In
addition, being able to deduct as a business expense something (in this case
rent) that would not otherwise be deductible is more beneficial than moving a
deduction such as mortgage interest or real estate taxes from one schedule to
another. Lastly, home office deductions for employees are miscellaneous itemized
deductions, requiring a taxpayer to itemize their deductions, subject to the 2%
threshold for deduction, and are an add back for alternative minimum tax.
"I hear it is a problem when I go to sell my house, is that
Not like it used to be. Years ago, if you sold
your home at a profit, the percentage of that profit attributable to the home
office did not qualify for the favorable tax treatment. That went away a few
years back and now if you sell your home for a profit and you had a home office
you only have to pay tax on the depreciation that you claimed - a minor issue.
"O.K., I am sold, what are the home office deductions?"
Home office deductions are essentially a
percentage of all costs associated with owning or renting a home. The first step
is making sure that you qualify for a home office. When you make that
determination you should be contemplating what portion of your home is used
exclusively for business. Let's say that your home is 2,000 square feet and the
space that is used exclusively for your business is 200 square feet. This is
10%. Accordingly 10% of your rent, your utilities, home owners insurance,
repairs, home cleaning, etc. will comprise your home office deductions. If you
own your home, rather than 10% of your rent, you would deduct 10% of your mortgage interest, real estate taxes,
and depreciation of 10% of your home.
"How do I communicate this information to Hoffman at tax
You might want to talk to us to make sure that
you do in fact qualify for a home office and that it makes sense in your
situation to claim a home office. As always, we like to actually get the related
tax reporting forms so that would include your mortgage interest form 1098, and
if this is a new home that you purchased we would want your HUD settlement
statement. The bulk of the information goes on organizer