This so-called taboo deduction has been talked about in quiet hushes around tax offices for decades, at least since I’ve been practicing in the mid 90s. Clients sometimes bring it up in conversation but are quick to shy away for fear of the dreaded ‘red flag’ as though, somehow, it would trigger a financial cavity search by the IRS. But is it really that bad?
The home office deduction has historically met with varying interpretations of the law ranging from it being “ordinary and necessary” to “appropriate and helpful” as the applied standards. Internal Revenue Code Section 280A was first enacted by Congress in 1976 in response to this unclear deduction, but it certainly did not put the confusion or the paranoia about taking the deduction to rest. Congress later enacted additional codes under 280A in an attempt to provide more clarity and, in reality, prevent taxpayer abuse under the “appropriate and helpful” standard. These addition codes were meant to provide general rules of exclusion as a means to isolate what didn’t qualify, rather than what did qualify.
Fast forward to 2015 and you’ll find that not a lot has changed with this particular tax code – at least not in the eyes of the taxpayer. So who qualifies under this law?
Here are the cliff notes for IRC Section 280A:
A home office deduction allows for a taxpayer to deduct expenses directly related to their trade or business as a principal place they meet with patients, clients, or customers. This space must be regularly and exclusively used for business; a spare bedroom doubling as an office with a guest bed will not qualify. Also permissible is a separate structure not attached to the home but used in connection with the taxpayer’s trade or business. Taxpayers are also permitted to deduct expenses allocable to space used regularly for the storage of business inventory and product samples.
Allowable deductions include the business-use portion of rent, mortgage interest, real estate taxes, utilities, insurance, repairs and maintenance and other home office expenses such as office furniture.
In the opinion of this CPA, if you truly qualify for the home office deduction then take it. My disclaimer is that you seek the advice of a tax professional before assuming qualification. And, for the record, I have never personally experienced an audit triggered solely from the home office deduction.
Be sure to catch my video for a more in depth look at the home office deduction and the new Safe Harbor option that was effective for taxable years beginning on or after January 1, 2013.
1 Robert J. Gerlack, What Has the Supreme Court Done – The Home Office Deductions Is Virtually Eliminated after Soliman, 41 Clev. St. L. Rev.
2 Internal Revenue Service Rev. Proc. 201313 Christopher W. Call, Office of Assoc. Chief Counsel