See also: Home Office Deduction

Introduction

Meeting the IRS Qualifications

Introduction to Qualifications

Technical Detail and Examples

Exclusive Use

Regular Use

Trade or Business Use

Principal Place of Business

Place To Meet Patients, Clients, or Customers

Separate Structure

How to Defend Yourself

Would you like to convert money you already spend for your personal living expenses into deductible business expenses? Here is a tax shelter -- in your very own home.

If you use your home for business purposes, many of your personal expenses can be converted into deductible business expenses. For example, when you qualify for an office at home, the following expenses can be deducted:

1. Your “office” furniture and equipment, on a depreciation schedule. This would include any desks, chairs, computers, couches, lamps or other furnishings that you put into your office. If you buy a sofa for $1,000 and put it in your family room, it costs you $1,000. If you’re in the 31% bracket and you put the same sofa in your home office, the IRS contributes $310 to the purchase of it.

In fact, there is a special provision that allows you to deduct as much as $18,500 in business furniture and equipment in a single year rather than depreciating it over its “class lifetime.” (The “class lifetime” is the number of years the IRS prescribes for the depreciation of the item.) This accelerates the value of the deduction into a single year and gives you, rather than the IRS, the benefit for the time value of the deduction. Note that the limit is for the total value of qualifying furniture and equipment purchased during the year, not a per item limit.

2. Your entire office, also on a depreciation schedule. If you own your home, rather than rent, you depreciate the portion of the acquisition cost (building only, not land) and improvements related to your home office over a 39-year period. For example, if your house is 2,000 square feet in size and you use 200 square feet of it for your office, you depreciate 10% of the cost and improvements to the whole house. If the improvements relate only to the office space, you can depreciate 100% of those expenditures. If your home is rented, you can deduct the percentage of your rent that would be for your office on a similar ratio basis.

It’s important to note that your home office does not have to be the whole room; any part of a room could qualify. In addition, your ratio percentage can be computed on a square footage basis, or, if the rooms are relatively equal in size, on a room basis.

3. Homeowner’s insurance, utilities and related expenses based on the percentage of their use in the home office. Maintenance also may be deductible. Repairs specifically to your home office are fully deductible while repairs to the whole house would be deducted on a percentage basis. Moreover, don’t forget snow removal and grass cutting. If you qualify for a home office, these expenses would also be allowed on a percentage basis.

4. The costs for a second phone line. Unless you have a separate line for business, no part of your basic phone bill can be deducted. However, you can still deduct any long-distance business calls, call waiting and call forwarding, and, of course, the full cost of a second line.  Furthermore, the lack of a business telephone line would indicate you are not serious about the business.

Having a qualified home office also allows you a greater auto deduction. Commuting is not deductible. However, with a home office, your commute may be your trip from the bedroom to the basement. All other business trips from your home office may be deductible.  Use common sense - do not claim more than you are entitled to.  In some instances the services will be provided ordinarily at the home office.   In some instances the services are never provided at the home office.  If you do use the home office to render your services - such as in health care, the IRS may challenge the first trip of the day to the Hospital or other location you may travel to for providing your services.  Under all circumstances - all travel to patients, clinics, hospitals, home health care locations, nursing homes, customers or potential customers after the frist stop are deductible.

You can deduct the standard mileage rate, plus tolls, interest on the business portion of your car (meaning that if you use your car 90% for business, 90% of the interest would qualify) and parking. Alternatively, you can keep track of all of your auto expenses and deduct the business percentage of the total. Indeed, having a home office increases your “business” use of the vehicle.

Contents

To qualify for a home office, the portion of the home used as an office must be used “exclusively and on a regular basis” for your business needs. To prove “regular basis,” just keep a diary of where you were working. That’s easy. Be careful about the “exclusive” requirement. The IRS may ask you what percent of the time you use your computer for business as opposed to investment purposes. If your computer is fixed in your home office and you use it at all for investment purposes, the IRS may find that you have failed the exclusive test and disallow your whole home office deduction!

