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FAQs: The Home Office Deduction
by Mark Minassian, CPA

The home office deduction is a popular yet misunderstood tax deduction for business owners. Many people think taking the deduction will result in an automatic audit and others do not understand the eligibility requirements for claiming it. The questions and answers below should provide you the guidance you need for understanding and using the home office deduction.

Q: Who is eligible to take a home office deduction?

A:  Both self-employed individuals (including partners in a partnership) and employees may be eligible to claim a home office deduction. However, for an employee to claim the deduction, the home office must be for the convenience of the employer, not the employee. In other words, if an employee has an office at the employer’s place of business, it is unlikely that the home office is for the employer’s convenience. However, if the employer does not provide office space to an employee, then the employee may be eligible for the home office deduction if the general home office eligibility requirements are met.

Q: What are the general requirements for claiming the home office deduction?

A:  To deduct home office expenses, the office space in your home must be used exclusively and regularly as:

  1. A principal place of business;
  2. a place to meet or deal with customers in the normal course of business; OR
  3. used "in connection with" the business if the space is a separate structure from the residence (e.g. a barn or detached garage).

Q: Does the office have to be a separate room in my house or apartment?

A:  No, the office does not have to be a separate room in the home to be eligible for the deduction. A corner of a living room with a desk and office equipment can qualify as a home office, but it must meet the “regular and exclusive use” test.

Q: What does “regular and exclusive use” mean?

A:  Regular use means that the home office must be used on a continuing basis. Occasional or sporadic use of the office, even for a full-time business, will disqualify the space for the home office deduction.

Exclusive use means that the office is used only for business purposes. Two exceptions to the rule are: 1) the office may be used to store inventory or product samples; and 2) if the office is part of a home daycare facility. Personal use of the office may be allowed under these circumstances.

TIP: The exclusive use test is very, very restrictive. There have been a number of court cases where the taxpayer has been denied a home office deduction because the exclusive use test was not met. In one case, an attorney was denied the deduction because the office was used after hours by him and his family. In another case, a doctor was denied the deduction because he had a TV and VCR in the office and could not prove the business purpose for having them there. In addition, if your office is not in a separate room but part of a living room or bedroom, it may be very difficult to prove exclusive business use of the home office.

Q: Can I claim the home office deduction if I do some of my work at another location?

A:  It depends. Your home office must be your principal place of business, but that does not mean it has to be your only place of business. If you work at another location, you may still be able to claim the home office deduction in any of the following circumstances

  • You meet clients, customers or patients in your home office on a regular basis.
  • Your home office is in a separate structure that is detached from your home (such as a garage, barn or shed).

For the above exceptions to apply, the home office still must meet the “regular and exclusive use” test described above.

Q: Will I get audited if I take a home office deduction?

A:  Not necessarily. Contrary to popular belief, taking the home office deduction will not automatically result in an audit. However, if you operate as a sole proprietor, you are already at an elevated audit risk. Taking the home office deduction on your Schedule C won’t necessarily increase that risk, but you want to make sure your home office deduction is legitimate and that you are not deducting personal expenses.

Q: Can I take the home office deduction if I rent?

A:  Yes. There is no requirement that you own your home to take the home office deduction.

Q: What sort of expenses may I claim?

A:  There are two types of expenses: direct expenses and indirect expenses.

Direct expenses are expenses that only benefit the home office portion of your home. Examples of direct expenses would include repairs made specifically to the home office area and a dedicated business telephone line. Direct expenses are 100% deductible when computing your home office deduction.

Indirect expenses are expenses that are incurred for running and maintaining your entire home. Indirect expenses would be incurred even if you did not have a home office. Common types of indirect expenses include mortgage interest, real estate taxes, rent, insurance and utilities. Indirect expenses must be multiplied by the business use percentage of your home when computing your home office deduction.

The home office deduction cannot reduce your Schedule C net income below zero. Any unused home office expenses may be carried forward and deducted against future income from your business.

Q: How do I calculate the business use percentage of my home?

A:  The IRS allows you to use any reasonable method for determining the business percentage. The two most common methods are dividing the square footage of the office by the total square footage of the home, or if all of the rooms in the house are approximately the same size, you can divide the number of rooms used for business by the total number of rooms in the home.

Q: How do I claim the deduction?

A:  If you are a sole proprietor and file Schedule C with your individual tax return, you will report your home office expenses on IRS Form 8829 (Expenses for Business Use of Your Home). The total home office deduction from Form 8829 will also be reported on line 30 of your Schedule C. If you are not a sole proprietor and do not file Schedule C, report your home office expenses on IRS Form 2106 (Employee Business Expenses) and also on line 20 of Schedule A of your Form 1040.

Disclaimer:  Any tax advice contained in this article is not intended or written to be used, and cannot be used, to avoid penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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