Example: Jim sells heating and air conditioning filters to small businesses. His home is the only fixed location of his business. Jim regularly stores his inventory of filters in half of his basement. He sometimes uses the same area for working on his racing bikes. Jim can deduct the expenses for the storage space, even though he doesn't use that part of his basement exclusively for business.
3. Meeting Clients or Customers at Home
If your home isn't your principal place of business, you may still be entitled to deduct expenses for business use of your home if you regularly use part of your home exclusively to meet with clients, customers, or patients. Doing so even one or two days a week is probably sufficient. You can use the business space for other business purposes, too -- doing bookkeeping, for example, or other business paperwork -- but you'll lose the deduction if you use the space for personal purposes, such as watching videos.
| Example |
| Julie, an accountant, works three days a week in her downtown office and two days a week in her suburban home office, which she uses only for business. She meets clients at her home office at least once a week. Since Julie regularly meets clients at her home office, she can take a home-office deduction, even though her downtown office is her principal place of business. | |
TIP: Keep a log of the clients or customers you meet at home. Good records can be key if the IRS challenges your right to deduct home-office expenses. Maintain an appointment book in which you carefully note the name of the client or customer and the date and time of each meeting at your home. Save these books for at least three years. They can be crucial to documenting business usage if your tax return is audited by the IRS.
4. Using a Separate Building for Your Business
If your home isn't your principal place of business, and you don't meet clients or customers at home, you can deduct expenses for a separate, freestanding structure that you use regularly and exclusively for your business. This might be a studio or a converted garage or barn, for example. The structure doesn't have to be your principal place of business or a place where you meet patients, clients or customers. But be sure you use the structure only for your business: You can't store garden supplies there or use it for the monthly meeting of a club.
| Example |
| Norm is a self-employed landscape architect. He has his main office in a professional center near a shopping mall, but most weekends he works in his home office, which is located in a converted carriage house in his backyard. Since Norm uses the detached carriage house regularly and exclusively for his landscape architect work, it qualifies for the home-office deduction. | |
| Ways to Document Your Home-Office Deduction |
Here are some steps you can take to help establish your legal right to deduct home-office expenses.
- Photograph your home office and draw a diagram showing the location of the office in your home. Keep this information in your tax folder.
- Have your business mail sent to your home.
- Use your home address on your business cards and stationery and in all business ads.
- Get a separate phone line for the business.
- Have clients or customers visit your home office -- and keep a log of those visits.
- Keep track of the time you spend working at home.
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5. How To Claim the Home-Business Deduction
If you qualify for the home-business deduction, you must figure the amount of your deduction on IRS Form 8829, "Expenses for Business Use of Your Home." Then you enter the total deduction on Schedule C, "Profit or Loss from Business." Attach both Form 8829 and Schedule C to your Form 1040 tax return.
WARNING: If you plan to sell your house. Usually, if you sell a home where you've lived at least two of the last five years, the first $250,000 of profit is tax-free gain ($500,000 for a married couple). But, if you take the home-office deduction, you will always have to pay capital gains taxes on part of the profit from the sale: The amount taxed will be at least as much as the total of the depreciation deductions you took as part of the home-office deduction. If you've been taking the home-business deduction and you want to sell your house, be sure to consult your tax advisor about this potential trap, well in advance of the sale.
| Tax Benefits of Business Deductions |
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All of the business deductions that you take -- whether under by the home-office deduction or as ordinary and necessary business expenses -- will reduce your net business income. This in turn reduces the self-employment taxes (Social Security and Medicare) that you pay on your net business income. Plus, if you run your business with the intent to make a profit but your business deductions are larger than your business income one year, you can usually take that business loss (called a "net operating loss") and use it to offset other income.
However, you cannot take a net operating loss if your "business" seldom makes a profit and is really a hobby. In that case, you allowed to take deductions only against what little income you make from the activity. | |
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