Do You Qualify for a Home Office Deduction?
Summary: As more people are working out of their homes, the home-office tax deduction is becoming more popular. However, it can get complicated as you try to separate home from business expenses. Click through for some tips on understanding the rules.
Good news if you have a home office! You may be able to deduct expenses related to the business use of part of your home if you use it:
- exclusively and regularly as your principal place of business.
- exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
- as a separate structure that is not attached to your home, in connection with your trade or business.
Principal place of business requirement
To determine if your home qualifies as your principal place of business, you must consider the relative importance of the activities performed at each place where you conduct business and the amount of time spent at each place where you conduct business.
A home office qualifies as your principal place of business if you meet the following requirements:
- You use it exclusively and regularly for administrative or management activities of your trade or business.
- You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
Activities that are considered administrative or managerial include billing customers, clients, or patients; keeping books and records; and ordering supplies.
If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a home-office deduction.
Example: Sarah uses part of her home exclusively and regularly to read financial periodicals and reports, watch investment shows on CNN and CNBC, and carry out similar activities related to her investments. She does not make investments as a broker or dealer. Sarah’s activities are not part of a trade or business, and she cannot deduct the business use of her home.
The determination of what constitutes a trade or business for tax purposes can be complicated and has been the subject of many court cases. It’s best to consult with a CPA or tax professional to determine if your activities qualify as a trade or business for which the home-office deduction applies.
Meeting patients, clients, or customers at your home
If you meet or deal with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if you meet both the following tests:
- You physically meet with patients, clients, or customers on your premises; and
- their use of your home is substantial and integral to the conduct of your business.
The part of your home you use exclusively and regularly to meet patients, clients, or customers does not have to be your principal place of business.
Example: Sam, a self-employed architect, works 3 days a week in a rented office, then works 2 days a week at home, in a home office used only for business. Sam regularly meets clients there. The home office qualifies for a business deduction because Sam meets clients there in the normal course of their business.
Using your home for occasional meetings and telephone calls does not qualify for the home office deduction.
Separate structure
You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers.
Calculating the deduction
There are two methods you can use to calculate your home office tax deduction: (1) the simplified method, and (2) actual expenses. Under the simplified method, the deduction is generally calculated by multiplying $5 by the area of your home used for a qualified business use. The area used in this calculation is limited to 300 square feet.
Calculating and substantiating your home office deductions and your qualification for the deduction can be somewhat arduous. Hiring an experienced tax accountant to help you through the process is highly recommended.
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