2 of the most valuable deductions for home businesses are the mileage deduction and the home office expense deduction. Both of these can be lost by not understanding one simple rule, and that is your home office must be used exclusively for your business. That means no personal use of that space.
A recent ruling (Haag, T. C. Summary Opinion 2013-29-you can Google it) agreed with the IRS that the taxpayers were not eligible to claim the home office deduction because they admitted in court that the 60 sq ft office space claimed on their tax return had personal information in the file cabinets and that there was personal use of the computer. (The fact that two businesses claimed the same office space is not addressed in the opinion. I believe that alone could have disqualified the use of that space as a home office).
A home office of 60 sq ft is pretty small. Losing that deduction alone would not have resulted in much in the way of lost deductions but does mean that their home doesn’t qualify as a principal place of business, In turn, this results in their deductions for traveling from home to several work locations being disallowed as they were considered to be commuting expenses.
This lesson cost the taxpayers nearly $7500 in lost deductions and accuracy related penalties. I don’t know what the court costs were but I would suspect that the total cost of this mistake was far in excess of $10,000 with interest and penalties and court costs considered.
I am surprised this went to court. After reading the summary, it appears that the deductions claimed were mostly unsubstantiated and/or not actually deductible. It was a self-prepared return so I can understand that they didn’t know what was or was not deductible and did not understand what records were required but the taxpayers were represented in court and should have been told that they had a very weak case prior to filing.
Don’t let this happen to you. I believe that the taxpayers in this case probably had good reason to claim a large part of what they claimed. With good advice tax advice, recordkeeping, and proper return preparation, this return would have never been flagged for audit. They probably saved $40-$70 for tax preparation when compared to what AFS would have likely charged for a married couple with 2 Schedule C businesses (our fees are pretty low). But you can see what it cost them.
AFS – Use the Best for Less