Home Office Writeoffs?
 

I've been working from a home office for years now, and every year I ask my accountant about writing off the home office space. She always insists that it won't be worth it, but I'm having a really hard time swallowing that.

Do any of you have home offices and do any of you write off your office spaces on your taxes? What are the benefits and disadvantages?

I just get the feeling my accountant is avoiding work and not looking out for my best interests, but I could be wrong.

find a new accountant. I've never had anything but a home office and while many years ago it was almost more work than it was worth to write it off (or find an accontant that would) today there are millions if not 10s of millions of people that work from home and believe me it is well worth it come tax time.
I own my home but the same applies if you rent (but see a GOOD accountant first) I can deduct from my mortage the amount proportioned out for the % of my home-there is a limit of course but I don't remember what it is (thats why I have an accountant) so say my house is 2000 sq ft and I use an "office" that is 200 sq ft-10 percent of my mortgage, my electric, my gas or heating oil are all part of your office overhead which makes it deductible. Say your rent or mtg is just $1000 per month and the utilities are $25.00 per month-together thats $12300.00 for the year-10% of that is $123.00- off the top.
Doesn't seem like a lot but of course I just made these number up-I know for my self my home office deduction is "quite a bit more" and over the years has added up nicely.
I'm not an accountant nor a tax expert but I do have someone who is and over the years he looks for every legitimate deduction he can find and if he ever told me that my home office wasn't worth deducting, I'd find me a new guy to do my work. But thats just my opinion.
Don

If you claim a home office deduction aren't there tax implications when you sell your home? You'll owe tax on that percentageof your home when you sell? Maybe this is what your accountant meant by "not worth it."

My accountant has advised me against doing this, and his counsel has always been good for me personally. For one thing, he says that these deductions are very carefully scrutinized by the IRS because there are a lot of fraudulent claims. He feels that it increases your likelihood of being audited. Of course your situation may be completely different. If you do writeoff your home office then I suspect the key will be finding a way to document that it's used solely for business.

You need to pick an accountant that you trust who understands you and your business. Then follow their advice... or if you don't like the advice, find another accountant :-)

Boyd,
You are right about possibly being scrutinized more carefully and yes, each and every situation is different however my advise to Travis is to talk to an accountant who may be better versedin the home office deduction.
25 years ago while running my home office I was audited but the proof was in the receipts and pictures. AAMOF after the audit the folks at the IRS suggested I wasn't taking a large enough deduction due to the size of the office space I had in my home at the time. One of the biggest keys to HO deduction is that it must be a seperate room not the dining room or kitchen.
However every one is different and again I suggest an account who can look at ones business-income VS outgo, expenses, overhead etc and make a determination from that. Since that audit 25 years ago I am always careful about deductions but the home office for me at least is a wonderful thing-my office is down the hall and to the right-close to the bathroom, kitchen and I can even take a break and watch TV, it's a wonderful thing ;-)
Travis, if you're not sure about what your accountant is suggesting then talk to someone else and get a 2nd opinion. As for implications when selling the home, well when I sold my last home prior to this one, I had no implications but its possibly because I bought a more expensive home but it's also possible that the implication may be when you sell and downsize - the carryover from year to year for the depreciation might get you.
And that's why I have an accountant. :-0
Don

Thank you everyone for the replies. I think I will talk to another accountant to get a 2nd opinion. My wife also has a home office (photography) and we have a theater room we built specifically for showing off my wedding videos to clients, so it sounds like maybe it might be a good idea for me.

I really hate the idea of getting audited, not because I've done anything wrong, but because I hear it's a huge hassle. But if it's going to save me money, maybe it's worth the risk.

I'd love to hear some more opinions from those of you who work from a home office.

I can't imagine waving a bigger red flag than that! Is there some way to document that it's used only for business purposes? I suppose it would have to do with what the room looks like. But since "home theatres" are popular luxury items these days it seems like the kind of thing that would raise an agent's eyebrows...

Yeah, I figured that would be a big red flag. The truth of the matter is that the theater is only used for personal movie watching during the holidays when family is around (as sad as that is). But other than a display area that showcases some of our dvd packaging and a sign for my business, I don't know how else we could 'prove' it's use. Might not be worth claiming.

