To deduct expenses related to the business use of part of your home, you must use your home for trade or business purposes, and the use must be regularly and exclusively for business. Voluntary, occasional, or incidental use of your home in connection with business doesn’t qualify. In addition, the business part of the home must be one of the following:
Your principal place of business.
A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
A separate structure (not attached to the home) that you use in connection with the trade or business.
Exclusive use means that you must use the specific area of your home only for trade or business purposes. The area used for business can be a room or other separately identifiable space, but it doesn’t need to be marked off by a permanent partition. You won’t meet the requirements of the exclusive use test if the area in question is used both for business and for personal purposes. Furnishings such as a TV or a couch shouldn’t be in the space, although they are common in many businesses.
Example: You’re a tax accountant, and you use the extra bedroom in your house to prepare your clients’ tax returns. When you’re not using the room, your two sons use the computer to play video games, and friends sleep in the room when they have guests. Since the room isn’t used exclusively for your business, you can’t claim this deduction.
However, you don’t need to meet the exclusive use test if either of the following applies:
You use part of the home for the storage of inventory or product samples. Your home must be the only fixed location of the trade or business, and the storage area must be used on a regular basis and identifiably suitable for storage.
You use part of the home as a day-care facility for children, handicapped people, or people over age 65, and you meet all state licensing or certification requirements.
Regular use means that you use part of the home on a continuing basis. This generally means daily use. In some cases, less frequent use may be sufficient.
Example 1: You’re a freelance writer and you spend 4 hours a day, 5 days a week, writing in your home. In this case, you clearly pass the regular-use test.
Example 2: You make wooden toys for sale. Although, you use a part of your basement exclusively for this purpose, you ignore your business most of the time. In 2007, you used your workshop on only three days. In this case, you fail the regular-use test.
You can have more than one business location for a single trade or business, but to deduct home-office expenses, your home must be the principal place of business. Your home office will qualify as the principal place of business if it meets the following requirements:
You use it exclusively and regularly for administrative or management activities of the trade or business.
There is no other fixed location where you conduct substantial administrative or management activities of the trade or business.
Example: You’re a self-employed plumber, and you spend most of your working hours visiting customers, installing and fixing their pipes. You also have one room in your house that you use to make and receive customer phone calls, do your billing, and maintain your business’s books. Because the room is the only fixed location at which you perform administrative activities, your home office qualifies as your principal place of business.
You can use the following factors if the principal place of business can’t be determined with the above rules:
The relative importance of the activities performed at each location
The time you spent at each location
Administrative or management activities include any of the following:
Billing customers, clients, or patients
Keeping books and records
Ordering supplies
Setting up appointments
Forwarding orders or writing reports
The following activities won’t disqualify a home office as the principal place of business:
You have others conduct administrative or management activities at locations other than your home. For example, another company does the billing from its place of business.
You conduct administrative or management activities at places that aren’t fixed locations of the business, such as in a car or a hotel room.
You occasionally conduct minimal administrative or management activities at a fixed location outside your home.
You conduct substantial nonadministrative or nonmanagement 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.
You have suitable space to conduct administrative or management activities outside your home, but choose to use the home office for those activities.
If you’re engaged in more than one trade or business, whether or not 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 won’t meet the exclusive-use test for any activity unless each activity conducted in that office meets all the tests for the home-office deduction.
Example: You’re employed as a teacher, and your principal place of work is the school. You also have a mail-order cosmetics business, and all of your work in the cosmetics business is done in your home office, and the office is used exclusively for the business. However, on occasion, you also use your home office to grade papers for school. Because the office isn’t used exclusively for your cosmetics business, you can’t claim the home-office deduction.
If you meet patients, clients, or customers in your home office in the normal course of business, the office qualifies for a deduction if you meet the regular- and exclusive-use tests.
Example: You sell insurance, and use the front room of your home regularly and exclusively for your insurance work. You often hold meetings with clients there, as well as listen to sales presentations, and conduct other insurance-related business. Because you meet the regular- and exclusive-use tests and meet clients there, your home office qualifies for the deduction.
If you’re an employee (work for someone else), you can’t deduct home-office expenses unless you use your home office for your employer’s convenience. Usually, this means that your employer doesn’t provide a place where you can perform your required duties. Whether or not the business use of your home is for your employer’s convenience depends upon all the facts and circumstances. However, business use is not considered to be for your employer’s convenience merely because it’s appropriate and helpful.
Example 1: You teach high school history, and you use a bedroom in your home to exclusively and regularly grade papers and prepare lesson plans. You can’t deduct home-office expenses because the school where you work provides a desk for you to use. The fact that you find it more convenient to work at home doesn’t give rise to a deduction.
Example 2: You work as a telemarketer from your home office for a company located in another city. Since the company provides you with no place to make your calls from, you can deduct your home-office expenses as long as you meet the regular- and exclusive-use tests.
Deductible home-office expenses include:
Depreciation of the home
Rent paid
Dwelling insurance
Utilities, maintenance, and repairs
You can’t deduct expenses for landscaping or lawn care unless a business purpose can be shown, such as use as a display to potential clients of a lawn-care business.