Under the IRS rules, a taxpayer is allowed to deduct expenses related to business use of a home, but only if the space is used "exclusively" on a "regular basis". To qualify for a home office deduction you must meet one of the following requirements:
A separate structure not attached to your dwelling unit that is used regularly and exclusively for your trade or profession also qualifies as a home office under the IRS definition.
The exclusive-use test is satisfied if a specific portion of the taxpayer's home is used solely for business purposes or inventory storage. The regular-basis test is satisfied if the space is used on a continuing basis for business purposes. Incidental business use does not qualify.
In determining the principal place of business, the IRS considers two factors: Does the taxpayer spend more business-related time in the home office than anywhere else? Are the most significant revenue-generating activities performed in the home office? Both of these factors must be considered when determining the principal place of business.
You can deduct all your business expenses related to the use of your home if your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation). But, if your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.
Nondeductible expenses such as insurance, utilities, and depreciation that are allocable to the business are limited to the gross income from the business use of your home minus the sum of the following:
If your deductions are greater than the current year's limit, you can carry over the excess to the next year. They are subject to the deduction limit for that year, whether or not you live in the same home during that year.
Sale of Residence
If the part of your property used for business is within your home, such as a room used as a home office for a business there is no need to allocate gain on the sale of the property between the business part of the property and the part used as a home. However, if you used part of your property as a home and a separate part of it, such as an outbuilding, for business other rules apply such as whether the use test was met (or not met) for the business part and whether or not there was business use in the year of the sale.
If you need more information about whether you qualify for the exclusion, please don't hesitate to call us.
Remember however, that an individual is not entitled to deduct any expenses of using his/her home for business purposes unless the space is used exclusively on a regular basis as the "principal place of business" as defined above. The IRS applies a 2-part test to determine if the home office is the principal place of business.
If the answer to either of these questions is no, the home office will not be considered the principal place of business, and the deduction cannot be taken.
A home office also increases your business miles because travel from your home office to a business destination--whether it's meeting clients, picking up supplies, or visiting a job site--counts as business miles. And, you can depreciate furniture and equipment (purchased new for your business or converted to business use), as well as expense new equipment used in your business under the Section 179 expense election.
Taxpayers taking a deduction for business use of their home must complete Form 8829. If you have a home office or are considering one, please call us. We'll be happy to help you take advantage of these deductions.
Tax Planning For Small Business Owners
Our Tax Planning Service
7 Biggest Misconceptions Business Owners Have About Their Returns
Travel and Entertainment: Maximizing The Tax Benefits
7 Ways To Save Even More Income Taxes
How To Make Money on Vacation
Form of Business Organization: Which Should You Choose?
Retirement Plan Options For Small Businesses
The "SIMPLE" Plan: A Retirement Plan for the Really Small Business
Recordkeeping For Your Taxes: Frequently Asked Questions
1040 Tax Estimator
1040 EZ Tax Estimator
Marginal and Effective Tax Rates Calculator
Self Employment Tax Calculator
Our Tax Preparation Service
Our Tax Problem Resolution Service