Tax myths are a lot like a bad date. They are annoying and seem to last forever. Yet people have beliefs about income taxes that have no basis in reality. Were it not for the potential financial costs, some of these might be amusing. But if you believe them and act upon them, they can cost you serious money.
1. The Home Office Deduction Is an Automatic Audit
This
myth has been around for about a quarter-century and is accepted as
gospel among those who are not intimately familiar with income tax
preparation. In truth, as long as a home office deduction follows IRS
rules, and is not excessive, this deduction is not an automatic red flag
for audits.
The IRS has three basic rules when it comes to the home office deduction:
- Regular and exclusive use – This means that the home office is regularly used for business, and has no other use. As long as you have a room in your home that you are using exclusively for business on a regular basis, you meet this requirement.
- Principal place of business - The home office can't simply be a space that you occasionally use to conduct business. It must be the primary office from which you run your business. This means that you can't deduct expenses for a principal office outside of your home, in addition to your home office.
- Additional tests for employee use – As an employee, you may be able to take a home office deduction if you a) meet the two tests above, b) your business use of your home is for the convenience of your employer, and c) your employer does not pay rent for the space.
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