There are three qualifying uses for a home office. You must use the area either as:

1. A storage place for goods sold in your business; or

2. A place of business where you meet patients, clients or customers; or

3. The principal place of your business.

Even if you do most of your work outside the office, but you still use your home office to handle administrative duties, make phone calls and so on, you can qualify for a deductible home office. Prior to the law changing in 1998, it was possible to actually not have a “principal place of business.” The new law now makes one of the best ways to cut your tax bill available to thousands of more people.

Contents

To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.

This section describes the tests that you must meet to qualify for the deduction. Use this section, along with Figure A, to decide if you can deduct expenses for the business use of your home.

To qualify to claim expenses for the business use of your home, you must meet the following tests.

1. Your use of the business part of your home must be:
   1. Exclusive (however, see Exceptions to Exclusive Use, later),
   2. Regular,
   3. For your trade or business, AND
2. The business part of your home must be one of the following:
   1. Your principal place of business,
   2. A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
   3. A separate structure (not attached to your home) you use in connection with your trade or 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 earlier plus:

1. Your business use must be for the convenience of your employer, and
2. You do not rent all or part of your home to your employer and use the rented portion to perform services as an employee.

Whether your home's business use 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.

Contents

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.

You do not have to meet the exclusive use test if either of the following applies.

Storage of inventory or product samples. When you use part of your home for the storage of inventory or product samples, the exclusive use test does not apply. However, you must meet all the following tests.

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.

Contents

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.

Can you deduct business use of the home expenses?

Contents

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.

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, your home must be 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.

Alternatively, if you do business at more than one location, and 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 consider the time spent at each location.

If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot 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.

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.

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 details of his business, such 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 home 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 of 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 available 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 of 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 of the following activities.

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 nonadministrative 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 of 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 business 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.

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 the business. If she meets all the other tests, she can deduct expenses for business use of her home for the jewelry business.

If Tracy also uses the office for work related to her teaching, she would not meet the exclusive use test for the jewelry business. As an employee, Tracy must meet the convenience-of-the-employer test to qualify for the deduction. Because she does not meet this test for her work as a teacher, she cannot claim a deduction for the business use of her home for either activity.

Contents

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.

Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home.

Doctors, dentists, attorneys, and other professionals who maintain offices in their homes will generally meet this requirement.

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.

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.

Contents

Your “home office business” does not have to be your primary occupation. Home offices for second or third businesses qualify as long as there is a profit objective to qualify the activity as a “business.”  

Moreover, you may qualify for a home office even if you are an employee, but only if your employer requires you to maintain an office at home as a condition of your employment. While not required, my suggestion is to get a letter from your employer and attach it to your return. If you return is kicked out by the computer, the attached letter may decrease your chances of being audited. It shows you know the law, proves you need the home office, and tells the IRS you’re ready to prove it. The IRS is hesitant to initiate audits where they feel the chances of additional revenue are small.

A snapshot of your office
To prove a home office, have its address on your business cards and stationery, keep a log of who you see, when you use the office, and what you do. I recommend that you even have someone photograph you in your home office with a time stamp on the photograph to prove the date, and all of the contents of your office. A video tape may be useful also to help you stabiles what is in the office.  Retain in your files for tax records your appointment books, your bills for the telephone for the office, any delivery tickets for office supplies or furniture that were made to the office address, etc.

Remember, if you claim a home office on your 1999 return, you can be audited any time through April 2003 (there is normally a three-year statute of limitations). During those three years, you may move, discontinue the business, or even just discontinue the use of a home office. Nevertheless, the deduction was legitimate for 1999. Having a photograph makes it much easier to prove.

Usually you may refuse to admit anyone from the IRS into you personal residence.  However, the IRS does have a right to enter any area considered open to the general public.  It is my opinion that if  you claim a "home office" you have defined an area in which you are allowing the "general public" entrance.  Therefore, your refusal to admit Service Personnel into your home office might be overturned by a court - or you might lose the home office deduction.   HOWEVER - any area not set aside for a home office is Off Limits to Service Personnel.

Contents

[home_office_rules]