With rising unemployed, it's a safe bet that more people who lost a job last year decided to give up the rat race and start their own business and work from home. If so, you'll probably be writing off the business use of your dwelling.
While the Internal Revenue Service (IRS) provides many tax breaks for the business use of a home, there are many specific rules and requirements that must be followed. Perhaps most important, there must be a solid wall, figuratively at least, between personal and business uses. The two cannot mix.
If you have started a business, chances are you have already retained the services of an accountant. If not, it is highly advisable, especially to help you find your way through this part of the tax code. For starters, we'll provide an overview of what you can, and cannot, write off.
Home sweet home
When the IRS uses the term "home," it includes many types of dwellings. It can be a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. You may take the deduction whether your own the property or rent it.
Generally, you cannot deduct items such as mortgage interest and real estate taxes as business expenses (they're already deductible on your personal return). However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements.
Even then, your deduction may be limited.
To qualify to deduct expenses for business use of your home, you must use part of your home:
- Exclusively and regularly as your principal place of business,
- Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
- In the case of a separate structure which is not attached to your home, in connection with your trade or business,
- On a regular basis for certain storage use,
- For rental use (see Publication 527), or
- As a daycare facility
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.
You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Even if you use a personal area of your home occasionally for business purposes, it does not qualify as a business use deduction.
You must also use the business portion of your home on a regular basis. Incidental or occasional business use is not regular use. You must consider all facts and circumstances in determining whether your use is on a regular basis.
To qualify under the trade-or-business-use-test, you must use part of your home in connection with a trade or business. If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use.
You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business.
Principal place of business
To determine whether your home is your principal place of business, you must consider the relative importance of the activities performed at each place where you conduct business, and the amount of time spent at each place where you conduct business.
Your home office will qualify as your principal place of business if you use it exclusively and regularly for administrative or management activities of your trade or business, or if you have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses.
After you determine that you meet the tests under Qualifying for a Deduction, you can begin to figure how much you can deduct. You will need to figure the percentage of your home used for business and the limit on the deduction. This is where you probably need some accounting help.
If you decide to go it alone, or just want to better understand the process, IRS Publication 587 covers it in detail.