Home Office Expenses Deduction IRS Rules

By | January 27, 2015

Self-employed taxpayers who work from their homes may be entitled to favorable “home office” deductions for certain expenses they incurred. However, in order to claim this deduction, certain home office expense deduction rules must be met. When self-employed people make any kind of deduction from their taxes, the IRS is watching carefully and may always audit these deductions. An IRS audit for an improper home office deductions could lead to IRS penalties. If claiming these home office tax deductions, be sure to follow the rules very closely.

Home Office Expenses Deduction IRS Rules

The home office deduction is available for home owners and renters, and applies to all types of homes. IRS also provides for a simplified method to figure your expenses for business use of your home. The standard method has some calculations, allocations, and substantiation requirements that are complex and burdensome for small business owners.This new simplified option can significantly reduce recordkeeping burdens by allowing the qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.

How to Keep Home Office Business Deductions

Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction. One, you must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room. Two, you must show that you use your home as your principal place of business.

 

Home Office Expense Deductions Allowed

  • Deductions for the “direct expenses” of the home office. These are expenses that are easily traceable to the actual home office. For example painting the home office or buying furniture for the home office.
  • Deductions for the “indirect” expenses of maintaining the home office-e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and casualty losses.

In addition to these deductions, if your home office is your “principal place of business,”  the costs of travelling between your home office and other work locations in that business are deductible transportation expenses, rather than nondeductible commuting costs. Furthermore, you may also deduct the cost of computers and related equipment that you use in the home office.

 

Tests for home office deductions.

You may deduct your home office expenses if you meet the principal place of business test, the place for meeting patients, clients or customers test, or the separate structure test.

  • Principal place of business. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.
  • Home office used for meeting patients, clients, or customers. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the home office.
  • Separate structures. You’re entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that’s located in a separate unattached structure on the same property as your home-for example, an unattached garage, artist’s studio, workshop, or office building.
  • Space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.

 

More Information About Home Office Deductions

 If you conduct business at a location outside your home but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. Generally, deductions for a home office are based on the percentage of your home devoted to business use. So if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the two tests already discussed, plus your business use must be for the convenience of your employer, and you must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer. If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

How to Take Home Office Expense Deduction from IRS

For a full explanation of tax deductions for your home office, refer to Publication 587, Business Use of Your Home.