One of the most difficult parts of completing tax returns for a home business is trying to figure out how to apportion home office expenses between business and personal use. CPA Gail Rosen provides some information and advice:
What's listed property?
The IRS has a special category of deductions related to "listed property." which can be either business or personal. Laptop computers and printers in home offices are a good example. If you use your home computer for both business and personal use, and you want to take a business tax deduction for the business use, you must provide detailed reports on business use.
Let's say you have only one Internet service (ISP) for both business and personal use. How do you figure business use? You must provide detailed documentation of business use, showing:
1. Dates of use for business purposes
2. Length of time the Internet was used for business purposes on those dates and
3. Exactly what the business purpose was - sites accessed, for example.
How to substantiate business purpose. One way to show business purpose might be to print out the browser HISTORY of use each month. For example, I can click on "History" and "Show All History" and see month by month exactly what sites were used. You can even show "Visit Date." The best way to verify business use is to keep a contemporaneous (at the time) log of which business sites you used and how long you used them.
Yes, the IRS requirements are very strict. If you want the tax deduction for these expenses, it's up to you to provide the verification.
Cell phones, by the way, are a special case. While they are no longer considered listed property, they do require some verification of business use.
More from Gail Rosen on Verifying Business Expense Deductions in a Home Office and What If the IRS Visited Your Home Office?
Gail Rosen is the owner of a well-respected boutique accounting firm in Martinsville, NJ that has been serving individual and business clients for over 27 years. In addition to tax preparation, the firm specializes in assisting business start-ups in understanding their tax responsibilities and deductions. You can email her at firstname.lastname@example.org