E-Newsletter: Tax Law

Business Use of a Home

If a taxpayer runs a business out of his or her home or works from home for an employer, he or she may be permitted to deduct expenses related to the business use of his or her home if certain requirements are met. This is referred to as the home office deduction.

Section 280A of the Internal Revenue Code (IRC) covers deductions available for business use of the home. An individual is permitted to deduct expenses related to the business use of his or her home if that part of the home is used exclusively and regularly as a principle place of business for any trade or business; as a place of business that the individual uses in the normal course of his or her trade or business to meet with clients, customers or patients; or if a separate structure on the property is used, it is used in connection with the taxpayer’s trade or business.

As stated above, the business part of the taxpayer’s home must be used regularly and exclusively for business purposes. Regular use requires that the taxpayer use the home office on a regular basis. For example, it will be easier for a taxpayer to prove regular use if he or she uses the home office to meet with clients on a daily basis, rather than only once a month.

Exclusively means that the taxpayer cannot use the office for any other purpose besides business purposes. Other uses (such as personal use), even on a de minimis basis, may prevent a taxpayer from claiming the home office deduction. To meet the exclusive requirement, it is not necessary for there to be a permanent partition (such as a wall) between the space used for business purposes and other areas of the house. However, it will generally be easier for a taxpayer to prove the exclusive requirement if the business space is separated from other areas by walls, a door or a curtain. If the home office is open to other family members (for example, a desk and file cabinets that are set up in a section of a living room), it may be difficult for a taxpayer to claim the home office deduction. Under IRC section 280A(c)(2), there is an exception to the exclusive use requirement for areas of a home used to store inventory. In addition, under section 280A(c)(4), the exclusivity requirement does not apply to use of parts of a home as a day care facility.

If the taxpayer is an employee (and not self-employed), the business use of a home must be for the convenience of the employer. It is not enough for a home office to be merely helpful to the employer. Whether a home office is for the convenience of the employer is based on all the facts and circumstances.

The taxpayer can choose how to measure the portion of the home that is used for business purposes and is eligible for a deduction. The taxpayer may select the determination based on square footage or on the number of rooms. For example, suppose the taxpayer owns a home with 10 rooms and uses 2 of those rooms exclusively and regularly as a principle place of business. The taxpayer will be able to deduct one-fifth of the total expenses as expenses relating to the business use of a home.

It is important for the taxpayer to maintain adequate records to substantiate deductions related to his or her home office expenses. The taxpayer should keep cancelled checks, invoices, receipts and other records that show expenses related to the home office. The records should show the part of the taxpayer’s home that is used for business or trade purposes and the amount of depreciation and other expenses for maintaining that part of the home. Records should also show that the home office was used regularly (for example, documents that show the frequency of client meetings or telephone calls).

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