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How Can I Prepare for an IRS Visit to My Home Business?

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Question: How Can I Prepare for an IRS Visit to My Home Business?
If the IRS decides to visit your home business, they will be looking to see if you comply with the "regular and exclusive" use test for your home office. That is, you must use your office regularly for business and your use of the area must be exclusive. You can do nothing else in that area and you can't have anything personal there. Recently I asked CPA Gail Rosen to answer some questions that might help you prepare for a possible IRS visit to your home office:
Answer:

Q: I have some personal photos and decorations in my home office. I figure you would find these in a business office, so I don't think those would be a problem. Or are they?
Yes, but be careful. If the decoration is a putting green or a dart board, it can mean that you are doing something personal there. You can argue that you might be allowed to have a putting green or dart board in a regular office but it is different in a home office. Any personal use disqualifies the deduction.

Q: I have business files mixed in with personal filing in my credenza and desk. David Allen (Getting Things Done) might think this is just being efficient, but he's not a tax expert. Should I remove the personal files and put them somewhere else?
Yes, the safe thing to do is to move it to your personal part of your house. The law states that there can be no other use of the space.

Q: I have many books in my office, but they are all business and work-related. I figure these are acceptable.
Yes, business books are fine; just nothing personal.

Q: I print home stuff on the printer in my business office - should I get another printer?
The safe thing to do is to get another printer. In order to deduct 100% of the printer, it has to be used 100% of the time for business. This way you solve two problems at once.

Q: I have my own business on the side but also work full time for an employer. If I use my room for my employer and for my business; does that affect my home office deduction?
If you are using the home office both as an employee and a self-employed person, you must meet the home office requirements for both in order to take the deduction. As an employee, if you work in your home the deduction can only be taken if it is for the convenience of the employer and not for your convenience. It must be a requirement of the job and you would have to be able to get a note from your company that states that or no home office deduction is allowed. You have to meet the requirements both as an employee and as a business owner to deduct the home office if the office is used for both.

Q: I have a TV and VCR in the room and can prove that I use that for business; can that affect my home office deduction?
Yes, under a 1994 Tax Court case, (TC memo 1994-27), Dr Salih was denied a home office deduction for failure to provide evidence that an office containing a television and a VCR had no personal use. Ask yourself: How are you going to prove that you don't watch an occasional TV show or movie on this equipment?

Q: If I use my exclusive room for personal use after business hours; does that affect my deduction?
Yes, in Cook, an attorney was denied deductibility for a portion of his residence used as a home office because he failed to meet the exclusive use test. While the residence was in fact the principal place of business for the law practice, the portions used for business was also personally used by the attorney and his family after business hours and presumably on weekends and holidays. Thus, the space for the law practice failed the exclusive test and the entire home office deduction was denied. (Cook v Commissioner, TC Memo 1997-338.)

Q: I read about a husband-wife business in which the couple had dogs that they let stay in their home office during the day. They also let the dogs sleep in the office at night. Is having dogs in your office a problem?
Dogs sleeping at your office at night would disqualify the home office deduction. No personal use; same thing as allowing a kid to sleep there at night. A kid, a dog, it's all personal. (T.C. 2009-55)

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Gail Rosen, CPA 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 what deductions they are entitled to. Gail has earned a reputation for putting complex tax issues into language others can comprehend and profit from. You can email her at grosen@gailrosencpa.com

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