Determining if you qualify under the IRS home office rules to write off your home office expenses on your income taxes is not simple. You should only take the home office deduction if you meet every requirement and can provide proof of your eligibility if audited. Learn the IRS home office rules to determine whether or not you qualify for the home office deduction.
What Are the IRS Home Office Rules?
The IRS home office rules help you determine whether you qualify for a tax deduction based on the business use of your home. A home, in this case, could be your:
HouseApartment or condoMobile homeBoatUnattached structure on your property, such as a studio, barn, garage, or greenhouseAny other structure that provides living accommodations
However, it does not include any part of your property that you exclusively use as a hotel, inn, or another similar establishment. Home office expenses can only be deducted when you regularly and exclusively use a specific part of your home as your primary place of business.
How the IRS Home Office Rules Work
Determining whether you should take a home office deduction relies on meeting the criteria outlined in the home office rules.
Specific Area of Your Home
Your home office can be a separate room, but it does not have to be. The IRS home office rules say it may be a separate, identifiable space, though permanent partitions are not necessary to mark off that space. If you do not have permanent partitions, you should take care to define the space with furniture or some other way because you must only use this space for business purposes.
Regularly and Exclusively
The key point in taking the home office deduction is that the office space must not be for both personal and business use. For example, say you have a home office space you use for work, but it’s also the place where you pay your bills, email your friends, and watch TV. Since the space must be used regularly for business, occasional or incidental business use does not qualify. Some exceptions to exclusive use apply to licensed daycare owners and those that store inventory at home. If you store inventory in your home, you can deduct expenses for the business use of your home if, according to the IRS’ wording:
The inventory you’re storing is what you sell as part of your business.You keep the inventory or product samples that you sell in your home.Your home (where you store the products) is the only fixed location of your business.You use the storage space on a regular basis for business.You use a separate, identifiable space to store your inventory (i.e., you aren’t keeping products under your sink, in your closet, and on the dining room table).
If you are a daycare provider and regularly use a space in your home for daycare, you may still qualify to deduct it as a home office even if you occasionally use it for other purposes. To qualify, you must meet two requirements:
You are in business providing daycare for children, people over age 65, or those who can’t care for themselves physically or mentally.You have, are in the process of getting, or are exempt from having a license or other official approval to work as a daycare or family/group daycare home, based on state law.
Principal Place of Business
Defining your principal place of business is trickier for those conducting business in multiple locations. You should meet one of the following conditions:
Do the majority of your work in your home officeUse it regularly and exclusively for administrative activities, such as billing, setting appointments, and recordkeeping, with no other fixed location where you do this
For example, a sales rep who spends a large amount of time outside their home office visiting clients should still qualify to take a home office deduction. However, the home office should be the only place they do administrative activities, and they must meet all the other home office deduction rules.
Meeting Clients, Patients & Customers
If you meet with clients in your home office, but your principal place of business is elsewhere, you may still claim the home office deduction if:
You must physically meet with clients in your home. Occasional meetings and phone calls don’t countSubstantial use of the office is integral to conducting your business.
For example, a self-employed attorney who meets clients in a home office two days a week but works out of another office for three would qualify for a home office deduction, even though the other office might be considered their principal place of business.
Do I Need the Home Office Deduction?
If you meet the IRS home office rules, you may be able to deduct all or part of the cost of:
Property taxesMortgage interest or rent paymentsUtilitiesHomeowner’s or renter’s insurancePainting and repairs
However, taking the home office deduction comes with pros and cons, and it is not always the best choice for your tax bill. If you take the home office deduction, you may be limited in other deductions. For example, you cannot deduct mortgage interest both on your itemized deductions and as a home office deduction. Before you take this or any other deduction on your taxes, consult a tax preparation specialist. A tax professional will be able to help you claim the most profitable deductions for both your business and personal taxes.
