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The home office deduction debate

Does deducting your home office send a red flag to the IRS?

By Jeff Zbar
Net.Worker, 08/20/01

Part 2 of a two-part series

As a teleworker, you may be perfectly entitled to the home office deduction. Even so, many tax preparers are leery.

Some cite residential tax issues. By deducting your home office, you're reducing the cost basis used to compute capital gains liability when you sell your home. That means at the time of resale, you'll owe taxes on the amount of depreciation you've claimed, explains Doug Stives, CPA, a partner specializing in individual and small business taxes with Wiss & Company, a Red Bank, N.J., accounting firm.

Part 1: Determining whether you're eligible for a home office deduction

Other tax advisors and preparers fear that by attaching the required Form 8829 to your tax return, you're in essence goading the IRS to audit you. Stives, who serves on the Tax Executive Committee of the American Institute of Certified Public Accountants, says that's not the case. Even so, if you take the deduction, be prepared to substantiate that your company "expects and encourages" you to work from home.

Create a supporting file that includes:

A signed letter from your manager or employer verifying employment, and stating that the company does not provide you with customary office space.
Photographs of your home office.
Receipts, check stubs and bank statements that prove the company reimburses you for office equipment, as well as voice and data lines and service.

Most important, don't procrastinate. If you wait and the company you work for fails or is sold, the original owner or manager may no longer be around to sign the letter or even acknowledge the validity of your telework arrangement.

To learn more, visit the IRS Web site and download Publication 587 on "Business Use of Your Home." Then use IRS Form 8829 to compute your deductible expenses for business use of the home.

Under current tax law, filers can amend returns filed within the past 3 years. But before you go amending back returns, find a tax advisor who understands and appreciates the value of the home office deduction. Many do not, Stives says: "But if you're following the rules and get audited, you're not going to lose."