The Home Office Red Flag Myth

From our friends at Tax Coach:

What do you get when a technical tax discussion meets a rant and they fall madly in love? Today’s Briefs, that’s what!

 

Ours is a culture that takes comfort in accumulated wisdom from generations past. Why reinvent new wheels when we can reach back to familiar lessons? Yes, “experience is the best teacher” – but the tuition can be awfully high!

 

In the tax world, there’s one lesson that looms large above all others. “Don’t take the home office deduction! It’s an audit red flag!”

 

It’s been repeated so much that it’s almost unquestioned.

 

Google “home office audit red flag” and you’ll get 526,000 results. (Probably more by the time you read this.)

 

Check out nearly any magazine or newspaper article on audit triggers, and you’ll see the home office. The first page of those 526,000 results links to such respected sources as Kiplingers, Forbes, and Money magazines.

 

There’s just one problem with this overwhelming mountain of conventional wisdom.

 

It’s not true!

 

And it drives me nuts when I see it or hear it. It’s not just because I like to prove myself right when everyone else is wrong (although, if I’m being honest with myself, that’s part of it). It’s because so many well-meaning business owners leave so much money on the table when they follow the advice of people – whether they’re lazy, timid tax professionals or simply credulous reporters – who perpetuate that myth.

 

Maybe the home office was an audit red flag, back in the mist-shrouded days when business owners and professionals guzzled martinis at lunch. But no longer.

 

• In 1993, the Supreme Court ruled in Soliman v. Commissioner that an anesthesiologist, whose actual “deliverable” consisted of gassing patients at several different local hospitals, could take the deduction for the space he used to perform administrative and managerial services in the spare bedroom of his Maryland condo. That opened the deduction to a whole new category of business owners.

 

• In 1997, Congress expanded the deduction to include home office expenses when a specific portion of the home is used regularly and exclusively as a taxpayer’s principal place of business.

 

• In 2013, the IRS introduced a simplified “safe harbor” method for calculating the home office deduction.

 

• And earlier this month, the IRS published a notice titled “For Small Business Week, IRS offers tips to small business owners about the overlooked home office deduction.”

 

That’s right . . . the IRS itself, the agency that so many people are afraid is targeting home office deductions, is actually making it easier to claim and telling taxpayers not to overlook it! (Seriously, go read that article – it’s short.)

 

Does that really sound like a red flag? (Announcer voice: it’s not a red flag.)

 

Why do so many people persist in repeating the myth? Beats me. But three things are sure.

 

First, they’re wrong. Second, when a reporter, even from a respected publication like Forbes, writes that the home office is an audit risk, you should probably just ignore everything they say. (Sad to see fake news invading our corner of the world!) And third, when an actual tax “professional” repeats the myth, ask them if they have any evidence to back up that claim. Start by asking them if any of their own clients have ever been audited for home office expenses. (Spoiler alert: they haven’t.)

 

I don’t bother sugarcoating it anymore. When someone tells me, “I don’t take the home office deduction because my accountant tells me it’s an IRS red flag,” I just say, “You need a new accountant.” And I say it in a pretty snide and scoffing tone.

 

I’ve spent the last 13 years of my career helping business owners pay the least amount of tax legally allowed. The home office deduction is an important part of achieving that goal. Yet the “home-office-as-audit-bait” myth is like a vampire. It just refuses to die. Time to put a stake through its heart for good!