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Question or Topic |
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Explain what qualifications must be met to deduct home office expenses ---
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The Answer |
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Thumbnail Sketch (Decision Chart)
If you receive a W-2 you are an employee.
If you receive a 1099-Misc you are self-employed
The self-employed must meet 4 tests - the employee must meet 5 tests.
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Solutions |
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Solutions are dependent upon facts & circumstances, law and the objectives. These elements vary from one time to another, from one circumstance to another and from person or entity to another. Kit to Prepare for Your Adviser
First the discussion will cover the four tests that are common to both types of employment.
To qualify for this test, you must have a specific area of your home used only for the business. The area used can be a room or other space identified as separate, but the area must be used solely for business. For example, if you have a room set up as an office, but occasionally use it also as a guest room, you do not meet this test. Likewise, if the area is used to handle personal finances or homework, you do not meet this test. In order to meet this test, you must use the area solely for the business. Exclusive
Use To
qualify under the exclusive use test, you must use a specific area of your
home only for your trade or business.
The area used for business can be a room or other separately
identifiable space. The space does not need to be marked off by a
permanent partition. You
do not meet the requirements of the exclusive use test if
you use the area in question both for business and for personal purposes. Example.
You are an
attorney and use a den in your home to write legal briefs and prepare
clients’ tax returns. Your
family also uses the den for recreation. Since the den is not used
exclusively in your profession, you cannot claim a business
deduction for its use. Exceptions
to Exclusive Use You
do not have to meet the exclusive use test if either of the following
applies. 1
You use part of your home for the storage of inventory or product samples
(discussed next). 2
You use part of
your home as a day-care facility, discussed later under Day-Care
Facility. Storage
of inventory or product samples. If
you use part of your home for the storage of inventory or product samples,
you can claim expenses for the business use of your home without meeting
the exclusive use test. However,
you must meet all of the following tests. 1
You sell products
at wholesale or retail as your trade or business. 2
You keep the
inventory or product samples in your home for use in your trade or
business. 3
Your home is the
only fixed location of your trade or business. 4
You use the
storage space on a regular basis. 5
The space you use
is an identifiably separate space suitable for storage. Example.
Your home
is the sole fixed location of your business of selling mechanics’ tools
at retail. You regularly use
half of your basement for storage of inventory and product samples. You
sometimes use the area for personal purposes. The expenses for the storage
space are deductible even though you do not use this part of your basement
exclusively for business.
In order to meet this test, you must use the specific area on a continuing basis. If it is used only occasionally, you don't meet this test. However, in the construction industry, it is typical to have a slow period during the winter months. As long as the area is still set aside and not used for any other purpose, the slow down of the business would not prevent you from meeting this test. Regular
Use To
qualify under the regular use test, you must use a specific area of your
home for business on a continuing basis. You do not meet the test if your
business use of the area is only occasional or incidental, even if you do
not use that area for any other purpose.
This describes how you must use the business portion of your home1)
Your use of the business part of your home must be: a)
Exclusive (however, see Exceptions to Exclusive Use, later), b)
Regular, c)
For your trade or business Trade
or Business Use
To
qualify under the trade or business use test, you must use part of your
home in connection with a trade or business. If you use your home for a
profit-seeking activity that is not a trade or business, you cannot take a
deduction for its business use. Example. You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. You do not make investments as a broker or dealer. Since your activities are not part of a trade or business, you cannot take a deduction for the business use of your home.
The Business Portion Must Be One Of The Followinga)
Your principal place of business (defined later), b)
A place where you meet or deal with patients, clients, or customers in the
normal course of your trade or business, or c)
A separate structure (not attached to your home) you use in connection
with your trade or business. Place
of Business
The last test requires that your home office is either your
principal place of business or the place you regularly meet with
customers. Principal
Place of Business To meet this test, your home office must be your principal
place of business. In the construction industry, your business location
may be split between two places: the job site and the place you keep your
records. As long as you use the area exclusively and regularly for the
administrative or management activities of your business, and you have no
other fixed location where you conduct these activities on a substantial
basis, your office will qualify. Before 1999, the only definition of
Principal
Place of Business You
can have more than one business location, including your home, for a
single trade or business. To qualify to deduct the expenses for the
business use of your home under the principal place of business test, your
home must invenbe your principal place of business for that trade or
business. To determine your principal place of business, you must consider
all the facts and circumstances. Your
home office will qualify as your principal place of business for deducting
expenses for its use if you meet the following requirements. 1
You use it exclusively and regularly for administrative or management
activities of your trade or busi- Howness. 2
You have no other
fixed location where you conduct substantial administrative or management
activities of your trade or business.
