How to keep your home office in tune with the IRS
By Michael Sivy, Wall Street Editor

Reprinted from Money Magazine, June, 1997

Now, Fleetwood Mac's Stevie Nicks can't stop thinkin' about yesterday-- because the IRS won't let her.

On her 1991 tax return, Nicks, whose band's '70s hit "Don't Stop (Thinking About Tomorrow)" became a Clinton Administration anthem, deducted $60,160 in expenses for a home office in her Arizona residence. But the IRS audited her return and nixed Nicks' write-offs (as well as $208,827 in deductions for pop-star-related expenses, like a personal manager and makeup). In all, the IRS says she owes $85,887 in back taxes.

Nicks, who declined to speak with MONEY, is currently fighting an uphill battle against the feds in tax court. Based on my experience as a tax lawyer and former IRS audit group manager, here's what Nicks will have to do to prevail over the IRS-- and what you can learn from her tax troubles.

The IRS can get you singing the blues-- like Stevie Nicks. Photo credit: Carraro/Gamma-?Liaison In order to keep her write-offs, Nicks must first prove that the home office was her "principal place of business." That'll be difficult, since the IRS believes a musician's work is done mainly in recording studios and concert halls. (Similarly, a lawyer who makes most of her money defending clients in court probably couldn't get her home office expenses past the IRS.) So to salvage her deductions, Nicks will probably try to prove that her home office is the primary place for the various businesses she says she runs. Her petition, for example, lists a host of activities she conducted from the home office, including composing, writing poems, drawing and painting.

Nicks must also show that her home office was used "regularly and exclusively" for business. That argument could fall flat, especially for the write-offs attributed to the outdoor portions of her home, if she also uses the space for personal entertaining or relaxing.

My advice to Stevie and to you: In order to write off a legitimate home office, keep a separate business phone line there and take photographs to show that you have no personal items in this part of your home. Also, keep detailed records of the work you conduct in your office and a daily log of all business visitors. Finally, hang on to your canceled checks and receipts for all office expenses, so you can document your costs if the IRS comes calling.