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If you use part of your personal residence for business you may be able to take a deduction. You may take a deduction whether you are self-employed or an employee. But just because you can take a deduction doesn?t mean you should. The home-office deduction has traditionally been a high audit area so if you use it you should be certain you use it correctly.
To take the deduction part of your home must be used exclusively and regularly for business. Exclusively means that the part of your home used for business may not be used personally. Space that is used jointly would not qualify for the deduction. This is typically interpreted very narrowly and the deduction has been disallowed for non-business use as little as a place where the kids sometimes watch television. If providing a daycare facility in your home or using your home to store inventory that you resell, the exclusive use requirement is loosened.
Several issues go into determining if the use is regular. First you have to consider the relative importance of activities performed in your home as compared to other places. You should also consider where you conduct the administrative functions of your business. Meeting clients or using the office as the primary location where you perform administrative functions certainly qualifies for the deduction. Inconsistent or occasional use of the home office would not meet this criterion. If you are an employee the home office must additionally be for the convenience of the employer.
If you meet the exclusive and regular use tests and you decide to take the deduction the next step is to figure the amount. The expenses that are deductible as a home-office include mortgage interest, real estate taxes, property insurance, utilities, general repairs, depreciation, and other expenses for keeping up and running your home. The amount of the deduction for these types of expenses is generally based on the relative size of the office compared to the whole structure. You can deduct 100% of direct expenses to the office such as repairs or painting.
Expenses for self-employed persons are deducted before determining AGI while expenses for employees are deducted on Schedule A and subject to a 2% floor. The deduction is further limited by the income from the activity. If depreciation is deducted there are some potential negative issues with regard to the gain exclusion on the sale of a personal residence. If you have a separate structure for your office space or use your home as a daycare facility, there are other things to consider. These issues are too complex for this article but should be addressed if you are considering using this deduction.
Hopefully this gives you an overview of how the home-office deduction works. For a more complete discussion see IRS publication 587 or contact us.
Last Updated by Admin on 2012-06-29 10:32:28 AM