Hey everyone.
I recently changed CPA firms after my CPA retired and we wanted to get one in NC instead of VA where we used to live.

I’ve had an LLC for about 20 years that owns a few rental properties. The LLC is headquartered in my home. My office is a dedicated room that is used exclusively for the running of this little business. With my old CPA firm we routinely deducted a proportionate amount of our expenses like mortgage, taxes, HOA fees, utilities etc. based on the square footage of the office versus the total SF of the home (about 17%). We did this for years.

Our new CPA says that since the LLC is “passive income”(I’m not sure I agree with that) that I can’t use the deduction.

I’ve researched all the IRS publications I could find on their website site and everything I could find says that we can use the deduction.

Can anyone set me straight on this?
Thank you.

Business degree with an accounting major. I can't see how that you're not entitled to declare a home office.

In the accounting class of my MBA program, the professor who was/is a CPA said, you know how you find a good accountant?

Ask them what 2 +2 is. If they answer 4, don't hire them. If they answer, "What would you like it to be?" That's a good accountant.

If you're involved in actively managing the rentals, I don't see how it's passive. I say find another CPA.

Another metric that professor said is if you're not getting audited at least once every 5 years, you're not taking enough deductions.

quote:

Another metric that professor said is if you're not getting audited at least once every 5 years, you're not taking enough deductions.

^^^^^^^^^^^^
That is BS and not even funny. Audits are awful and I do my best to avoid them. That is a ridiculous statement from anybody let alone a professor.

25 years ago I was told by a tax lawyer that a home office can be used for NOTHING but the business you're expensing it to. She also mentioned I should be prepared to prove it. Apparently in those days home office deductions were an audit flag. Not sure if that was then or is the case now. I did the math on my taxes and the potential hassle seemed like it was much larger than the gain.

When I had my construction company I went through a full blown audit. The initial assessment was a fine of $297,000. This was based on my then accountant’s advise who was fired immediately. Believe me this is not something that I would wish on my worse enemy…

I was able to hire one of the best tax attorneys in the state of Virginia who was able to argue it down to about 10% of that…

quote:

Originally posted by Bytes:
25 years ago I was told by a tax lawyer that a home office can be used for NOTHING but the business you're expensing it to. She also mentioned I should be prepared to prove it. Apparently in those days home office deductions were an audit flag. Not sure if that was then or is the case now. I did the math on my taxes and the potential hassle seemed like it was much larger than the gain.

My office is used solely for the running of the LLC and I can easily prove it should someone come knocking on my door so I’m not worried about that. I, like many here, pay a huge amount of taxes so if I’m able to legally take a deduction you bet your ass I’m going to take it.

I ran my sole proprietor IT consulting business out of my home office for over 30 years always taking the deduction on my Schedule C. Never got audited once in that time. With the overly-advertised "shortage" of IRS employees, I suspect they're looking for bigger fish to fry.

I'm sure there is some numerical "trigger" as to what percentage to which a deduction might rise that will draw additional scrutiny. I have no idea what that ratio might be, but if you are writing off half your revenue, you're probably going to be tagged, 5-10% maybe not so much.

I doubt that a CPA would have any better idea of where the line might be drawn, except perhaps anecdotal.

I have an LLC for my FFL. I built an 8x8 office in my garage to do business out of and my CPA uses that (as a percentage of my entire house) as a deduction. I would not see why yours is any different.

I’ve been audited (prior to having the LLC) and that is why I started using a CPA. I do not ever want to deal with the IRS again. They did not fin d anything wrong in what I was doing, but they were what you would picture in your head of an IRS employee. Unprofessional, contradictory and had an attitude.

Years ago, I was accompanied by a friend, who was both an attorney and a CPA, to the IRS office for an audit.

I had income from two sources that year; salaried tech (software development) job, and independent flight instructor.

