The problem with the home office tax deduction

Ginger Dean

March 12, 2015

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

The home office tax deduction is a popular one, but it could open up Pandora's box if not used correctly. The IRS is prone to auditing tax payers who use this deduction liberally and aggressively. So what's the best way to handle it? Know the rules, abide by them faithfully, and keep good records.

IRS red flag

The home office deduction is typically seen as a red flag for the IRS. It can knock off an appreciable amount from your tax bill, sure, but it may earn you some extra scrutiny. A great way to avoid any suspicion is to be sure to claim the exact amount of space exclusively used for your business. The best way to do this is to have a contractor come out and measure the space. That calculation helps you determine the percentage of the total square footage of your home being used for business purposes.

"Exclusive use" gets complicated

Proving exclusive use may be difficult in the event of an audit, so to be safe, make sure the office is explicitly designated for business use. Not a spare bedroom, not the guest room, and certainly not your toddler's play room. None of those rooms can double as a home office while claiming exclusive use. Take pictures if needed to support exclusive use.

Size matters

Claiming more than 300 square feet sends red flags to the IRS as this is the maximum allowable square footage. IF you happen to live in a fairly large home and have a pretty expansive work space then this may prove problematic for you. Additionally, if you operate a daycare out of your home the amount may be less. That said, being that tax laws change every year, please check with IRS.org for the most updated maximum allowable square footage.

Keep good records. Meet with your tax adviser so that you can get a good idea of how best to implement this deduction. Know the rules and follow them to the letter. Still, this doesn't mean that you miss out on a valuable deduction altogether. You just need to make sure that you're applying the deduction fairly based on what is expected of someone on your income level and type of business. Keep copies of floor plans, pictures of the space and calculation of square footage by a contractor. The last thing you want is the IRS knocking at your door questioning your deductions.


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