Posted by Income Taxes and Bookkeeping LLC

The Home Office Tax Deduction

The Home Office Tax Deduction

Using a section of your home for business makes you qualify for some deductions, which Uncle Sam calls the "business use of your home." As long as one meets all the requirements, there is the provision to deduct some percentage of various costs incurred in running the home like rent, utilities, insurance, mortgage interest, depreciation, real estate tax, renovations, etc. 

Both renters and house owners can take advantage of this deduction. Any part of your house you use for a business, like a garage, workshop, etc., qualifies. The IRS specifies that the home can be an apartment, a house, a condo, a boat, a mobile home, etc., as long as that is where you cook and sleep. 

There are, however, two critical tax requirements one has to meet to qualify for these deductions:

  1. Exclusive and Regular Use: This means that part of your house designated as a home office must be used regularly and exclusively for your trade or business. 

  2. Principal place of business: You must prove that your home is your full business address. This involves showing at least one of these:

  • Your home is the meeting point for your clients, patients, or customers.

  • There is a part of your property that you designate for business purposes exclusively.

People who do not meet the rules specified above can deduct all ordinary and essential business expenses incurred from using a home office. Cost of office supplies and a distinct phone line qualifies. This, however, only applies to the expense you incur from the maintenance and running of your homes, such as rent, home insurance, depreciation, real estate taxes, mortgage interest, and repairs. 

Exclusive and Regular Use 

To qualify for the home-related expense deduction, it is essential to use part of your home for business purposes. 

Regular Use: While Uncle Sam has no straightforward definition of what everyday use means, it is essential to use a section of your home for business continuity. This means occasional use will not qualify for such. However, a couple of day's work at the home office every week for some hours will help you be eligible. 

Exclusive Use: This means that a section of your house is dedicated solely for business purposes. For instance, using a room to sleep at night and for work during the day makes it fail the exclusive test. However, there is the opportunity to use a part of a large room for business purposes. Again, the section will only be for business purposes ONLY.

Examples of Exclusive Use 

Jude is a counselor who uses his garage to meet and advise clients. As a member of the band, Jude uses the garage to practice with the band. Since the garage serves Jude for both business and pleasure, he cannot claim business deductions from the use of the garage. 

Madison uses her garage strictly for business. Madison also puts a desk, business calendar, and a PC in the kitchen. He also cooks and eats there. While Madison can claim a business deduction for her garage, she can't claim it for the kitchen. 

Storing Product Samples and Inventory at Home 

For people who have their inventory or product samples stored at home, there is also the provision to deduct the expense incurred from the house's business use. Again, it does not happen if you use the portion of your home exclusively for your business.

This, however, comes with two limitations:

  1. One cannot qualify for the deduction if one has another office or main business location asides from the house.

  2. The storage must be in a particular place like the den, closet, basement, or bedroom. You can use the designated storage for another purpose as well.

It is important to note that the home office deduction strictly applies to bona fide business. If Uncle Sam concludes that what you have is a hobby and not a profit-generating business venture, they might prevent you from enjoying the home office deduction.



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