Business Use of the Home

In past years, taxpayers have been confused as to whether they could take a deduction for the business use of their home because of the complicated rules qualifying a home office as the principal place of business. For tax years beginning in 1999, qualifying for the home office deduction was made easier for many taxpayers

When does my home office qualify for an income tax deduction?

In order to claim an income tax deduction for an office in the home, the office must be used exclusively and regularly for administrative or management activities as the principal place of a trade or business and there is no other fixed location where you perform these activities.

What does exclusive and regular use of my home office mean?

You must use a specific area of your home only for your trade or business. Accordingly, if your home office is also used as a recreation room or a spare bedroom it will not qualify for the home office deduction.

What are examples of administrative or management activities?

Activities that qualify as administrative or management activities include billing customers, keeping books and records, ordering supplies or inventory, or setting up appointments.

Can I qualify for the home office deduction if the office is not my principal place of business?

If you meet with patients, clients or customers in your home in the normal course of your business, while the principal place of your business is in another location, you can deduct expenses for that part of your home used exclusively and regularly for business where the patients, clients or customers use of your home is substantial and integral to the conduct of your business.

Another exception to the principal place of business rules is where you have a structure separate from your residence that you use exclusively and regularly for a trade or business. The structure does not have to be your principal place of business nor does it have to be a place where you meet patients, clients or customers.

How do I figure my home office deductions?

After you determine that you qualify for a home office deduction under the rules discussed above, you need to compute the business percentage of your home that is used for business purposes. To compute this percentage you compare the size of your home office to that of your entire home. Examples of expenses you can use in computing your home office deduction are home mortgage interest, real estate taxes, homeowners insurance, rent, utilities, and depreciation (if you own your home). These are expenses for your entire home. Accordingly, these expenses are multiplied times the business percentage use of your home to arrive at the deductible amount. Expenses such as repairs that are done specifically to your home office are 100% deductible.

Can I create a business loss with the home office deduction?

The home office deduction is limited to gross income less expenses not relating to the home office, less home office expenses that would be deductible even if you didn't use your home for business. The home office deduction for mortgage interest and real estate taxes can create a loss. Home office expenses for insurance, rent, utilities, repairs and maintenance and depreciation cannot create a net loss on your business and they cannot increase the net loss of your business.

What happens if my home office deduction is limited during the current tax year?

You can carry the expenses not deductible due to the income limitations to the next tax year where the amount carried over will be subject to the deduction limit for that year.

Can I deduct expenses for the business use of my home as a home day care provider even though no part of my home is used exclusively for business purposes?

There is an exception to the exclusive use rules for home day care providers. To qualify for this exception, you must meet the following two requirements;

1. You must be in the trade or business of providing day care services for children, persons 65 or older, or persons who are physically or mentally unable to care for themselves, and
2. You must have applied for, been granted, or be exempt from needing a license, certification, registration, or approval as a day care center or as a family or group day care home under state law. You do not meet this requirement if your application was rejected or your license or other authorization was revoked.

How do I figure the deduction for the business use of my home as a day care?

If you regularly use part of your home for day care, figure the business percentage on the part that is used for day care as explained earlier. If you use that part exclusively for day care, deduct all the allocable expenses, subject to the income deduction limit as explained earlier.

If you use part of your home regularly for day care but not exclusively, you must figure what part of available time you actually use it for day care (time percentage). To do this, you compare the number of hours you used your home for day care to the total number of hours during the year (8,784 for 2000). To compute the deduction, you multiply the business use percentage times the time percentage times the allocable expenses.

Can I deduct expenses for the business use of my home where I store inventory or product samples but the room I use does not meet the exclusive use test?

Yes, but you must meet all of the following tests.

1. The inventory or product samples are kept for use in your trade or business.
2. Your trade or business is the wholesale or retail selling of products. 
3. Your home is the only fixed location of your trade or business. 
4. Your use of the storage space is on a regular basis. 
5. The space you use is an identifiably separate space suitable for storage.

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