Qualifying for a Home Office
The requirements of the home office deduction are strict. To
qualify, your home office must be used exclusively and regularly for
business. In addition, it must either:
- be your principal place of business or be used to personally
meet with clients or customers in the normal course of your business; or
- be a separate structure that is not attached to your house or
residence, in which case it merely has to be used in your trade or
business.
Exclusive and regular business use. You don't
necessarily have to use a portion of your home as an office; it could
be a showroom, lab, or storage area. However, you must use it regularly,
not just occasionally. Exclusive use means that the business
part of the home may not be used for any personal, family, or investment
activities, or for any other business activities that don't meet the
home office requirements.
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Warning The "exclusive use" requirement is extremely
strict and deductions are frequently disallowed based upon a finding
that the use was "not exclusive." Any non-business use by yourself,
your family or your friends violates the "exclusive use" requirement
even if this use is after working hours or on weekends (unless the
storage or day-care exceptions discussed below apply). The
IRS can ask to inspect the home office if they are auditing your return
and can question you regarding non-business use of the space or the
equipment within in (For example, playing video games on the home
office computer, or allowing your children to use it for their school
work while it is in the home office violates the exclusive use of
the space. |
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There is an exception to the "exclusive use" requirement
if your home is the only fixed location of a retail or wholesale business.
In that case, you can deduct expenses that pertain to the use of
part of your home for the storage of inventory or product samples.
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Example Patrick Daley's home is the sole, fixed
place of his business selling personal computers at retail. He regularly
uses half of his basement for inventory storage, although he also
uses that part of the basement for personal purposes when his inventory
is low. The expenses allocated to the storage space are deductible
even though he does not use that part of the basement exclusively
for business. |
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There is also an exception to this exclusive use requirement
for those who operate a child care business in their home. The portion
of the home that is used regularly for day care qualifies as a "home
office," even if it is also used for personal and family living space.
However, day care operators face an additional time
restriction; they may only deduct expenses for the actual time
the day care center was open.
Principal place of business.
In addition to the exclusive and regular use tests, you must meet one of
the following requirements:
- The part of the home must be your principal place of business.
- You must use it as a place to personally meet clients or customers
in the normal course of your business (telephone calls don't count).
- If it is a separate structure that is not attached to your house
or residence, it merely has to be used in your trade or business.
The "principal place of business" definition is significantly
easier to meet than it once was. A home office will qualify as the
principal place of business if: (a) the office is used by the taxpayer
to conduct administrative or management activities of a trade or business,
and (b) there is no other fixed location where the taxpayer conducts
substantial administrative or management activities of the trade or
business.
The test looks at "administrative" and "managerial"
activities. So, you can meet the test even if you perform substantial non-administrative
or non-managerial activities outside your home. Administrative
or managerial activities include: billing for services, keeping books
and records, ordering supplies, and scheduling appointments.
In
addition, the following activities will not stop you from taking a
home office deduction, assuming you meet the other tests:
Paying
others to perform administrative activities outside of your home (for
example, you hire a bookkeeper to do your payroll and she works from
her office).
Doing occasional administrative activities at
a fixed location outside your home (for example, you make the work
schedules for the week from your home office, but you make an adjustment
while at your retail store when an employee phones in sick).
It
doesn't matter if you have suitable space to conduct administrative
or management activities outside your home, as long as you don't make
use of it for that purpose. For example, you have a room at your restaurant
that could function as an office, but you do not use it for that purpose.
Also, the fact that you may conduct management activities in a non-fixed
location, such as a car or hotel room, will not cause you to lose
the deduction.
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Example Joe Ditto operates his photocopier service
and repair business out of his home. His only office is a room in
his house used solely for business purposes. Although Joe
never meets with customers in his home office, he spends about 12
hours per week working there, scheduling service calls and writing
up orders and other reports. He spends an average of 30 hours per
week on service calls at his customers' businesses at various locations
in the metropolitan area. Joe keeps the few tools and supplies necessary
to his business in the trunk of his car. Joe's home qualifies
for the home office deduction. Even though the essence of his business
requires him to service and repair photocopiers at the customers'
places of business, and he spends less time in his home office than
he does at the customers' offices, his home office is considered his
principal place of business because it is the only fixed location
from which he conducts administrative and management functions. The
same result would apply to a restaurant owner who serves his customers
in a retail setting, but conducts management activities such as ordering
food and supplies, scheduling employees' working time, and doing bookkeeping
and payroll chores out of his home. He will qualify for the
home office deduction, as long as this is the only place he conducts
substantial management activities; the fact that some of his employees
may conduct management activities at the retail location does not
matter. |
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Meeting patients, clients, or customers. Even
if you don't meet the "administrative and managerial" test, you can
satisfy the "principal place of business" requirement if you conduct
business with patients, clients, or customers in your home in the
normal course of your business. Doctors, dentists, attorneys, and
other professionals who maintain offices in their homes generally
will meet this requirement.
You must meet both of the following
requirements:
- You must meet in-person with patients, clients, or customers on
your premises (phone consultations don't count.)
- This must be substantial and integral to the conduct of your business
(an occasional meeting with a vendor would not count.)
Are you eligible as an employee? If you or
your spouse is an employee, including an employee/shareholder of a
small corporation, you must be using your home for the convenience
of your employer in order to qualify for the home office deduction.
If your employer provides you with office space elsewhere, you probably
can't take the home office deduction because your home would not be
considered your principal place of business.
The IRS specifically
prohibits you from taking the home office deduction if you rent all
or part of your home to your employer and then use the rented portion
to work in as an employee.
If you don't qualify.
Even if you don't meet these strict requirements, you can still deduct
certain expenses that are directly related
to your business activities.
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