Every year at tax time, the question comes up: Is the home office deduction an audit red flag for the IRS?
The answer: No one knows for sure.
The best thing to do is to take the deduction if you’re sure you’re entitled to it.
First, ask yourself two things:
- Are you using the space as your principal place of business or for another approved reason?
- Are you using the space regularly and exclusively for business?
What you need to know about qualifying your office as your principal place of business:
Usually, you must use space in your home as your principal place of business, which is where you earn most of your business income. If you earn your money outside of the home (e.g., at client or customer locations), you can still qualify if you use the home for administrative activities, such as scheduling appointments, keeping records, and ordering supplies, and do not have another fixed location (a storefront or other commercial space) for your business.
If you work from home after hours or a few days a week rather than go to your office downtown or in another location, you won’t qualify. But if you use a home office to meet customers or clients in the normal course of your business, you can qualify (talking to them by telephone isn’t good enough; you must meet in person).
What you need to know about regular and exclusive use:
To take a home office deduction, you must use the space regularly and exclusively for business. A den used for work during the day and as a TV room for your family at night won’t do. Here's the best strategy: take a time-stamped photo of the office, just in case the IRS questions your return and you are no longer using the space for business when you receive the IRS inquiry. This will help to prove you have a genuine home office.