Barn Can Serve As Home Office
For Tax Purposes If Done Right

Lots of people use their barns, or part of their barns, for home offices. This is very convenient for people in the livestock industry who have outside jobs. Federal tax law allows tax deductions if you use a barn as a home office, even if the costs are greater than the income generated from that office.

This is a complex subject that I hope to clarify here, particularly since the IRS has recently expressed alarm over abuses in tax deductions for home offices. Generally, you can deduct the costs of a home office if:

1. You are self-employed and your home office is your principal place of business; or

2. You work for someone else but your home office is for the convenience of your employer; or

3. You use space (in your barn, for instance) to store inventory used in your business; or

4. You use the home office to meet with patients, clients or customers in the normal course of your business — and your business requires you to meet or confer with clients or patients, or to deliver goods or services to customers.

Your home office space must be used on an "exclusive and regular" basis for your business. "Exclusive" means that you have a specific space in your barn used solely for your business activity. I recommend marking off the space by a permanent partition such as a wall, door or curtain, to clearly show the specific area used.

"Regular basis" means that your home office is your principal place of business. If you have more than one work location, this requires legal consultation to figure out.

If you are not self-employed, your home office is tax deductible only if it is for the "convenience of the employer," in other words, that it’s required by the nature of your job, not that it’s merely helpful, appropriate or

convenient for you.

University professors, concert musicians, writers and actors want to show that there is no other location available for performing job duties such as writing or individual practice. A professor might show that the university office is noisy, or that it’s unsafe or must be shared, and is therefore unsuitable for research activities. In that case, the home office is deemed to be for the convenience of your employer.

You can deduct the cost of computers, utilities, homeowner’s insurance, lawn care, repairs and maintenance of the residence as a whole, security systems, mortgage or rent payments, and depreciation deductions — with

apportionment of costs based on square footage of the office space compared to the property as a whole.

Because barns are separate structures, the tax law treats them in a preferred way. By placing your office in a barn, you are entitled to unlimited tax deductions regardless of income generated from that office during that year.

By contrast, the deductions for a home office inside your residence are limited to the gross income you earn from work done at that office in each year. If costs of the home office are greater than the income you generate, you can’t use that excess to offset income from other sources. For instance, a writer who generates $5000 of income during the year from work at the home office, but who incurs $l0,000 in costs, cannot deduct more than $5000 from gross income.

Storage space in your barn qualifies as an office if used to store inventory or products sold in your business. The storage space must be used regularly, and it should be the only fixed location for storage of your products.

A home office used just for administrative or management activities qualifies for a tax deduction if you do essential organizational, administrative or management activities at home (as distinguished from activities that generate income), and you have no other fixed location to

attend to such details. The fact that you might conduct some paperwork in a car or hotel room, or even at your regular office, doesn’t affect your ability to claim a home office deduction for administrative activities.

You should keep records as to the regularity of your use of a home office, such as a log of telephone calls, meetings or other work you perform there.

You should also keep records of canceled checks, receipts and other evidence of expenses paid for your home office.

Taking home office deductions is a "red flag" that can make it more likely to be selected for an IRS audit. Therefore, you should always consult a tax expert to support your compliance with the tax laws. If you are

audited by the IRS, it is best to seek legal counsel to map out your strategy so as to avoid the many pitfalls that taxpayers are known to make when they try to represent themselves in an audit.