Home Office Deductions
Home Office Deduction Reminders
Overstated adjustments, deductions, exemptions and
credits account for up to $30 billion per year in unpaid
taxes, according to IRS estimates.
In order to educate taxpayers regarding their filing
obligations, this fact sheet, the fourth in a series,
explains the rules for deducting home office expenses.
Home Office Deduction: Basic Requirements
Generally, expenses related to the rent, purchase,
maintenance and repair of a personal residence may not
be deducted as a business expense. However, taxpayers
who use a portion of their home for business purposes
may be able to take a home office deduction if they
meet certain requirements. Expenses that may be deducted
include the business portion of real estate taxes, mortgage
interest, rent, utilities, insurance, painting, repairs
and depreciation. Note: The amount of depreciation deducted,
or that could have been deducted, decreases the basis
of your property.
In order to claim a deduction for that part of a home
used for business, taxpayers must use that part of the
home:
Exclusively and regularly as their principal place
of business, as a place to meet or deal with patients,
clients or customers in the normal course of their business,
or in connection with their trade or business where
there is a separate structure not attached to the home;
or
On a regular basis for certain storage use such as
inventory or product samples, as rental property, or
as a home daycare facility.
In addition, taxpayers working as employees can claim
this deduction only if the regular and exclusive business
use of the home is for the convenience of their employer
and the portion of the home is not rented by the employer.
“Exclusive use” means a specific area of the home is
used only for trade or business. “Regular use” means
the area is used regularly for trade or business. Incidental
or occasional business use is not regular use.
Non-business profit-seeking endeavors such as investment
activities do not qualify for a home office deduction,
nor do not-for-profit activities such as hobbies.
Example: An attorney uses the den in his home to write
legal briefs or prepare clients’ tax returns. The family
also uses the den for recreation. The den is not used
exclusively in the attorney’s profession, so a business
deduction cannot be claimed for its use.
Computing the Amount of Home Office Deduction
Generally, the amount of the deduction depends on the
percentage of the home that is used for business. The
deduction will be limited if gross income from the business
is less than the total business expenses.
A taxpayer can use any reasonable method to compute
business percentage, but the most common methods are
to:
Divide the area of the home used for business by the
total area of the home, or
Divide the number of rooms used for business by the
total number of rooms in the home if all rooms in the
home are about the same size.
Taxpayers may not deduct expenses for any portion of
the year during which there was no business use of the
home. If the gross income from business use of the home
is less than the total business expenses, the deduction
for certain expenses is limited.
Personal Expenses Are Not Business Expenses
It is important for taxpayers to realize that business
expenses may be deducted only if they are ordinary and
necessary for the particular type of business. Personal,
family and living expenses are not deductible under
any circumstances. A common error is to deduct expenses
for a portion of the home that is not used regularly
and exclusively for business.
Example: The basic local telephone service charge,
including taxes, for the first telephone line into a
home is a nondeductible personal expense. However, charges
for business long-distance phone calls on that line,
as well as the cost of a second line into a home used
exclusively for business, are deductible business expenses.
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