Home Office Deduction Basics

• In order to claim the home office deduction on your income taxes, you must meet a few requirements. Your designated home office must be exclusively used as your principal place of business of the place you hold meetings or consultations in the course of operating your business. If your home office is in a separate structure at your home, it simply must be used in connection with your trade or business (i.e., a shed used as an artist’s studio). Finally, if you are an employee, working from home must be for the convenience of your employer.
  
  

Valuing the Deduction

• The fact that you take the deduction is not the part that potentially raises eyebrows at the IRS, it is the amount that you try to deduct for your home office. Your deduction is based on the percentage of square footage of your home that you use for your trade or business as well as the percentage of time that the office is used exclusively for those purposes. The IRS has developed a worksheet to assist taxpayers in reasonably determining the value of this deduction. Once you have determined the percentage of your house used for business purposes, you are able to allocate the percentage of your deductible mortgage interest, real estate taxes and other utilities and maintenance expenses used for the home office.
  
  

Does the IRS Audit You for Taking a Home Office Deduction?

• IRS audits are based on a combination of things, such as potential use of tax avoidance schemes, relation to other returns that are being audited and computer scoring. Just because you claim a home office deduction, you will not be flagged for an IRS audit, provided you do not claim a wildly unreasonable deduction amount.
  
  

General Tips to Avoid an Audit

• In order to avoid an IRS audit, do not overestimate your square footage, usage of your home office or expenses. When in doubt, underestimate the value. If you have a way to substantiate your use of your home office by keeping an appointment log or days worked, that would be helpful in the event you were audited to prove you accurately claimed your deduction. Use that room exclusively for your trade or business and do not allow any personal use of that room or area. This is perhaps the biggest problem with the home office deduction.