Having a Home Office – and getting a tax deduction for it!!

A tax deduction is available for the costs of having a home office.  However, there are several requirements that must be met.  This is an area that the IRS polices regularly, so if the rules are not followed exactly, the deduction will be denied and the assessment of penalties is likely.

First, the home office must be used for a trade or business activity.  Generally, this is going to be an enterprise that is reported on Schedule C in an individual income tax return.  The activity must be a real business; you cannot have a home office deduction for managing personal investments.

The home office must be used regularly and exclusively for business.  The office must be in a separately identifiable area of the home that is used only for the business (no deduction for working at the kitchen table).  If the area is used both for business and personal purposes then the requirement is not met.  It is not necessary that an entire room be dedicated to the business.  A portion of a room – as long as it is used exclusively for the business – will satisfy the requirement.

The home office must be one of the following: (1) the principal place of business, (2) a place to meet with customers in the normal course of business, or (3) a separate structure used for the business that is not attached to the dwelling structure.

It is very difficult for an employee to take a home office deduction.  To be able to take the deduction the home office must be for the employer’s convenience.  If the employer does not require the employee to work from home and provides a space for the employee, then it is likely that the home office is at the employee’s convenience and no deduction is available.

The expenses available to be deducted include allocable portions of the costs to maintain the home.  This includes mortgage interest, property taxes, maintenance, utilities, insurance, and other costs.  It is important to remember that mortgage interest and property taxes would be deductible anyway if the home office does not meet the requirements.  Depreciation on the allocable portion of the property is also allowable; however, this will possibly lead to a portion of any gain realized on the sale of the home to be taxable.  The expenses are deductible only to the extent of the business’s income.  Any expenses not deducted can be carried over to future years.

This article only covers the basics of the deduction.  As mentioned, the IRS watches this very closely, so it is important to follow the rules outlined.  But for those who do, this deduction is something that should not be overlooked.

Any federal tax advice contained in this article is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

Greg Tanner – is a Tax Principal at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.