The items that were questioned were all aviation related. My attorney / CPA friend was also a commercial pilot, so he was more knowledgeable about the items in dispute than the IRS agent was. He (my friend) whittled everything down to the last item in question. Long time ago, so I don't remember all the details, but I do remember two things about this item:

1. It was only eighty-one dollars. The IRS guy had folded on everything except this one.
   
   
2. It was clearly a legitimate deduction. Absolutely no question. Black and white, no gray area at all. It should never have even been questioned by the IRS guy.

This last item was so clearly legit, that I dug my heels in and refused to budge, until my lawyer friend stepped on my foot under the table, as a "shut up" signal. I wrote a check for the small tax amount on that eighty-one dollars and we departed.

Later, over a liquid lunch, I asked Chuck (my lawyer friend) why he had capitulated on that item. He said, "It's not about right and wrong. It's about tactics. Let the guy save face. Give him something small, so that he won't bother re-opening any of the other stuff."

^^^^^^^^^^^^^^^
I have had lawyers do the same for me. It was a court case we were clearly winning. The other party made a snide remark and I wanted to badly to say something.He stepped on my foot and I got the message.

I thought they did away with the home office deduction in 2017.

no that's not accurate. still available. If used exclusively I see no difference on the type of income.

This year I did bump into deductible territory, a host of things. That said I don’t like to ‘red flag’ myself for little gain. Yes I’m fairly simple, use TurboTax.

I reference ‘averages’ for the income level, also look for things that could trigger an issue. My evaluation would be looking into what gains(savings) could potentially be had with a deduction? Maybe I can get similar results other ways??

Last year I had a more unusual situation, thought I’d pay a pro. They came up with the same as me on Turbo, back to doing it myself.

not a CPA, but do own a business,

corporation with my Brother and I as owners,

I ran the business address as my home,
however the business is in a home we both own,

I write off all electric, cable, and taxes thru the company, and some minor repair bills now and again and my CPA blessed it all,

I do not write off anything at the house I normally sleep in,


same? maybe not,, but he (brother) did live there many years and we did the same,

If there is a gray area I do not deduct it. My retirement plan was audited and although nothing was amiss it cost me six grand.The IRS was doing some special study and flew an auditor down from Saint Louis. It was stressful to say the least. It also knocked out three days of work. Oh,they never say they are sorry, they just send a letter several weeks later.

The home office deduction is a well established deduction with adequate IRS guidance on what's allowable. Its not in any way a 'red flag'. And its a very good one for most. Provided you use it exclusively. I looked and see no reason its not available in this situation.

Thanks everyone.
I have a BIL who is a retired CPA and CFO of the largest law firm in NH. He still does his immediate families taxes so he should be up to date with the latest rulings etc.

I’m going to reach out to him this am and see what he has to say. I’ll report back.

^^^^^^^^^^^
Good idea. A seasoned CPA has the pulse on the IRS. I have learned that some years they focus on certain things. I am hoping the reduction in force will reduce the number of audits of honest people. I remember when Nixon ordered the IRS to audit his enemies. At that time my income did not warrant an audit.

quote:

Originally posted by smlsig:
Hey everyone.
I recently changed CPA firms after my CPA retired and we wanted to get one in NC instead of VA where we used to live.

I’ve had an LLC for about 20 years that owns a few rental properties. The LLC is headquartered in my home. My office is a dedicated room that is used exclusively for the running of this little business. With my old CPA firm we routinely deducted a proportionate amount of our expenses like mortgage, taxes, HOA fees, utilities etc. based on the square footage of the office versus the total SF of the home (about 17%). We did this for years.

Our new CPA says that since the LLC is “passive income”(I’m not sure I agree with that) that I can’t use the deduction.

I’ve researched all the IRS publications I could find on their website site and everything I could find says that we can use the deduction.

Can anyone set me straight on this?
Thank you.

Your new guy is right, "perhaps". The fundamental question is whether the rental operation rises to the level of "a trade or business" under Code Section 162. If not, the HO deduction is not an option. i.e. if the rental operation is under Code Section 469, the passive activity rules. Too many nuances to get into here and at this time three days before filing deadline. Your BIL can probably school you on it and come to a determination after asking several questions.