Qualifying for the Home Office Deduction
To be eligible for the home office deduction, two conditions must be met:
First, your office must be one of the following:
- A place to meet or deal with patients, clients, or customers in the normal course of your trade or business
- Your principal place of business
- A separate structure that is not attached to your residence and used in connection with your business
Second, you must use your home office regularly and exclusively for the conduct of your business. This means your home office may not be used for any other purpose other than activities related to your own business. Of course, this begs the question: How will the IRS know?
Obviously, they won't. However, if an IRS auditor should ever question you about your deduction and you happen to mention that you let your kids use your home office computer to play games once in a while, your deduction could be disallowed for violating the regular and exclusive rule.
Principal Place of Business Test
If you don't actually meet with customers or clients in your home office, you can still qualify for the home office deduction if your home office is your principal place of business.
Your principal place of business is generally the location where you spend most of your working time and earn most of your business income. For example, a writer, bookkeeper, and a web designer working out of their home. Their home office would be their principal place of business.
If you're self-employed in the trades, such as a plumber or electrician, you earn most of your money on the job site and not out of your home. However, you can still qualify for a home office deduction under the administrative and management rule, discussed next.
Administrative and Management Rule
Your home office will meet the principal place of business test and qualify for the home office deduction even if you don't spend most of your working time there or generate most of your business income from that location, provided you use space in your home regularly and exclusively as the only place for conducting administrative or management activities.
Tip: It is not necessary to have a partition between your office space and the rest of the room, as long as the space is being used exclusively as your office. For example, a corner in your bedroom could be used as your home office.
Examples of administrative and management activities:
- Appointment setting
- Billing clients/customers/patients
- Handling business mail
- Making follow-up calls or emailing customers/clients and prospective customers/clients
- Marketing your business products/services
- Ordering supplies and merchandise
- Paying business bills and taxes
- Preparing payroll
- Preparing reports
- Reconciling your business checking account
- Recordkeeping (updating a travel log or diary for vehicle mileage and/or business trips).
A home office meets the principal place of business test if:
- You use your home office to conduct administrative or management activities of a trade or business, and
- You have no other fixed location where you do a substantial amount of administrative or management activities.
- Business activities performed outside your home, such as in a hotel room or in your car, will not disqualify you from meeting principal place of business test.
Separate Business Structure
You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
Before the Administrative and Management Rule came into existence, which made it easier for self-employed individuals to claim the home office deduction, millions of self-employed people were prevented from claiming the home office deduction. Passage of the Tax Relief Act of 1997 eliminated this problem by overturning the requirement, set by the U.S. Supreme Court, regarding what constituted a principal place of business.
Prior to the 1997 act, for a self-employed person's home office to be considered his principal place of business...
- most of his time had to be spent there, and
- most of his business income had to be generated from that location.
This stringent requirement prevented millions of self-employed individuals from claiming a home office deduction. Electricians, plumbers, painters, and outside sales persons, who spent most of their time outside the home but performed administrative activities in their homes, such as bookkeeping and recordkeeping, were out of luck.
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- Return to the Business Deductions Table of Contents to find related links