IRS to Small Business Owners: Don’t Abuse the Home Office Deduction

Small Business Week was September 22 through 24. In recognition of the event, the Internal Revenue Service (IRS) took the opportunity to remind small business owners of the pitfalls of abusing the home office deduction. Here, Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, provides an overview of what business owners who work from home need to know:

1. The Home Office Deduction is Only Available to Self-Employed Business Owners

As the IRS explains in its News Release, “The home office deduction is available to qualifying self-employed taxpayers, independent contractors, and those working in the gig economy.” It is not available to anyone else—including employees who work from home. Additionally, not all self-employed business owners qualify. As a result, before claiming the home office deduction for the 2020 tax year, it is imperative to ensure that you meet the eligibility criteria.

2. There are Two Threshold Eligibility Criteria to Take the Home Office Deduction

In order to qualify for the home office deduction, self-employed business owners must meet two threshold eligibility criteria. These are:

• The home office must be used, “exclusively for conducting business on a regular basis;” and,
• The home office must be the self-employed business owner’s principal place of business.

If either of these criteria is not satisfied (i.e. if the home office is used for both personal and business purposes or it is used only occasionally while the business’s primary location is commercial office space), then the home office deduction is not available.

3. A Home Office Can Be Used for Various Business Purposes

Despite being referred to as the “home office deduction,” this deduction is not limited to office-type uses of residential properties. For example, self-employed business owners can claim the deduction for any portions of their homes that are:

• Used as a principle place of business;
• Used to meet patients, clients, or customers in the ordinary course of business;
• Used for inventory storage;
• Separate structures that are used exclusively in connection with a trade or business;
• Rented for income; or,
• Used as a daycare facility.

4. Not All Expenses Related to a Home Office are Deductible

The home office deduction does not apply to all expenses related to the establishment and maintenance of a qualifying home office. As the IRS explains, “[d]eductible expenses for business use of home normally include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs.”

5. Abuse of the Home Office Deduction Can Lead to IRS Audits and Penalties

The IRS closely scrutinizes self-employed business owners’ tax returns, and it has recently established an Office of Fraud Enforcement within its Small Business/Self-Employed Division that will be targeting these taxpayers specifically. As a result, business owners who work from home must be careful to avoid improperly taking advantage of the home office deduction, and they must be prepared to demonstrate their eligibility for the deduction in the event of an IRS audit.

Contact Washington D.C. Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

Do you have questions about small business tax compliance? Is the IRS auditing your federal income tax returns? To request a confidential consultation with Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033, email ket@thornlawgroup.com or contact us online now.