Today, let’s talk about the Home Office deduction. If you have a room (or a segregated portion of a room – meaning it is screened off or something like that) that you use for conducting business for either your employer (as long as it is for their convenience) or a business of your own, you may qualify for an Home Office deduction. It is normally based on square footage (office/total home) and allows you to deduct a percentage of rent, utilities, gardening, insurance and many more items that normally are not deductible as a residence deduction.
A Home Office deduction is normally taken as a miscellaneous itemized deduction (unless you are a sole proprietor; then it can be deducted on Sched C) and there has always been some question about whether it is an audit flag item (it may start the ball rolling on an audit). From experience I have not seen an audit triggered just by a Home Office deduction, but as one item in many items the IRS looks at, it could be a starting point, so be careful. Here is the link to the IRS website discussing Home Office:
http://www.irs.gov/businesses/small/article/0,,id=204169,00.html
In summary the Home Office deduction can be a nice tax deduction, but if there are other questionable items on your tax return, it is best to weigh the pros and cons before proceeding.