Taxpayers are eligible to claim a home office expense in limited situations and only if the following conditions and requirements are met.
Home Office Must Be Used For Trade or Business
If you are merely using the home office for profit seeking activities that are not a trade or business, you cannot claim the home office. For instance, if you are using the home office for managing your investments, you may not deduct the home office expenses associated with this investment activity.
Qualification Tests for Home Office
Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
- As your principal place of business. For example, your home office will qualify if it is used regularly for administrative activities and you have no other fixed location where you can conduct these activities on a substantial basis; or
- As a place to meet or deal with patients, clients or customers in the normal course of your business. Occassional meetings and telphone calls will not meet this test; or
- In any connection with your trade or business where the business portion of your home is a separate structure not attached to your home. This structure does not have to be your principal place of business or a place where you meet patients. For example, Sam has a wine shed in his back yard and produces wine there. He then has a store in town where he sells the wine. Even though the shed is no his principal place of business, he can deduct the costs associated with the shed, because it is separate from the dwelling.
Basically, you must use a room or other separate area only for your business. If you use this area for both business and personal purposes you cannot claim the home office expenses.
Situations Where Exclusively Test Does Not Apply
You do not have to meet the exclusivity test in three situations:
Certain storage use
Rental use, or
Daycare-facility use.
You still must use the property regularly in this case but not exclusively.
Amount of Home Office Linked to Percentage of Home Use
Generally, the amount you can deduct depends on the percentage of your home used for business.
Gross Income Limitation
Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
Daycare Providers and Business Inventory, Samples
There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
Self-Employed Use Form 8829
If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction.
Such deduction funnels to and is reported on Line 30 of Form 1040 Schedule C, Profit or Loss From Business.
Special Rules For Employees Claiming Home Office Deductions
If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer. Where an employer does not require the employee to work from home and provides an office at work, the convenience of the employer test will not be met and home office expenses are not deductible.
Limitation of Home Office Expenses
Even if the home office qualifies, deductions may still be limited.
Home office expenses are only deductible to the extent of gross business income less those expenses attributable to the business but not related to the home.
Such excess expenses can be carried forward to offset future home office income.
Remember that items that are otherwise deductible items like real estate taxes and mortgage interest can be deducted in any event and are not subject to these limitations.
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