Home Office Expense Deductions

December 17, 2008

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A deduction for the business use of a personal residence is allowed only if the space is used exclusively and on a regular basis as any of the following:

The principal place of any business in which the taxpayer engages. A home is treated as a principal place of business if it is used for substantial administrative or managerial activities and there is no other fixed location for the performance of these activities.
A place of business used for meeting clients, customers, or patients.
In connection with the taxpayer’s trade or business if the taxpayer is using a separate structure that is not attached to the dwelling.

Additionally, if the taxpayer is an employee, the business use of the home must be for the convenience of the employer.

Hint: The home office deduction of an employee is a miscellaneous itemized deduction subject to the 2% of adjusted gross income limitation.

If the space is in a separate building, not attached to the taxpayer’s residence, it will qualify so long as it is used exclusively and on a regular basis for business purposes.

Business expenses related to space in a home used regularly (even if not exclusively) as a storage unit for inventory or sample items (or both) are deductible if the home is the sole fixed location of the business.

One exception to the exclusive use test is if the residence is the only fixed location of a trade or business engaged in selling products at retail or wholesale, provided a separate, identifiable portion of the residence is regularly used for inventory storage.

Thus, where a part of a basement is used for this purpose, the proportionate part of the expenses will qualify, even though the basement is used for other purposes as well.

Another exception is where a residence is used to provide day care services to children, handicapped individuals, and the elderly on a regular basis.

Use Form 8829 to figure out your deductions and then enter on Schedule C if you own your business. Employees use Form 2106.

You’ll need to know the square footage of the space used exclusively for business purposes. A portion of your mortgage interest, property taxes, insurance and utilities are deductible.

The first phone line into your home is not deductible although charges such as long distance calls, call waiting and equipment rentals are deductible.

Please check with your tax preparer as your situation may be different than described.

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