We’ve all read about Fortune 500 companies where the founders started the operation in a garage. If you’re one of the many who work from home incubating a business -- or have an established home-based business -- you’re probably eligible to deduct some expenses. Whether you are a homeowner or a renter, make sure you can prove your eligibility for the home office deduction by meeting Internal Revenue Service “tests” and documenting everything.
What is Meant by “Home” in the Home Office Deduction
The IRS definition of “home” for the home office deduction includes houses, apartments, condominiums, mobile homes, boats and similar property with basic living accommodations. This definition also includes any unattached structures such as barns, studios, garages and greenhouses. Make sure the “home” in your home office has your name attached to it somehow, either on a rental lease document or ownership document.
Eligibility Tests for the Home Office Deduction
You are eligible to claim the home office deduction if you meet four specific IRS tests for exclusive use, regular use, trade or business use and principle place of business: You must use a specific area of your home exclusively for business and not for personal activities. Make sure this area is 100 percent dedicated to business use with no personal items or equipment at all. The amount of home office space is based on a percentage of your home’s total square footage, supported by real estate documents stating the total square footage. You must regularly conduct business in this specific area. Keep a work log with dates, types of work performed and hours worked for proof of this test. You must be conducting business and not hobby work or personal office work. The IRS definition of conducting business is conducting a trade or business for profit. You must have proof of earnings such as 1099’s and bank deposits to prove earnings. Additional proof of conducting business would be a business license and invoices to customers. You must use this specific area as your principle place of business even if you work in other locations, performing substantial administrative and managerial activities there. A work log with dates, types of work performed and hours worked and records of meetings with customers at your home are both proof that your home office is your principle place of business.
Additionally, if you are an employee and are allowed or required to work from home, you must meet the four tests described above, plus the business use of your home must be for the convenience of your employer, documented in writing by a letter from the employer.
Supporting Expenses for the Home Office Deduction
Allowable expenses that are deductible with the home office deduction include a portion of real estate taxes, qualified mortgage insurance premiums, deductible mortgage interest, depreciation, insurance, rent paid if you are a renter, repairs, utilities and services. Keep copies of all bills for expenses you’re deducting.
Forms Used for the Home Office Deduction
There are several IRS forms used to claim and file the home office deduction. The most common form used is Schedule C Profit or Loss from Business for form 1040, for self-employed tax filers. Form 4684 Casualties and Thefts is used to claim a portion of repairs or replacements expenses from damage to the home where you have your home office.
- Internal Revenue Service: Publication 587 (2011), Business Use of Your Home
- Deduct It! Lower Your Small Business Taxes; Stephen Fishman
Heidi Cardenas specializes in human resources, business and personal finance, small-business advice, home and garden and home improvement. Her professional background includes human resources and business administration, technical writing and corporate communications. She has studied horticulture and business administration, and enjoys guest blogging for publications including Herb Companion Magazine, Natural Home Living Magazine, and Mother Earth Living.