Can Your Home Office Lower Your Tax Bill?
Q: Over the past year, I've been working out of my home office more and more. How can I qualify to take my home office as a business tax deduction?
A: As a small-business owner, you may qualify to take a home-office tax deduction. In order to qualify for the deduction, the use of your home office must be both "exclusive" and "regular." If you qualify, you may deduct certain other expenditures, such as depreciation and the indirect expenses of operating your home, on a pro-rata basis.
Qualifying for the home-office deduction is a two-step process:
1. You must be using a portion of your home for your business, and you should be doing so on an exclusive and regular basis. "Exclusive use" means you use a separate area of your home (or a separate, unattached structure) only for business purposes. This area can be a room or any other separately identifiable space, although the space does not need to be marked off by a permanent partition. If you use an area for both personal and business purposes (it must be either space for storage of inventory or a day-care facility), you do not need to meet the requirements of the exclusive test; however, you are required to pro-rate the total space between personal and business use in order to identify the business portion.
"Regular use" means you must use a specific area of your home for business on a continuing basis. However, you do not need to meet the this test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose.
2. The business part of your home must be one of the following locations:
- Your principal place of business. Your home office will qualify as your principal place of business if both of the following conditions are met: You use it exclusively and regularly for administrative and management activities of your business, and you have no other fixed location where you conduct substantial administrative or management activities of your business. Of course, you can have more than one business location, including your home, for a single business. If you do, and your home office doesn't qualify as your principal place of business based on the previous two conditions, you should determine your principal place of business using the relative importance of the activities performed at each location. If the relative importance factor does not determine your principal place of business, you can consider the time spent at each location.
- A place where you meet or deal directly with patients, clients or customers in the normal course of your business.
- A separate structure (not attached to your home) that you use in connection with your business.
In qualifying for a home-office deduction, either you qualify or you do not. There is no partial qualification available.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.
David Meier received an MBA in Finance from Loyola of Baltimore, and spent much of the 1970s teaching business courses; later, he created a consulting group, and for the next two decades, provided accounting and tax services to small-business owners. He is currently the founder and COO of Business Development Coaching, which provides small-business owners with ongoing business coaching and the knowledge and support required to enable them to become truly successful entrepreneurs. Visit his site at http://www.makeyourlifetaxdeductible.com.