Excessive Home Office Tax Deductions are an IRS Red Flag

June 27, 2007— -- If you're getting started working from home, resist the temptation to claim all sorts of wacky home office tax deductions. Excessive claims for home office renovation and decorating are one of the fastest ways to an IRS audit. Apparently the first generation of telecommuters ruined it for the rest of us by installing pools and gourmet kitchens and such and claiming those were business necessities!

To claim expenses and avoid and audit when you use your home for business purposes, you must meet all the requirements outlined by the IRS.

If you use your office exclusively and regularly, you may qualify for business deductions on your taxes. To meet the requirements for regular use, the area specified in your home should be used on a regular basis, not for occasional business. Under the exclusive use test, you may use your office strictly for business use, not personal.

There are exceptions to the exclusive test. If a space in your home is used for storing inventory or product, you do not have to meet the exclusive use test. Also, if part of your home is used for a daycare facility, the exclusive use test does not apply. (Storage rooms and daycare facilities may have to meet other IRS requirements.)

You must be able to prove that your home office is your principal place of business. You cannot have any other fixed location to conduct business if you want to deduct your home office expenses. The IRS also considers how much time you spend in the home office and the importance of the business activities you perform there.

If your office is a separate structure from your home it does not have to be your principal place of business, but it still has to be used regularly and exclusively for business. In this case, you can deduct expenses for the separate structure.

The other awkward thing about claiming home office deductions is what percentage to claim. For example, let's say you have a cleaning crew that cleans the whole house, including the office. You can only deduct the office portion of the cleaning. The IRS suggests 2 methods of calculating the percentage.