Alternatively, if you use your home exclusively and regularly for
your business, but your home office does not qualify as your principal
place of business based on the previous rules, you determine your
principal place of business based on the following factors. 1)
The relative importance of the activities performed at each location. 2)
If the relative importance factor does not determine your principal place
of business, you can also conbusiness sider the time spent at each
location. If,
after considering your business locations, your home percannot be
identified as your principal place of business, you cannot deduct home
office expenses. However, see the later discussions under Place To Meet
Patients, Clients, or Customers or Separate Structure for other
ways to qualify to deduct home office expenses. Administrative
or management activities. There
are many activities that are administrative or managerial in nature. The
following are a few examples. 1
Billing customers, clients, or patients. 2
Keeping books and
records. 3
Ordering supplies. 4
Setting up
appointments. 5
Forwarding orders
or writing reports. Administrative
or management activities performed at other locations. The following activities performed by you or others
will not disqualify your home office from being
your principal place of business. 1
You have others
conduct your administrative or management activities at locations other
than your home. (For example, another company does your billing
from its place of business.) 2
You conduct
administrative or management activities at places that are not fixed
locations of your busisuch ness, such as in a car or a hotel room. 3
You occasionally
conduct minimal administrative or management activities at a fixed
location outside your home. 4
You conduct
substantial nonadministrative or nonhome management business activities at
a fixed location outside your home. (For example, you meet with or provide
services to customers, clients, or patients at a fixed location of the
business outside your home.) 6
You have suitable
space to conduct administrative or management activities outside your
home, but choose to use your home office for those activities instead. Example
1. John is a
self-employed plumber. Most of John’s time is spent at customers’
homes and offices installing and repairing plumbing. He has a small office
in his home that he uses exclusively and regularly for the administrative
or management activities of his business, busisuch as phoning customers,
ordering supplies, and keeping his books.
John does not do his own billing. He uses a local bookkeeping
service to bill his customers. John’s
home office qualifies as his principal place of business for deducting
expenses for its use. He uses the nonhome office for the administrative or
managerial activities of his plumbing business and he has no other fixed
location where he conducts these administrative or managerial activities.
His choice to have his billing done by another company does not disqualify his home office from being his
principal place of business. Because he meets all the qualifications,
including principal place of business, he can deduct
expenses (to the extent of the deduction limit,explained later) for the
business use of his home. Example
2. Pamela is a
self-employed sales representative for several different product lines.
She has an office in her home that she uses exclusively and regularly to
set up appointments and write up orders and other reports for the
companies whose products she sells. She occasionally writes up orders and
sets up appointments from her hotel room when she is away on business
overnight. Pamela’s business
is selling products to customers at various locations throughout her
territory. To make these sales, she regularly visits customers to explain
the availbusiness able products and take orders. Pamela’s home office
qualifies as her principal place of business for deducting expenses for
its use. She conducts administrative or management activities there and
she has no other fixed location where she conducts administrative or
management activities. The fact that she conducts some administrative or
management activities in her hotel room (not
a fixed location) does not disqualify her home office from being her
principal place of business. Because she meets all the qualifications,
including principal place of business, she can deduct expenses (to the
extent of the deduction limit, explained later) for the business use of
her home. Example
3. Paul is a
self-employed anesthesiologist. He spends the majority of his time
administering anesthesia and postoperative care in three local hospitals.
One of the hospitals provides him with a small shared office where he
could conduct administrative or management activities.
