John M. Hoffman & Associates CPAs

Frequently Asked Tax Questions

Home Office Expenses 

"Does claiming a home office increase my chance of being audited?" 

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 true?"

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, utilities, insurance and depreciation of 10% of your home.

"How do I communicate this information to Hoffman at tax time?"

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 sheet 29.