Are You Waving a Red Flag Outside Your Office?

An accountant can really help you figure out what tax deductions you qualify for, and mine has suggested a myriad of things I didn’t know were deductible. I suggest if you don’t have an accountant, you consider hiring one. The Sloan Brothers offer this advice on how to choose the right accounting service.

With that said, I have been reading up on the home office deduction. And this past week on Startupnation Radio, Accountant Felicia Dixon discussed home office deductions during "The Nitty Gritty" feature. Give it a listen.

According to a variety of published tax experts, the deduction isn’t the RED FLAG it used to be. (The laws changed several years ago to make the criteria less stringent, so if you go searching for information on this, check out the date of the publication).

The truth is, owning your own business is the RED FLAG. Why? Because the IRS has traditionally found discrepancies in the tax returns of small business owners. Whether the errors are mistakes, or people trying to deduct the cost of furnishing their home with antiques as a business expense, the bottom line is that the IRS often collects more by auditing small business owners. (All the more reason to invest in a professional when it comes to doing your taxes.)

Most accountants say you should take every deduction you deserve, but you better keep good records including things like photos of your office space. There is no easy deduction even when you qualify. There are many different individual things you can deduct depending on your individual situation.

While nearly a third of the U.S. workforce regularly worked at home in 2004, less than a quarter of them claimed home office deductions. The criteria is outlined in this IRS publication, but it can still be confusing, and even if you do all your work from your home office, it may not qualify if you also use the space for other purposes. For example if you use your computer for things other than work, it may no longer qualify. If you use the spare bedroom, only the square footage around your desk may be considered an office.

Taxmama.com says you might want to forget it if you plan to move soon or move frequently. It has something to do with the depreciation aspects of claiming a portion of your home as business that adversely affect your tax situation when you sell your house at a profit. She also mentions you can’t have the deduction if your business losses money. And only certain types of businesses qualify. I’m pretty sure you can’t have the deduction if you are incorporated.

You’ll want to be confident and prepared for any questions the IRS may have about all your tax deductions. So even if you hate it, keep those receipts and logs of your business dealings.

If you take the deduction and can shed some light, please do. I’d love to hear from you if you think you were audited because of it.