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Business Use of Home Office Tax Deductions
November 15, 2010
For this week’s post, I would like to share some basic information on qualifying a home office as the principal place of business. The advantage to doing this comes in the form of allowable tax deductions for business use of the home. Before I begin, please note that there are other ways to qualify for business use of the home deductions, such as storing inventory or using the home as a day care facility, but I want limit the scope of this post to how the vast majority of eligible taxpayers might qualify their home office as a principal place of business.
Tax Advantages
There are some major advantages to using a portion of one’s home as an office:
- Daily commuting costs between the home and another work location in the same trade or business are deductible.
- Portions of otherwise nondeductible expenses, such as utilities and insurance, qualify as legitimate business deductions and are therefore deductible.
- There is another advantage that comes into play when the taxpayer later sells his or her home, but we do not need to get into that today.
Qualification Requirements
To take a business deduction, an area in the home must meet three tests: the Exclusive Use Test, the Regular Use Test and the Principal Place of Business Test.
Exclusive Use Test. The exclusive use test is fairly self-explanatory. An area of the home must be used only for business. Generally, this area is a room in the home used only for business, but need not be so long as the space is separate and identifiable as the home office location.
Regular Use Test. The regular use test means a taxpayer must use a specific area of the home for business on a regular basis. Incidental or occasional business use is not regular use. All facts and circumstances are considered in determining whether the business use is regular.
Principal Place of Business Test. A business can have more than one location. To qualify for a business use of home deduction, however, the home must be the principal place of business for that business.2 If there is more than one place of business, a number of factors are considered in determining whether or not the home office will qualify as the principal place of business. If you find yourself in this situation, do not hesitate to contact a tax professional. A tax professional can assist you in not only determining the principal place of business, but also what changes would be needed in cases where the home office did not, in fact, initially qualify as the principal place of business.
In the interest of brevity, I decided not to discuss the types of expenses that are deductible. Information on calculating the amount of the deduction and certain deduction limitations are excluded as well. If you would like to know more about these topics, the IRS covers it all in Pub. 587.
I hope you found this information to be helpful. Again, please feel free to leave a comment or question.