Office Outside Home

[kristinecfp]

Hi Dennis,

Your opinion is noted and is one that I hear a lot. However, I don't think you should pass up on a legitimate business deduction just out of fear of being audited.

Schedule C filers (sole proprietors) are the most audited group of taxpayers, but does that mean you shouldn't file a Schedule C, or that you shouldn't be in business? Of course not. The first would be illegal, and the second would be plain silly.

Why then would you pass up on a legitimate business deduction if it could reduce your tax burden? (Btw - I am a pretty conservative CPA, I would never recommend a deduction that I didn't think was 110% legitimate)

If you have legitimate home office expenses, you should take advantage of them. After all, as you stated in your post above, if you're in the 25% tax bracket, your home office deduction could save you approximately 40% (25% + 15.3% SE tax) in taxes for every dollar you spend on your home office. This may not be substantial to you, but it is very substantial to myself and many other home based business owners, especially those in their early years of business who can use any tax break they can get.

I respect your decision to pass on the home office deduction for your own return, but I disagree with your opinion. I believe passing up on a legitimate tax deduction out of fear of being audited is poor tax planning.

[DBeavers]

Kristine,

I didn't pass the option lightly, and did so with my CPA's concurrence.

My home is 1800+ square foot. With a $298 monthly mortgage payment, and reasonable utility costs, the amount of the deduction was not substantial. The office takes up less than 10% of the total square footage, so the deductible expenses are relatively small. (Living was cheaper in Louisiana before Hurricane Rita, which helps account for the low cost of such a large house.)

On the other hand, I do keep track of and deduct all expenses for postage (much more than the home office deduction), telephone equipment, service, and long distance, all office equipment, including computers, mileage for using personal vehicle in the course of business, and much more. Once I incorporated my business back in 1996, I switched to letting the corporation buy my vehicles with pre-tax dollars.

All vehicle expenses, as well as business-related travel, depreciation, etc. are all recorded and taken as deductions.

The minor amount of $ saved via the home office deduction does not amount to a significant amount. And having been subjected to 2 audits, I am very comfortable with my decision to pass on a few dollars of savings in lieu of a deduction that can and has been a red flag which triggered IRS audits in my area in the past.

Even if I don't lose a dollar in acceptable deductions, the hours I could lose by having the audit in my home, could cost me a number of sales missed because I was forced to spend selling time with the auditors.

My CPA knows the $ involved and agreed with my decision. He is also very conservative when it comes to accounting for business expenses. I even got his blessing before trading in my old company car for the new one. But, it was simply a matter of sound economics - Lower monthly notes, and full 100,000 mile warranty, or keep the old car, paying more per month, and having all the risk as there was no warranty left.

Rest assured my CPA and I confer on a number of business expenses, investments, and deductions in the course of a year.

I don't know if you can get any statistics from the IRS on past years, but a number of home office deductions have been investigated, with many being reduced or rejected. If I don't take the claim, they can't demand to visit my office. If I am to be audited, let it be in their office and not mine.

Dennis Bevers

By the way, I opted for the Sub-Chapter S when I incorporated 11 years ago. I used Scedule C for my home business for over 10 years prior to incorporating. I gave up being my own tax preparer years ago, and sleep much better knowing I have a like-minded professional handling my books and taxes.

[DBeavers]

Part II

Ex. If my total office expense from the mortgage, utilities (other than telephone), and insurance total $8000 (Which I seriously doubt)

And my office uses 8% of my homes total area

Then $8000 X 8% = $640

With a 40% total tax rate

Your talking less than $260 annually or less than $22 per month saved.

My peace of mind, knowing the IRS can't schedule the audit in my home is worth far more than $26.

I know the deduction is legitimate, or the IRS wouldn't have a form for it. I know my office qualifies to take the deduction. I knowingly pass which is neither illegal or unethical. It's a personal choice.

I don't discourage anyone else from taking it. That is their choice.

If giving up a $20 monthly legitimate deduction is a vice or mistake, it is a most a small one. My business has survived Hurricane Rita and other difficulties over the past 23 years. It will certainly survive my choice to forego this legitimate deduction.

Dennis Bevers

[kristinecfp]

[DBeavers]

Please,

No one take my decision to opt out of using the IRS's legitimate deduction for my home office. It is my personal decision as a non-tax preparer. I decided years ago to pay professionals to prepare my taxes.

My decision is for myself and myself alone.

Please consult with your tax preparer and decide for yourself.

Dennis