The Home Office Tax Deduction
From the Nolo.com Business Tax Center
Running a business from home can save not only the cost of renting a separate office, but it can also save you tax dollars.
You may be able to take a tax deduction for business use of your home. The deduction is available not only for a home office but for other business uses as well, such as a workshop or studio at home.
Basically, if you meet the technical requirements of the tax law, you can deduct the cost of utilities, rent, depreciation, home insurance and repairs when you use part of your home for business. For a detailed explanation, see IRS Publication 587, Business Use of Your Home, which also spells out the limitations on the amount you can deduct. It's available online at http://www.irs.ustreas.gov.
Keep in mind that whether or not you can deduct expenses that relate specifically to your home, such as rent, utilities, home insurance and repairs, you can still take a deduction for regular business expenses, such as photocopies, stationery, paper clips, wages, travel, equipment, professional memberships and publications. You can also deduct the cost of long-distance calls you make from home and a separate phone line used for business calls.
According to the IRS, your "home" can be a house, condo or apartment unit--or even a mobile home or boat. But wherever you live, before you can deduct expenses for using part of your home as a business, you must meet two tax law requirements.
Requirement #1: You must regularly use part of your home exclusively for a trade or business (see Section 1).
Requirement #2: You must be able to show that:
- you use your home as your principal place of business (see Section 2), or
- you meet patients, clients or customers at home (see Section 3), or
- you use a separate structure on your property exclusively for business purposes (see Section 4).
1. Regular and Exclusive Use
The first requirement for taking deductions related to your home is that you regularly use part of your home exclusively for a trade or business. The notion of regular use is a bit vague. The IRS says it means you're using a part of your home for business on a continuing basis--not just for occasional or incidental business. A few hours a day on most days is probably enough to meet this test.
Exclusive use means that you use a portion of your home only for business. If you use part of your home for your business and also use it for personal purposes, you don't meet the exclusive use test.
| Example: | | Brook, a lawyer, uses a den in his home to write legal briefs and prepare contracts. He also uses the den for poker games, watching TV and hosting a book club. Result: Brook can't claim business deductions for using the den. | |
| Ways to Document Your Home-Business Deduction | Here are some steps you can take to help establish your legal right to deduct home-related business expenses.- Photograph your home office and draw a diagram showing the location of the office in your home.
- Have your business mail sent to your home.
- Use your home address on your business cards and stationery and in all business ads.
- Get a separate phone line for the business.
- Have clients or customers visit your home office--and keep a log of those visits.
- Keep track of the time you spend working at home.
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