Our other 2 home offices would be easy, though, since they are totally separate rooms that are ONLY used for business.

:EDIT:
On another note, how did you guys go about selecting a good accountant? I'm not sure what to look for or ask really?
:EDIT:

Moved from Weddings to Business for better exposure. Great thread, by the way.

In my case, I guess I was lucky. I met mine when he was a volunteer working backstage at the Opera Company here many years ago (his "real" job was an accountant for a big local institution). After doing my personal accounting for several years, the Opera Company had an opening which he applied for, and to make a long story short, he's our CFO now as well as my accountant - and a good friend also.

But aside from getting lucky, I think the best way to hire a professional is through recommendations from others in your same line of business. Ask around and see who does your friends' taxes, then arrange to meet them and see what you think.

Chris,

Thanks for the move. I didn't even realize there was a business section. lol

If your company is a corporation the corporation might pay rent for use of the office area and that is a legitimate business expense. However, now you have the income for the rent in your personal taxes and even though you can write off things like depreciation and utilities to offset the income, you still wind up with a mess to deal with at tax time, and especially when you sell the house (if depreciation was claimed). So, add in the cost of the accountant's time (or the value of your time) for the extra tax management to your analysis.

My company is an LLC, so it is still filed within my personal taxes. Because of that I don't think paying rent to myself will really help, right?

It sounds like it's just a tossup for the amount of hassle you want to deal with. Not claiming the office spaces results in less hassle, but claiming them could reduce my overall tax payment (I wish I knew how much). Either way I'm paying an accountant, so that doesn't really matter I guess.

When I went looking for a new accountant (my old guy retired an moved-damn, I was pickin' his pocket on the golf course) I went to a few freinds who own businesses and asked for recommendations-got a good guy -now 5 years-but he's a much better golfer than the old guy so I don't get much of my yearly fee back from him as the other guy :-(
Don

I'm not an accountant and only related some info that arose from a discussion with my CPA, so don't really know the implications for an LLC. You should be able to do a reasonable back-of-the-envelope estimate of the tax savings. For corps, the tax rate is 15% on the first 50k (and 6% for my state), so if I know the amount of a deduction the resulting net in real money is about 20%. So, if my office was 10% of the house and the utilities etc. ran $4k/yr, I might get to deduct about $400/year, which for a corp might net $80 in tax savings.

Ah, I see. That makes sense.

Do you deduct mileage or actual expenses for your automobile? Do you deduct your cell phone? Do you deduct meals you eat on the road when on the job? If you had an office outside of your home would you not deduct that? Do you deduct credit card interest for things you buy that are directly related to your business? Can you PROVE with receipts everything you do deduct? How about any medical insurance, and biz cards, paper to print your brochures or contracts on? These are all legitmate expenses therefore writeoffs for you business as is a home office. Over 80million people today work out of their homes and are able to deduct a portion of that from the taxes without breaking the law. 25-30-35 years ago different story, home offices were looked at with a jaded eye from the IRS - today not so much. You and I have the same tax benefits as any major company out there AS LONG AS 1) your home office is your primary place of doing business (not shooting but RUNNING your business-phones,editing, meeting with clients) Unlike a doctor who may have an office in his/her to do papaerwork they generally donot meet patients there and do say a physical exam therefore it is not considered to be their primary place of business therfore no deduction- that's what they have an office in a medical building for. We on the other hand GENERALLY do not need an office outside of our home to do business. 2) Your home office must be a seperate defined room however it can serve double purpose if say guests come over and stay you happen to have a couch that opens into a bed and they can sleep in your office. It's primary function is that of OFFICE not bedroom. Those are the 2 main things and after running a business from my home for almost 35 years and never having a problem with the IRS about my home office (nor any of the literally hundreds of other people I know) again I can only suggest talk to an accountant who is well versed in the subject who knows about deductions who understands the differences and tax implications between an LLC a sub S and whathave you and make a decision based on facts.
We're videographers not accountants-we know video not accounting nor do we,dare I say, know ALL of the implications of the IRS tax codes-check with an accountant- a real accountant.
I'm not pickin' on anyone not flaming anyone it's just a thread like this can be dangerous to someone who reads only bits and pieces.
Get a lawyer and an accountant pay the money to them and let them do the job they know how to do-we're videographers and I for one am not a lawyer or accountant-I pay them and when they need MY services they pay me. They're pros at what they do, I'm a pro at what I do-it keeps things cleaner that way.
Don

