Eyeing risks, rewards of home-office deduction

But square footage is another way owners can run into trouble with the government — for example, if it appears to the IRS employees examining your return that your home business space is too big for the kind of business you operate, they may question the size of your deduction.

If you're thinking of claiming the deduction, you need to get yourself educated about the IRS' requirements. The first thing you should probably do is download and carefully read IRS Publication 857, Business Use of Your Home, from the IRS Web site. There are also several small business and home business tax guides available in bookstores that can give you a grounding about the deduction.

Also take a look at the IRS form you'll need to file, 8829, Expenses for Business Use of Your Home, and its accompanying instructions. They can also be downloaded from the IRS Web site.

It's probably a good idea not to try to claim the deduction without consulting a tax professional. Jeffrey Chazen, a tax partner at the accounting and consulting firm Richard A. Eisner & Co. LLP in New York, noted, "there are little quirks you have to look out for" with a home business deduction.

For example, he noted, if you've been depreciating the space for your home office but now sell your home, you'll have to "recapture" the depreciation, or adjust the profit you made on your house to account for the tax break you already received.

Another, important quirk: Your deduction cannot be larger than the net profit you make. But you can use the excess to offset profits in succeeding years.

Chazen suggests that now, as you're preparing your 2006 tax return, isn't the time to be thinking about the home business deduction for last year. If your business space didn't already meet the requirements for the deduction, you can't shoehorn it in after the fact.

You can, however, start working now so you can claim the deduction for the 2007 tax year.

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