The Home Office Deduction
The U.S. Bureau of Labor Statistics puts the number of home-based businesses currently operating at 18.3 million. Other organizations say the number is closer to 38 million. The vast majority of these businesses are sole proprietorships (unincorporated entities). This article focuses on those businesses. If your business is a corporation or LLC, some of the rules will apply but there are differences.
With a home-based business, you may be able to deduct part of your rent or take a depreciation deduction if you own your home. This tax break is commonly called the home office deduction. The home based activity can’t be a hobby or to manage your investments. A house, apartment, condo, mobile home, motor home, boat or just about any other place with sleeping and cooking facilities can qualify for the home office deduction.
To claim a home office deduction, your home office must meet all of the following criteria:
The principal place of your business. If your only job site is your home, you meet this criterion. But if you meet clients regularly somewhere outside of your home (e.g. local coffee joint), your home can still qualify as a home office if you do the administration or management of your business at home AND you have no other fixed location where you conduct those activities. Maybe you’re a plumber and all of your calls are at customer locations. You should qualify for the deduction provided that you meet the next two criteria.
Separately identifiable space in your home. The space in which you work must be separate from the rest of your home to qualify for the deduction. A separate structure (studio or converted garage or barn) works best as proof for the IRS. But for most folks, this is not practical so they instead carve out a part of their living space as a home office. If you convert a spare bedroom you should remove personal items and the bed. It needs to look like a business office. Take a picture for your records. If you store inventory or samples at home, you can also deduct the square footage used for storage space, even if you use the space for other non-business purposes.
Regular & Exclusive Use. “Exclusive” means you can’t use the separately identifiable space for any other purpose. Thus no kitchen table or den where you watch Steelers or Eagles games with the neighbors. What “regular” means has generally been kind of fuzzy with the IRS. If you do your paperwork once a month you probably satisfy this requirement. You may want to keep a log of activity for which you use the space in the event of an IRS inquiry.
→ TIP Business travel expenses from your home office are deductible. If you travel to or from your home office for business – using your car or the subway or bus – you can deduct those travel expenses if you qualify for the home office deduction.
For more information, See IRS Publication 587, Business Use of Your Home
Next Topic: Calculating Your Home Office Deduction