Thanks again for taking the time to respond. I originally posted this question because it seemed perfectly reasonable to get a deduction for my office space, yet my accountant has steered me away from doing this for the past 2 years. It just seemed odd.

If nothing else, you have shown me that my accountant might not have my best interests at heart. We are definitely looking for a new accountant this year. Thanks for all the great advice and input.

Hey Travis, don't be to quick to dismiss your accountant as not having your best interest at heart. He is "advising you" based on what the IRS can do if they snag you for an audit. He is not a surgeon. Out of all of the hearsay comments here, there is some important info also.

1. When you rent your home (or part of) to your business you can expect to have a tax implication. Not being taxed directly, but when it comes time to sell your home. Again only if your snagged.
If your home is your primary residence, the profit is usually tax free on a one time basis. If you have rented your home to your business all of the money payed as rent is no longer tax free.


2. The IRS has definately clamped down on home office deductions, making it very limited on what you can claim, hence why some say it's not worth it.
I find this interesting because more and more people are working out of their home's because they can (Computers, faxes, email etc.) and it saves the double overhead of having 2 locations to support (home and office). Many large corporations actually incourage it because it saves them money on capitol inventment. (not needing to build new buildings to expand or to accomodate good employees who have children etc.)

The essence is, if you're a gambler you might never have a problem. If you want to avoid problems that would only save you a few pennys anyway, play it straight.
Besides, instead of trying to save a few dollars why don't you just go out and make more revenue.

Just a thought

Home Office
 

If you have a legit home office, the write-off effort is worthwhile and is a great help on the long form. I have been doing it for 20 years. Key is to make sure you can account for expenses with receipts, that you use the space in your home as a primary work area, and that you have an accountant that understands the nature of your business. There are lot of legitimate deductions related to production, etc., that may not be understood by a civilian bookkeeper.

Bravo! You and I are on the same page there. I think far too many people get hung up on saving money on taxes.

I'm not 'hung up' on the issue or anything. I just want to take advantage of any opportunities to save money that I can. It's the same reason I shop around for equipment or materials or services. If my home office is legit, and I'm paying more in taxes because it's not being deducted, then that is just another avenue for me to improve my bottom line. I'm already paying the accountant every year, so it seems like I might as well take advantage of the option.


Gary,

I don't want to go through the hassle of 'renting' my office to myself, unless it's somehow easier than just taking a deduction. Thanks for all the input you gave. I appreciate it.

I really just feel like a lot of people deduct their home offices, and because I'm not, I'm paying more in taxes than I need to. If it was going to cost me more money to make the deduction, then that would be one thing. However, I pay my accountant the same whether we take the deduction or not. So the only possible downside it sounds like is an audit from the IRS, which could happen anyways.

Travis, I'm sorry if I confused you. In order to take a deduction, your company has to pay for something so that you can deduct that money as an expense. So by renting your home I mean that you will take a room or space that is only for business purposes and pay the owner (you) for that space or portion of your home as rent.

Gary,

I guess my understanding of it is that you don't have to rent the space out to your business. You can just deduct a percentage of your mortgage/utilities based on the square footage of the office space. My business is an LLC, so I file my taxes with my personal taxes.

Travis,

I can't see why you would not deduct your home office. If you did get audited and a portion of your home office deductions were disallowed that isn't the end of the world. You will lose all the money for that deduction if not taken for sure if you don't claim it. If on the other hand you are doiing jobs and pocketing the cash, then good day to you sir.

