Do you take the home office deduction? If so, are you prepared in case an IRS auditor inspects your office to make sure it qualifies for the deduction? You should be.
IRS auditors can and do inspect home offices. In fact, the Internal Revenue Manual says that "when determining the validity of office in the home deductions, the office or business should be toured as any other business site."
You Need to Prove Exclusive Use
You can’t take the home office deduction unless you use part of your home exclusively for your business. In other words, you must use your home office only for your business. The more space you devote exclusively to your business, the more your home office deduction will be worth.
If you use part of your home—such as a bedroom—as a business office, and you use that same space for personal purposes, you won’t qualify for the home office deduction.
Example 1: Johnny has a den at home furnished with a desk, chair, bookshelf, filing cabinet, and a bed for visiting guests. He uses the desk and chair for both his business and personal reasons. The bookshelf contains both personal and business books, the filing cabinet contains both personal and business files, and the bed is used only for personal reasons. Johnny can’t claim a business deduction for the den because he does not use it, or any part of it, exclusively for his business.
Example 2: Paul keeps his desk, chair, bookshelf, computer, and filing cabinet in one part of his den and uses them exclusively for his business. The remainder of the room—one-third of the space—is used to store a bed for house guests. Paul can take a home office deduction for the two-thirds of the room that he uses exclusively as an office.
If you use the same room (or rooms) for your office and for other purposes, you’ll have to arrange your furniture and belongings so that a portion of the room is devoted exclusively to your business. Place only your business furniture and other business items in the office portion of the room. Business furniture includes anything that you use for your business, such as standard office furniture like a desk and chair, and tools and other items you use in your business.
The IRS does not require you to physically separate the space you use for business from the rest of the room. However, doing so will help you satisfy the exclusive use test. For example, if you use part of your living room as an office, you could separate it from the rest of the room with folding screens or bookcases.
Ordinarily, your audit will take place at the IRS office or your tax preparer's office, not your home. Thus, inspecting your home is an additional side trip the auditor might like to avoid. You can help avoid a physical inspection by an IRS auditor if you can provide him or her with recent photos of your home office. The photo should be no more than one year old. It should have a date on it—a digital camera can impose a date, or you can have your film date stamped by a developer.
Other Ways to Convince the IRS
Other things you can do to help convince the IRS that your home office deduction is legitimate include:
- drawing up a diagram that shows your home office as a portion of your home
- having all of your business mail sent to your home office
- using your home office address on all of your business cards, stationery, and advertising
- getting a separate phone line for your business and keeping that phone in your home office, and
- keeping a log of the time you spend working in your home office--this doesn’t have to be fancy; notes on your calendar will do.