Your home office might trigger an audit flag


Working from home has increased in popularity in recent years, partly due to technological advances that make it possible to create a virtual office and telecommute from practically any location with Internet access. Employers may offer telecommuting as an employee perk, or perhaps as a solution to office expenses and overcrowding. Small business owners may also designate a part of their homes as their workspace.

In the context of federal taxes, both self-employed workers and employees may be able to take a home office deduction, although there are additional rules that apply to employees claiming this deduction. Specifically, employees who claim a deduction for their home office may have to demonstrate that the space is for the convenience of their employers.

For both self-employed individuals and employees, however, simply claiming a home business deduction may raise a red flag, potentially triggering an audit by the Internal Revenue Service. A tax attorney might agree that one reason for the extra scrutiny may be the potential abuse of home office deduction rules. Generally, the area of the home designated for business must be exclusively and regularly used for that purpose.

Property or equipment that is purchased for the exclusive use of that home office may also qualify for special tax treatment, such as depreciation. However, a recent article reminds readers that the tax rules regarding deductions, depreciation of capital assets can be confused — and potentially trigger an audit from the Internal Revenue Service.

One commonly forgotten rule is depreciation recapture. Although business assets and property can be depreciated, selling that property at a property may subject the taxpayer to liability. In other words, the IRS may treat tax any profit from that sale at the ordinary income tax rate, instead of at lower capital gains rates, up to the point that it has recaptured the amount that was depreciated.

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