Prepping Documentation For Business Use Of A Home

Many small business owners and sole proprietors now work from home, thanks to technological advancements. Setting up a home office provides many conveniences, and the cost-saving benefits extend beyond reducing commuting expenses. Legal tax deductions are available to someone who performs their duties at their residence. However, the Internal Revenue Service may request proof to back up claims. Therefore, it would be helpful to keep thorough documentation of any claims for a home office deduction.

Detailing the Home Office Deduction

When taking a deduction for "business use of a home," the taxpayer must file a Form 8829 detailing the many figures that add up to establish the actual deduction. So, someone paying $1,800 a month in rent would take a deduction derived — in part — from a percentage of the rent. Two other elements to the deduction involve how many hours a week a person works and the utilization of space inside the premises. Making gross estimations or overstating the time worked could raise red flags, resulting in an audit. However, even when the taxpayer provides accurate information, he or she could lose their deduction when unable to substantiate it. Worse, they could face a civil penalty for submitting a questionable return.

Keeping a Supporting Documentation File

Maintaining a file of documentation proving the accuracy of "business use of a home" claims could be helpful. Without the file, a taxpayer could find him/herself trying to piece together to gather evidence to counter an audit, steps that might be challenging when asked about a tax period from three years ago. Items to keep in the folder may include:

  • Floor Plans: Procuring a floor plan that details all the square footage inside the residence helps. Measuring the home office area to determine the square footage establishes part of the claimed deduction. Copying the floor plan and adding a penciled drawing of the area might clarify the deduction.  
  • Photograph the Home Office: Photographing the office area may be worthwhile. Perhaps taking a picture displaying the tape measuring of the area could better establish the square footage claim. 
  • Work Hour Logs: Keeping a record of the hours worked each day, every day, throughout the year provides details about the earnings derived from working at home.

Be aware that even though someone submits accurate documents in response to an audit letter, the IRS representative might not rule in their favor. Thankfully, the option could exist to appeal the decision or even go to a tax court. 

Reach out to a small business tax preparation service to learn more.