Business Use of Home - Is It Deductible?

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Regardless of being self-employed or an employee, if a taxpayer uses a portion of his/her home exclusively and regularly for business purposes, he/she may be able to take a home office deduction.

A taxpayer can deduct certain expenses if the home office is the principal place where the taxpayer's trade or business is conducted or where he/she meets and deals with clients or patients in the course of his/her business. If a separate structure not attached to the home is used for an exclusive and regular part of the business, the taxpayer can deduct expenses related to it.

The home office will qualify as the principal place of business if the taxpayer uses it exclusively and regularly for the administrative or management activities associated with his/her trade or business. There must be no other fixed place where the taxpayer conducts substantial administrative or management activities. If both the taxpayer's home and other locations are regularly used in the business, the taxpayer must determine which location is the principal place of business, based on the relative importance of the activities performed at each location. If the relative importance factor doesn't determine the principal place of business, the taxpayer can also consider the time spent at each location.

If the taxpayer is an employee, there are additional requirements to meet. A taxpayer cannot take the home office deduction unless the business use of home is for the convenience of the taxpayer's employer. Also, a taxpayer cannot take deductions for space rented to his/her employer.

Generally, the amount that can be deducted depends on the percentage of the taxpayer's home used for business. The deduction will be limited if gross income from the business is less than total business expenses.

Expenses that can be deducted for business use of the home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs. However, a taxpayer may not deduct expenses for lawn care or those related to rooms not used for business.

There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

For more information, see IRS Publication 587, Business Use of Your Home.

For self-employed taxpayers, Form 8829, Expenses for Business Use of Your Home, should be used to figure the home office deduction and report those deductions on line 30 of Schedule C, Form 1040. Employees can use the worksheet in Pub. 587 to figure their allowable expenses and claim them as a miscellaneous itemized deduction on Schedule A, Form 1040.

To be on the safe side, taxpayers may also want to review IRS Publication 4035, Home-Based Business Tax Avoidance Schemes, which describes schemes that claim to offer tax relief but which actually result in illegal tax avoidance.

Source: Tax 2005-54

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