You might be able to claim a deduction for the business use of a home office. If you qualify, you can deduct a portion of expenses, including rent or mortgage interest, depreciation, utilities, insurance, and repairs. The exact amount that can be deducted depends on how much of your home is used for business.
Basic rules for claiming deductions
The part of your home claimed for business use must be used:
- Exclusively and regularly as your principal place of business,
- As a place where you meet or deal with patients, clients, or customers in the normal course of business,
- In connection with your trade or business in the case of a separate structure that’s not attached to your home, and
- On a regular basis for the storage of inventory or samples.
A strict interpretation
The words “exclusively” and “regularly” are strictly interpreted by the IRS. Regularly means on a consistent basis. You can’t qualify a room in your home as an office if you use it only a couple of times a year to meet with customers. Exclusively means the specific area is used solely for business. The area can be a room or other separately identifiable space. A room that’s used for both business and personal purposes doesn’t meet the test. The exclusive use rule doesn’t apply to a daycare facility in your home.
What if you’re audited?
Home office deductions can be an audit target. If you’re audited by the IRS, it shouldn't result in additional taxes if you follow the rules, keep records of expenses and file an accurate, complete tax return. If you do have a home office, take pictures of the setup in case you sell the house or discontinue the use of the office while the tax return is still open to audit.
There are more rules than can be covered here. Contact us about how your business use of a home affects your tax situation now and in the future. Also be aware that deductions for a home office may affect the tax results when you eventually sell your home.