Paul does not use the office the hospital provides. He uses a room
in his home that he has converted to an office. He
uses this room exclusively and regularly to conduct all the following
activities. 1
Contacting
patients, surgeons, and hospitals regarding scheduling. 2
Preparing for
treatments and presentations. 3
Maintaining
billing records and patient logs. 4
Satisfying
continuing medical education requirements. 5
Reading medical
journals and books. Paul’s
home office qualifies as his principal place of business for deducting
expenses for its use. He conducts administrative or management activities
for his business as an anesthesiologist there and he has no other fixed
location where he conducts administrative or management activities for
this business. His choice to use his home office instead of one provided
by the hospital does not disqualify his home office from being his
principal place of business. His performance of substantial nonadministra-
customtive or nonmanagement activities at fixed locations outside his home
also does not disqualify his home office from being his principal place of
business. Because he meets all the qualifications, including principal
place of business, he can deduct expenses (to the extent of the deduction
limit, explained later) for the business use of his home. Example
4. Kathleen is
employed as a teacher. She is required
to teach and meet with students at the school and to grade papers and
tests. The school provides her with a small office where she can work on
her lesson plans, grade papers and tests, and meet with parents and
students. The school does not require her to work at home. Kathleen
prefers to use the office she has set up in her home and does not use the
one provided by the school. She
uses this home office exclusively and regularly for the administrative
duties of her teaching job. Kathleen
must meet the convenience-of-the-employer test, even if her home qualifies
as her principal place of availbusiness for deducting expenses for its
use. Because her employer provides her with an office and does not require
her to work at home, she does not meet the convenience-of-the-employer
test and cannot claim a deduction for the business use of her home. More
Than One Trade or Business Whether
your home office is the principal place of business must be determined
separately for each trade or business activity. One home office may be the
principal place of business for more than one activity. However, you will
not meet the exclusive use test for any activity unless each activity
conducted in that office meets all the tests for the business use of the
home deduction. Example.
Tracy
White is employed as a teacher. Her principal place of work is the school.
She also has a mail order jewelry business. All her work in the jewelry
business is done in her home office and the office is used exclusively for
that business. If she meets all the other tests, she can deduct expenses
for business use of her home for the jewelry business. If
Place
To Meet Patients, Clients, or Customers 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 the following
tests. 1
You physically
meet with patients, clients, or customtive ers on your premises. 2
Their use of your
home is substantial and integral to the conduct of your business. Doctors,
dentists, attorneys, and other professionals who maintain offices in their
homes will generally meet this requirement.
Using your home for occasional meetings and telephone calls will
not qualify you to deduct expenses for the business use of your home. 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.
June
Quill, a self-employed attorney, works 3 days a week in her city office.
She works 2 days a week in her home office used only for business. She
regularly meets clients there. Her home office qualifies for a business
deduction because she meets clients there in the normal course of her
business.
Additional
tests for employee use. If
you are an employee and you use a part of your home for business, you may
qualify for a deduction for its business use. You must meet the tests
discussed above plus: 1)
Your business use must be for the convenience of your employer, and 2)
You do not rent any part of your home to your employer and
use the rented portion to perform services as an employee. Whether the
business use of your home is for your employer’s convenience depends on
all the facts and circumstances. However, business use Whether
the business use of your home is for your employer’s convenience depends
on all the facts and circumstances. However, business use is not
considered to be for your employer’s convenience merely because it is
appropriate and helpful.
Separate
Structure You
can deduct expenses for a separate free-standing structure, such as a
studio, 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. Example. John Berry operates a floral shop in town. He grows the plants for his shop in a greenhouse behind his home. Since he uses the greenhouse exclusively and regularly in his business, he can deduct the expenses for its use, subject to the deduction limit, explained later. Separate
Structures If you have a separate structure and you use it exclusively
and regularly for your business, you may deduct the expenses related to
the structure whether or not you can deduct your home office expenses. These
expenses could include:
Example: Adam is a self-employed roofer. He
has a home office where he kept his books. Adam also has a storage shed in
his backyard which he uses only to store the tools used in the business.
Adam can deduct the expenses directly related to the storage shed and the
expenses for his home office. Example: Ben is a self-employed painter. He rents office space where
his bookkeeper works and he meets with contractors. He also has a storage
shed in his backyard which he uses only to store the tools and supplies
used in his business. Although Ben does not have a home office, he can
still deduct the direct expenses related to the shed.
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Engagement Status Letter ~ WARNING!
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Bob Parrish
Copyright © 1999,2000,2001 Bob Parrish. All rights reserved.
Revised: February 26, 2007
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