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Claiming a Home Office Tax Deduction
Dear Professor Bruce:
I run my business out of my home. I use one of the rooms as my office. Friends have told me that this could easily raise "red flag" at the IRS even if it legitimate.
Your friends may mean well but unless they are qualified to give financial or tax advice (or medical or legal advice), I would thank them for their interest and move on.
Office in home reporting can be confusing. So your first year or so in business, consider establishing a relationship with a tax professional who can guide you through filing your business returns.
According to Eva Rosenberg, EA, publisher of TaxMama.com, and author of Small Business Taxes Made Easy, there are several instances where a home office deduction is appropriate.
- Your home office is your only place of business.
- Your place of business does not have room for you to handle your administration and business issues (like a Laundromat with no office space).
- You regularly meet with customers or clients at your home office.
- You store merchandise or inventory in a specific part of your home or property.
In addition, there are three main limitations.
- You don't use any area of your home exclusively for business. For instance, you work at your dining room table after the family goes to bed - but during the day, it's where the family eats or meets.
- You have a shop or office elsewhere, with files and space - you just prefer to work at home. For instance, you sell real estate and your main office location is an office or cubicle in your broker's facility.
- Your business never really turns a profit - well, then you don't really have a business do you? You have a hobby. So you won't be able to deduct your office in home expenses.
The IRS is looking for those people who abuse the system. So, if you're double-dipping, or making up expenses, you're asking for trouble. But understand that the IRS is not looking to go after the honest taxpaying citizen. If you really run your business from home, you're entitled to use the deduction.
For further information, you may contact Eva Rosenberg at www.taxmama.com.
Consider establishing a relationship with a tax professional who can guide you through filing your business returns.