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Home Office Tax Deductions

Definition: Income tax deductions you're allowed to take if your home office passes the "exclusive use" text needed to qualify for the deduction

Working at home can grant you a break on your income taxes, provided that your home office qualifies for the potential deductions. There are two factors you must prove to show the IRS that your home office qualifies for deductions on your tax return. First, you must show, on your tax return, that you use your home office exclusively and regularly as your principal place of business. And second, you have to prove that it's the place where you meet with patients, clients or customers in the normal course of doing business.

In order for your home office to qualify as your principal place of business, you must spend most of your working hours in your home office and most of your taxable business income must come from activities in your home office.

That's been harder to prove since the Supreme Court tightened this tax definition in 1993. To meet this tax test now, you must be able to show the IRS that your home office is your most important place of doing business or that you spend more time working in your home office than anywhere else. So make sure you have tax records of your activities at your home office and a log of the time you spend working at your home office.

You must also prove that the part of your home you use as your home office--which can be just a portion of a room as opposed to an entire room--is used only for business. Two exceptions are if you're storing inventory or using a room to provide day care; then you can also deduct the use of the space as part of your residence.

Here are some of the items you may be able to deduct if your home office passes the use test. (As always, consult with your accountant to make sure these apply to you.)

  • A percentage of your rent if you lease or rent, or of your home loan interest if you have a mortgage
  • Cleaning costs for your home office--both labor and supplies
  • A portion of your real estate taxes and interest costs "above the line" (that is, before payroll taxes are calculated)
  • Some depreciation for the office part of your home
  • Utility costs and trash collection fees you can attribute to your home office
  • Maintenance and repair of your home office, including painting
  • Household furniture you converted or purchased for use in your home office

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