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Home office deductions and IRS audit triggers

Many Minnesotans may worry that taking deductions on their taxes for a home office will trigger an audit. That may have been the case years ago, but now better than half of Americans either work for a small business or own one. And more than half of these small businesses are home-based with space for home offices. The advent of the internet along with technology improvements have also resulted in some businesses large and small implementing virtual offices recruiting employees from around the country who work out of their homes.

As the workplace changes along with the economy some people who may fear taking home office tax deductions will trigger an automatic IRS audit are paying more in taxes than is necessary. Although the IRS is making the process for taking home office deductions easier starting in the 2013 tax year, but the old rules still apply for the 2012 tax year. One of the big ones is that a home office must be used regularly and exclusively for business. And that deduction is limited to only income from that business.

There is no reason not to claim these deductions, as long as you meet all the rules. Just don’t claim these deductions if you do not meet all the rules because that may just trigger the dreaded IRS audit. And unless you have good records along with a solid claim for the home office deduction, don’t claim it. A home office deduction for 2012 requires filling out Form 8829, which involves 43 line-items with complex calculations for allocated expenses, depreciation, carryovers and the like.

There really is no fool proof way to ensure you will not receive an IRS audit notice, but there are some standard dos and don’ts that will help you avoid triggering an audit. First, report each Form 1099 and K-1 and avoid a schedule C if at all possible. Make sure you are careful when claiming values for your non-cash charitable donations. And if you own an S-corporation, make sure you are being paid a fair and reasonable wage.

When it comes to real estate losses, keep solid records of how much you spend since that amount can dictate whether your losses are considered active or passive losses. Lastly, avoid travel and entertainment expenses that can be considered excessive even if your overall income is high. It is important to carefully consider whether these expenses meet the test for business purposes before deciding to claim them.

Source: Forbes, “Shhh, Home Office And Other IRS Audit Trigger Secrets,” Robert W. Wood, Jan. 25, 2013

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