Home Office expense is too high

[ethan-nir]

My wife does freelance work a sole proprietor and receives 1099-misc for this work from her clients. Every year we do itemized deductions and apply a home office business expense.

When it comes to business income vs expenses, most years she breaks even or makes a slight profit. 

This year however she received very little income from the 1099-miscs (around $2600) and when you subtract her home office expenses (around $5000), the result is a very large deficit on TT (minus $3600). 

As a result of this loss, this is the first year TT puts our audit risk at medium instead of low ("Your business expenses are significantly higher than your income")

I'd like to understand if there is a way to still utilize the home office expense but reduce it to a more reasonable amount and reduce my risk of an audit.

It seems that even if I state that she only used the home office 2 months during the year for at least 15 days, I still receive the full year home office deduction. 

[AnnetteB6]

You should be careful with adjusting the number of months that the office was used during the year because the home office must still be used regularly and exclusively to qualify at all.  

The TurboTax audit risk meter may or may not be in line with what the reality of audits is with the IRS.  I would personally be more concerned with filing a complete and honest return with information and documentation to back up my claims versus trying to change something in the return to affect the audit risk meter.  The change in the risk may not actually be related to the home office expense at all.

That being said, there is a way to limit the use of the home office deduction.  It is in the question about how much of the income for the Schedule C business was generated through the use of the home office.  It asks for the percentage of time conducting business in the home office.  This sets a limitation based on the income of the business and will allow any disallowed home office expenses to be carried to future years, if you are using the actual expenses for the home office and not the simplified method.  

[ethan-nir]

Thanks for the detailed response!

What I stated was the honest truth - this year my wife didn’t get that much work from her clients and as a result she sat and worked in this home office for less months than prior years. This home office is not used for anything else, so I don’t believe we’re being dishonest about its primary (and only) use.

In regards to lowering  the percentage of time conducting business in the home office - When she did service her clients it was almost entirely by doing work in this home office (and nowhere else) so wondering if this modification would still make sense?

And maybe the bigger question here is whether it’s wiser to drop the home office expense completely from years like this one when business income is low?

Thank you!

[AnnetteB6 · Accepted solution]

To me, making any changes in the return other than simply reporting the honest truth of the matter would not be warranted.  In my opinion, it is best to report the reality of what your situation was and what you have documentation to substantiate.  Do not worry about the audit risk meter and manipulating your return to try to affect it.

Instead of dropping the home office completely from the return, you could take a close look at what it means to be used exclusively for business and adjust the size of the home office to reduce the expenses.  For example, if there is furniture in the home office that is not used for the home office (for example, a spare guest bed or fold-out couch), then that area of the room could be excluded from the 'exclusive' use for the home office.  This is just another thought to consider.

[ethan-nir]

This suggestion was super helpful as it made me check the exact measurements of the home office and it ended up being smaller than the estimate I had in TT.

Now the information is much more accurate and honest and I feel much more confident with it in case we do get audited.