Mike

it would seem that your accountant sees the BIG PICTURE (your business , personal income etc) and is giving you advice based on the BIG picture. we here do not know the fine details of your situation in 2005 or past years so it's easy to say take a office deduction.
... you could get advice over phone or short meeting with different accountant and that advice is just based on what you tell them - to give you sound advice they should probably know what your business has been doing the past 3-5 years

record keeping.....
 

NOTE: I am not a Lawyer, Accountant, EA, CPA or any other licensed professional so please do not take my comments as advice. Consult the proper professional!

I know the conversation has moved past this already but I did want to make this comment.

You prove it by keeping a log. Every time you use the room you make a note of when you started, stopped, who was there, what project you were working on, if not working on a project note the fact that you were showing demo's to a potential customer and the name of that potential customer. If you play a movie for the family, record it as personal use. As long as your log shows clearly that the room and the equipment in it are used primarily for business then you should have no problem claiming it as a deduction.

This works best if you have a peice of equipment that will log total hours used, such as the bulb timer on a projector but I have heard that the mere fact that you have documentation is a heavy factor.

Most importantly though.....Check with a proper professional!

Randy

P.S. About your current accountant not taking the deduction, he may be making that reccomendation based on the possible savings to you vs the possible expense you would have to pay to him and others to defend such a deduction in the event of an audit. If that is the case you need to talk to him about providing you with as much information about how/why he is advising you in a certain way just like you need to provide him with as much information as possible so that he can make informed reccomendations.

Yeah, I started thinking that I could use the bulb hours to prove the time that the projector was used. Combine that with a physical written log and I think I would be okay. The theater room is barely ever used, for clients OR home use (sad, I know, I know), so I don't know if that would factor into how much of a deduction I could take. I guess I'll be going over all of this with an accountant and see where I end up.

Hope this helps
 

Hello all. My name is Anna Schaffrina and I was asked to respond to your post by one of my clients, John Scott, who is also a member on the forum.

To answer your question as best I can without talking your ear off, the answer to it is YES; it is VERY worth the effort. To give you a little background on me and what I do: I own a business called Front Office Solutions in Fairbanks, Alaska, and have clients all over the country. What my company does is tax-loophole track accounting and bookkeeping. I have been doing this for over 25 years and what I do, mainly, is find all the deductions possible for my clients and do the necessary tracking or bookkeeping for those deductible expenses.

There are 2 very important reasons why you should take the deduction, one is much more important than the other. First, and the least important is the actual deduction itself. Even if it is only a couple of hundred dollars that you save it is STILL money saved. Secondly, and most importantly is the one I didn't see anyone addressing in the answering here. It is the need to prove "Intent" with the IRS.

I write a business editorial for a newspaper here and I am posting a copy of a recent article I wrote that explains INTENT and a partial clip of an article on Tax Loopholes referencing CPA's and Accountants. Neither is what most people think they are, and I hope it will help answer more deeply your questions.

If you have any questions at all, please feel free to contact me via email at info.frontoffice@gmail.com.

Defining Tax Loopholes (partial clip concerning accountants)


There are several loopholes that can be used that people never even know exist. More than once, I have had my clients ask me, "Why didn't my CPA tell me about this?" I can only shrug my shoulders and respond with "unless he/she specializes in tax practice, (as an Enrolled Agent), they probably didn't know." Now, don't start thinking I am, in any way, slamming CPA's. It is just an honest truth not all CPA's (or accountants) are tax specialist. While they are one of the most valuable members of your financial team, CPA's are more like historians. They track your financial data; use your historic data, combined with your new data, to help you succeed with your financial goals.

Your CPA is not a magician; he cannot read minds; he cannot pull your financial figures out of his hat. Believe it or not, you don't pay your CPA to track your income and expenses or to find qualifying loopholes. That is what you hire people like me to do. You hire a CPA to accurately prepare your tax return using those tracked income and expenses, which will tell him what you qualify for and to help you find the path to your financial goals. They cannot deduct what they don't know you have.


