You have probably read that the home-office deduction increases your chances of IRS audit. We’ve read that, too, but we don’t believe it. Regardless, there are a few things you can do to make your home office less likely to ever appear in an audit.
If you filed your business income and expenses as a proprietor in 2017 and reported $100,000 or more in gross receipts, your chances of IRS audit were 2.4 percent (2017 returns are still open for audit, so the percentage could increase).
Had you reported this income as an S corporation, your chances of audit were only 0.20 percent.
Does Home-Office Increase Your Chances of IRS Audit?
You have probably read that the home-office deduction increases your chances of IRS audit. We’ve read that, too, but we don’t believe it.
Regardless, let’s assume that you’re a little paranoid about audits, and you want to claim the home-office deduction in a way that doesn’t attract the attention of the IRS.
If you operate as a corporation, your home-office deduction does not show on either your personal return or your corporate return if you have the corporation reimburse the office as an employee business expense.
With reimbursement, the corporation claims the deduction for the expenses it reimburses to you. The corporation probably puts the reimbursement into a category called “office expenses” or something similar. Thus, the home-office deduction as a name or title does not appear in the corporate return.
You receive the reimbursement from the corporation as a reimbursed employee expense. You do not report employee-expense reimbursements as taxable income on your personal return. Thus, you do not identify the home office on your personal return.
Got it? The home-office deduction does not appear under a home-office label on either the corporate or personal tax return as a tax deduction.
If the corporate form of business appeals to you, feel free to contact me by scheduling a call, or by emailing at email@example.com so we can look at your options to see if we should spend some time on your tax planning.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.