You may be able to take a tax deduction for business use of your home. The deduction is available not only for an office but for other business uses as well, such as a workshop or studio at home.
Basically, if you use part of your home for business and you meet the technical requirements of the tax law, you can deduct a percentage of the cost of many home-related expenses. These expenses typically include utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, and some casualty losses, repairs, and improvements (if they relate to the part of the house you use for business).
According to the IRS, your "home" can be a house, condo, or apartment unit -- or even a mobile home or boat, so long as you can cook and sleep there. You can rent or own -- that doesn't matter here. But wherever you live, before you can deduct expenses for using part of your home as a business, you must meet two tax law requirements.
Requirement #1: You must regularly use part of your home exclusively for a trade or business (see Section 1, below).
Requirement #2: You must be able to show one of the following:
- You use your home as your principal place of business (see Section 2, below).
- You meet patients, clients or customers at home (see Section 3, below).
- You use a separate structure on your property exclusively for business purposes (see Section 4, below).
1. Regular and Exclusive Use
The first requirement for taking deductions related to your home is that you regularly use part of your home exclusively for a trade or business. The notion of regular use is a bit vague. The IRS says it means you're using a part of your home for business on a continuing basis -- not just for occasional or incidental business. A few hours a day on most days is probably enough to meet this test.
Exclusive use means that you use a portion of your home only for business. If you use a room of your home for your business and also for personal purposes, you don't meet the exclusive use test.
| Example |
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Brook, a lawyer, uses a den in his home to write legal briefs and prepare contracts. He also uses the den for poker games and hosting a book club. Result: Brook can't claim business deductions for using the den.
Marvin has a den he uses only for business. He also puts a business calendar, desk, and computer in his kitchen, but continues to cook and eat there as well. Result: Marvin can claim business deductions for the den, but not the kitchen. | |
There are two exceptions to this rule: You don't have to meet the exclusive use test if you use part of your home to store inventory or product samples, or if you run a qualified day care facility at your home. (The storage exception is discussed below. Check IRS Publication 587, Business Use of Your Home, at www.irs.gov , for the day care rules.)
2. Principal Place of Business
In addition to using part of your home regularly and exclusively for business, your home must be your "principal place of business" in order to take deductions relating to home business use. It's simple to establish that your home is your principal place of business if you conduct your business only from home.
| Example |
| Alma teaches school. As a teacher, her principal place of business is the school where she teaches. She also runs a public relations consulting company and uses a part of her home as the headquarters for that business. Alma should be able to take the home-office deduction for this business use of the home, so long as she also meets the "regular and exclusive use" requirement discussed in Section 1, above. | |
If you have more than one business location, including your home, for a single trade or business, you must figure out if your home is your principal place of business for that enterprise. Your home qualifies as your principal place of business if both of these are true:
- You conduct the administrative or management activities of your business there.
- You have no other fixed location where you conduct those activities.
In other words, your home doesn't have to be the place where you generate most of your business income. It's enough that you regularly use it to do such things as keeping your books, scheduling appointments, doing research, and ordering supplies. As long as you have no other fixed location where you do such things -- for example, an outside office -- you should be able to take the deduction.
| Example |
| Ellen, a wallpaper installer, performs services for clients in their homes and offices. She also has a home office that she uses regularly and exclusively to keep her books, arrange appointments and order supplies. Ellen is entitled to deduct home-office expenses for that part of her home (so long as she also satisfies the "regular and exclusive use" rule, discussed in Section 1, above). | |
WARNING: Home-connected expenses. These IRS rules apply only to home-connected expenses such as utilities, rent, depreciation, home insurance, mortgage interest, real estate taxes, and repairs. You needn't conform to the business-use rules in order to deduct other ordinary and necessary business expenses -- for example, the cost of office supplies, postage, advertising, travel, equipment, professional memberships and publications, long-distance phone calls, and a separate business telephone line. All of those are deductions you can legitimately take, assuming you have a bona fide business that is operated for a profit.
| Storing Inventory or Product Samples at Home |
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If you sell retail or wholesale products and you store inventory or samples at home, you can deduct expenses for the business use of your home, whether or not you use the storage space exclusively for business.
There are two limitations, however: First, you won't qualify for the deduction if you have an office or other business location away from your home. Second, you have to store the products in a particular place -- your garage, for example, or a closet or bedroom. It's okay to use the storage space for other purposes as well, as long as you regularly use it for storing inventory or samples.
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