Most people already know the mileage from your house to your office in the morning is not deductible and that the mileage from your office when you come home in the afternoon is not deductible. This is referred to as “commuting” mileage. On the other hand, the mileage between the office and other business destinations during the day is deductible, as long as it is properly “substantiated” (see my blog on mileage logs). Thus, if one is an employee and merely drives to and from the office every day, then his mileage will not be deductible. But, being self-employed offers some tax-saving opportunities.
What are those opportunities? At first blush, the same rules should apply, and they do – the trip to the office in the morning and to home at the end of the day are NOT deductible. But, self-employed individuals have the option of establishing a “home office.” What that does is it transforms mileage that would otherwise be non-deductible into deductible mileage. Thus, if one starts out his day AT his office, then any mileage incurred for business purposes thereafter during the day is business mileage. So, the question becomes exactly what one must do in order to establish his home office so he can get a higher mileage expense deduction on his tax return?
The home office deduction is available to sole proprietors and S corporation employee/shareholders, not partners in a partnership. There are two requirements under tax law:
- The home office is used regularly and exclusively as the principal place of business for conducting your trade or business, and
- “Principal place of business” means used by you for administrative or management activities if there is no other location where substantial such activities are performed.
The home office has to be used “regularly” – occasional or incidental use is not enough. Use your home phone to make business appointments and receive business calls – forward to your cell phone when you are not at home. Keep your files and records at home, if possible.
It has to be used “exclusively” for business – you cannot use it to store clothes or to conduct other personal usage, for example.
The home office must be the place where you run your business. If there is another place you go to on a regular basis where you perform administrative and/or management activities, then the deduction could be disallowed. What are administrative/management activities? Billing customers, keeping books and records, ordering supplies, setting up appointments, forwarding orders, and/or writing reports are good examples.
How does one PROVE home office? The best way to prove it is by documentation – good ways to document home office would be to:
- Have all bills delivered to your home, as opposed to some other location.
- Have office supplies delivered to your home address.
- Have a second land-line for your home (the first is always presumed to be personal).
- Meet with clients at your home, of possible.
In a very few situations, the home office can be applicable to employees. Consult your tax preparer before taking this leap.
Is the home office a “red flag” for the IRS? I say NO, depending on your line of work. If you are a real estate agent, for example, the way you make your living is by showing houses, going from house to house. The tax law KNOWS this and expects that when a real estate agent files a tax return, he will most likely claim home office and also high automobile mileage. On the other hand, if you are an accountant working for a large corporation with offices in the city, then the IRS would more than likely anticipate that you would NOT claim home office or a large amount of mileage. Believe it or not, the IRS has these items plugged into their computers so they will spit out the taxpayers that are more than likely taking deductions to which they are not entitled.
Don’t try this analysis on your own – make sure you consult your tax advisor!