Skip home-office deduction to avoid audit?

  • Updated: February 15, 2009 - 8:01 PM

Q I have a legitimate home-office expense this year, but I've heard that expense often flags an audit. I have no skeletons to worry about, but I dread the thought of being audited for fear of being buried in paperwork. Should I simply skip the deduction to reduce the risk of an audit? And how much time could an audit actually cost me?

RANDY ZARECKI, FITNESS TOGETHER

A Over the years I, too, have heard rumors that taking a deduction for home-office expenses will increase your chances of audit. Having worked with many taxpayers who have claimed home-office-expense deductions, I have seen no evidence that taking a home-office deduction creates additional audit risk. I could not prove this statistically.

I recommend to all my clients who qualify for the home-office deduction that they take it -- but only if they meet the tests they need to pass in order to be entitled to it. The detailed rules for the home-office deduction are found in IRS Publication 587. You may need to become familiar with the "exclusive use" rule, the "regular use" rule and the "principal place of business" rule to determine your eligibility. Because claiming depreciation deductions on your home office may interfere with the tax-free nature of the gain on the sale of your principal residence, I usually recommend not taking depreciation deductions on the home office.

How much time could an audit actually cost you? The answer is another question: How much time will it take you to produce documentation for every dollar you have deducted? If your records are in order, an audit should take very little of your time. If your records are a mess, or you have no records, there is no limit to the amount of time it could take.

MARK S. GLEASON,

ADJUNCT PROFESSOR OF ACCOUNTING,

UNIVERSITY OF ST. THOMAS OPUS COLLEGE OF BUSINESS

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