NFIB

The Home Office Deduction
10/ 22/ 2002

by Milton Zall

If you run your business out of your home, then you may be able to claim your home office and deduct a portion of the expenses associated with maintaining your home. The home office deduction consists of a series of small deductions for a portion of your utility bills, mortgage interest, repairs and home depreciation.

Do I qualify for the deduction?

To qualify for the write off, your home office must be used exclusively and regularly for business and either: (1) be your principal place of business or be used to personally meet with clients or customers in the normal course of your business; or (2) be a separate structure that is not attached to your house or residence, in which case it merely has to be used in your trade or business.

How do I calculate the deduction?

To determine your home office deduction, multiply the percentage of your home that's used for business by your allowable indirect household expenses, like electricity and gas. Then you add your direct expenses. For example, if your home has 3,000 square feet of living area, and your home office occupies 300 square feet of that space, then one-tenth of your indirect expenses are deductible. If all the rooms in your home are approximately the same size and an entire room is used for business, you can make your calculation based on the number of rooms.

What is exclusive and regular business?

You don't necessarily have to use a portion of your home as an office. It can also be a showroom, lab or storage area. However, you must use it regularly, not just occasionally. "Exclusive use" means that the business part of the home is not used for any personal, family or investment activities. If you have a desk or filing cabinet in your den that you use for business but you also watch television there, you're den is not being used exclusively for business purposes, so you can't deduct any expenses associated with the use of your den.

There is an exception to the "exclusive use" requirement if your home is the only fixed location of a retail or wholesale business. In that case, you can deduct expenses that pertain to the use of part of your home for the storage of inventory or product samples.

There is also an exception to this exclusive use requirement for those who operate a child day care business in their home. Day care operators can deduct the costs attributable to the portion of the home that is used regularly for day care, even if it is also used for personal and family living space.

Other requirements

In addition to the exclusive and regular-use tests, you must meet one of the following requirements:

The part of the home must be your principal place of business. You must use it as a place to personally meet clients or customers in the normal course of your business--telephone calls don't count.

A home office will qualify as the principal place of business if you use the office to conduct administrative or management activities for your business, or if there isn't another fixed location where you conduct substantial activities of your business.

The bottom line

If you claim a home office deduction, you should keep meticulous records of all your expenses and be prepared to back them up if you're asked to by the IRS. As with most tax matters, it's always a good idea to check with a CPA or tax attorney if you have any questions.

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This article originally appeared in the October/November 2002 issue of MyBusiness magazine.

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