TurboTax confuses me on home office sharing, MTM trader business income, and audit warning

[likesky1010]

I am self-employed and have been in a consulting business for over 10 years. I have a small home office for the consulting business. I am using the TurboTax Home&Biz desktop edition for my tax returns.

This year, the MTM trader business was added. I gained about $4k in this trader business. The gains/losses were entered in the 4797 Form by following the official guide of the TurboTax site.

Initially, I didn't share the home office. That means there are almost no expenses for the MTM trader business. Everything is fine. The audit risk result is LOW.

Then I think it may make more sense to share the home office to make the IRS think I am serious about the trading business.

I shared the home office by splitting the sq ft. The trader business received a $265 deduction. Then things changed.

1. The total home office sq ft is the same. But after sharing I need to pay more tax.

2. After claiming the home office expense, the MTM trader business' Net Income changed from 0 to -$265.

3. The Audit Risk Result changed from LOW to MEDIUM.

The MTM trader business has about $4k (Gains - homeOfficeExpenses) profit. Why was it treated as a loss business? or Is the profit not good enough to claim a $265 expense?

It looks like sharing the home office is not beneficial to trader businesses using the 4749 Form. I am thinking of not claiming home office expenses to avoid the audit risk. Is there any disadvantage to doing so?

Any suggestion? please advise.

[AnnetteB6]

For your first question, if you changed the square feet of space being claimed so that both home offices are claiming half of the total, then your consulting business expenses were reduced from this change, which would increase your self-employment tax and therefore increase your taxes even though the trading business created a loss.

A small loss of $265 should not create a red flag if the return were being examined by someone who understands what they are seeing.  The audit risk meter is most likely not taking into account that the income from the trader business is not reported on the Schedule C since this is not a very common situation.  Even with the audit risk meter being higher, your actual risk of being audited is still very low.

You are being truthful in claiming office space for two businesses since you do use the space for both.  Otherwise, you are actually violating the 'exclusive' use requirement if you claimed it only for the consulting business and still used it for the trading business.

[likesky1010]

@AnnetteB6 Thank you for your reply.

As you said the 4797 Form income is not common, it may not be treated fairly/correctly in the audit meter (and also in the Business Net Income area?). I hope TurboTax will address this issue.