Proving Intent: COG's, Expendable Inventory… (full article)

I will not insult your intelligence by explaining why a business must, without a doubt, track standard operating inventory. However, inventory for Cost of Goods sold (COG's) and expendable inventories are a totally different ball game. There are few business owners who know the IRS, while never telling you, will regard it mandatory for a business (regardless of size, type, or income level) to track COG's and expendable supplies. Most business owners believe that all deductible expenses are actually optional and believe COG's and expendable items are tracked simply "because they're tax deductible". It is because of that single thought most self employed, and/or very small independents, choose to not make the effort. In effect, by not tracking them, they will be making the worst mistake they can make.

There is one rule in the IRS code that can be interpreted countless ways, yet is written in what appears to be a very precise directive. No where in the IRS code does it state a company must make money to be a "real" business. The IRS Code states "a business must prove the intent to make money to be a business".

Now, let's define intent. Whether you use the word intent or intention- aim, goal, target, objective, plan, meaning, or purpose- is normally what you are trying to say. However, those definitions are not necessarily what the IRS is referring to, or using for its definition. In most cases you will find the IRS is using the word "intent" as a connotation, and using this as its definition: intent- the meaning, or significance of something, especially when it is not explicitly expressed while also encompassing full attention and effort concentrated or focused on, one thing.

What it means is, for a company to be designated a "real" company, the sole purpose of that company must be the concentrated effort and focusing on one thing… to make money. Sounds simple, doesn't it? But, how do you corroborate or establish "intent" when the amount of actual income is not necessarily a factor? What if you have little or no income? Many businesses, when first starting out, do not have the luxury of recognizing immediate income. Some owners even live under the misconception that they should "claim" they made money they didn't make, just to be safe. Guess what? They claimed it for nothing. If you are called in for an audit and you have "claimed" income but cannot prove intent, you are going to be in a lot of trouble. You will be required to prove "intent", among other things, by going much further than showing ads you have placed in a newspaper, or money deposited to your business account.

You must be able to prove that you have operated "as" a business. Not so simple.

No business can conduct any business without the basic necessities like paper clips, staples, paper, ledger sheets, envelopes, postage stamps, just to name a few. How can a lawn service company claim intent by showing a bank balance when they have no proof of purchasing trash bags? Show me one online company that claims they can function without purchasing envelopes, and I will show you a company that cannot prove intent.

The fact of the matter is advertising, networking, COG's, (cost of goods sold; NOT your standard inventory for re-sale, but money spent on items, which are not elsewhere defined expenses, you have to have to be able to sell your item or service), and expendable inventory are proof you are honestly operating "as" a business. While those items are not all you need to prove intent, you cannot prove intent without ALL of them. It boils down to the very basic truth, you can make money without "intent", but you cannot "prove" intent because you made money.

Should you be audited and not prove intent, regardless of how much money you made, every deduction you have taken will be disallowed. Taxes, penalties, interests; need I say more? Believe me when I say tracking ALL those costs, or paying someone to track all those costs, will be the BEST investment you will ever make IN your business, because you already know, "the future you are planning to bring to reality will not be determined by the money you make; it will be cemented by the money you keep…"


Hope it helped... Have a great week,
Anna
--
The future you are planning to bring to reality will not be determined by the money you make; it will be cemented by the money you keep...

internet and cable TV
 

What about writing off the cost of high speed internet? I'd estimate I use it 80% for work, 20% personal. Has anyone written off a % of this cost?

What about HD cable tv? I'm always looking at lighting, shot set-ups, frame composition while watching movies. I'd say it's a legitimate expense.

anyone written off any similar expenses?

I purchased my current home with my business in mind.
It is a 100 plus year old home in an historic district, that has a carriage house out back.
It has it's own utilities and such separate from the main house, which makes it perfect come tax time.

Any tax man can take one look at my office with the editing workstation, the stacks of papers and the clutter of dusty video equipment, and that'll be all the proof I need. ;-)


J.

Sooo... if I go out and rent office space to generate revenue, I shouldn't deduct THAT expense?

Why is it different from a home office?


J.

Any expense incurred in earning an income is deductible, while tax laws my vary between the U.S., Australia etc etc - the principle remains.

The quality of accountants is variable, like the quality of videographers - if you're unsure - call the tax dept, (or IRS) they can actually be helpful.