[ return to list ]

There's No Tax Place Like Home

If you operate a business out of your home, you may be able to claim home office deductions on your tax return.

Basic rules: You can deduct home office expenses on your tax return if you use part of your home “regularly and exclusively” as either the principal place of your business or a place to meet or deal with patients, clients and customers in the normal course of business. In addition, you can deduct expenses attributable to a detached structure—such as a garage or shed—that is used in connection with your business (e.g., to store inventory).

If you are an employee, the home office must be used for the convenience of the employer.

These basic rules are simple enough, but some of the key terms require further explanation.

Regular and exclusive use: To meet the requirement for regular and exclusive use, you must use a specific area of your home for business reasons only. The specific area can be a room or even an identifiable space within a room. This space does not have to be permanently enclosed, but doing so strengthens your tax position.

If you use the office portion of the home occasionally or sporadically for personal reasons, the personal use taints the home office and, therefore, deductions must be forfeited.

Note that certain exceptions for the “regular and exclusive use” requirement apply to day care centers and similar facilities for the aged or disabled. Furthermore, if a home is a principal place of a business and a specific area is used for inventory or product storage, the area qualifies for depreciation deductions if it is used regularly—but not necessarily exclusively—for business.

Principal place of business: If you are self-employed and work exclusively from home, it's obvious that your home office is your principal place of business. But this determination is not always so clear-cut. For instance, you may perform some business functions at home, but spend most of your time visiting clients, customers or patients at other locations.

The law see-sawed back and forth in the 1990s, but the IRS now concedes that you will qualify for home office deductions if you perform administrative and management functions at home and you have no other fixed business location for these functions. Administrative and managerial activities may include

*Billing and invoicing;

*Keeping books and records;

*Ordering supplies;

*Setting up appointments; and

*Researching and writing reports.

However, you are not disqualified if you arrange to have administrative or managerial duties performed at other locations. For example, you might outsource payroll duties or handle customer inquiries on your laptop in hotels or airports. Similarly, you will not be penalized if you spend more time on the road than at home.

Convenience of employer: An employee is entitled to deduct home office expenses only if he or she is specifically required by the employer to maintain a home office. Thus, an industrious worker who brings work home nights and weekends usually does not qualify. It does not matter if the work at home results in a benefit to the employer—it must be an absolute condition of employment. In addition, keeping a home office must be justified by the nature of the job.

Note: Deductions are not available if the employee rents the home office to the employee—even if it is for the employer's convenience.

 

[ return to list ]