Home Office – Avoiding Audits

We’re going to talk about that one topic every business owner fears: audits. Also known as, the “A” word.

The idea of an audit can be scary and, of course, no one wants to deal with being audited. But check this out.

If you filed your business tax returns as a sole proprietor and you had a $100,000 income from your company, your chances of audit in 2016 was 2.4%.

If you reported the same exact thing on an “S Corp” your chances of audit were 0.2%. That’s one fifth of 1%. That’s a pretty sizable difference.

Now, let’s chat about a common and specific deduction: the home office deduction. You might have heard, home office deductions increase your chances of audit. However, there’s no sufficient data that proves this.

Unfortunately, the IRS doesn’t give us straightforward answers as to why someone would be audited. That being said, if you’re curious about some red flags the IRS pays extra close attention to, they have a “Dirty Dozen” list you might want to check out.

Other than that, we don’t really know what the triggers are.

From my perspective, the home office deduction probably does increase your chances especially if filed the traditional way. But I’m going to tell you how to avoid that, the BollitProof way.

Let’s say we have a home office deduction, and obviously we don’t want to get any extra attention from the IRS.

If you would make the decision to operate as a corporation (LLC, S Corp for example) instead of a sole proprietorship, you could actually reimburse the home office expenses as an employee business expense or an employee benefit.

This means it won’t show up as a home office deduction.

The reasoning behind this strategy is so the deduction from your corporation actually reimburses the expense as an employee benefit, therefore “home office” wouldn’t be mentioned anywhere. Your corporation will probably put this under an office expense or rent.

Another advantage of doing this is the employee (you in this case) doesn’t pay any tax on the reimbursement from the corporation. Reimbursements are non-taxable to an employee.

When calculating rent, you don’t want it to be extreme. This would definitely flag the IRS.

So, the way you’re going to want to figure out this calculation is to actually use the form 8829. This is the form for using “Business Use of Your Home” worksheet for the IRS. This is a great resource to have on your file.

You’ve heard me say it before but I’ll say it again, dot your I’s and cross your t’s. This is an important strategy to utilize to avoid any unnecessary run-ins with our friends over at the IRS.