Home Office Deduction

Many small business owners could and can take advantage of the home office deduction.  It is not necessary to own the residence, but you will get a larger deduction when you own the real estate.

Some basic tests to qualify an area of your home as a home office.

1. Exclusive Use for the business – this may be a room or several rooms or even a specific portion of a room.  The key is that is only used for the business.
2. Regular Use by the business – it is necessary to review the facts and circumstances to insure that you meet this test.  There are many activities that would be considered use.  Such as administrative functions, research, client meetings, employee meetings, teleconferences, etc.
3. Principle Place of Business – unless the area is used for meeting clients or is a separate structure it must be the principle place where business is done.

There are a couple of exceptions to the exclusive test.  If you own a business that sells product at retail or wholesale the area where the product is stored doesn’t have to be exclusively for the business.  Also daycare use of a home does not have to meet the exclusive test.

The amount of your deduction is based on two things, the portion of the house that is used by the home office and what specific costs are attributed only to the home office.  If your home qualifies as a home office many expenses common to the whole house will become partly business.  Examples include property insurance, utility expense, repair costs, telephone, etc.  The main deduction is depreciation.

Repair costs exclusively for the home office would be 100% deductible while general repairs to the house would be subject to the percentage used by the home office.

For further information:

An IRS summer news release
Five Facts about the Home Office Deduction

IRS Publication 587