Can I Take A Deduction For Using My Home?
You can, of course, deduct the *direct* costs incurred due to business. For example, the cost of *supplemental* homeowners or renters insurance paid - because you meet with clients at your home - would be an ordinary and necessary business expense.
However, if you are looking to deduct costs that would otherwise be personal in nature ... such as the a portion of your apartment rent, depreciation on part of your residence, or utilities prorated to the home office ... there are rules that must be met. While these are relaxed considerably, for years 1999 and later, the rules are very strictly enforced, and any variation will disallow a deduction for the entire tax year.
The post-1998 rules for deducting use of your home for a business you own as a sole proprietorship* are:
I. The use of the home must be an "ordinary and necessary" expense for the business. That would mean that it requires an office, and, in the very least, there is no other fixed location of the business in which you can perform the necessary administrative and managerial functions that are performed in the home office.
(Note: Prior to 1999, a home office had to be the place where you met with customers/clients OR where you generally performed your income-producing functions. This is no longer the case, as long as the criteria above is met.)
II. The use of the office must be totally and exclusively for the business. There can be NO personal use (or non-business use, such as investment use) of the space whatsoever. For example, if you are using a home computer in that office, you must be able to document that the use of that computer is 100% business ... not used for personal investments, web surfing, etc. The room should not contain furniture or other items that would not be conducive for business use (such as a TV set, spare
1. Joe is a carpet cleaner, who spends roughly 10 hours a week in his home
office, calling potential customers, setting appointments, ordering supplies,
etc. He spends another 35 hours a week actually cleaning carpets in home office.
Although he spends more business time out of his office than in it, and and
has no other place to do the necessary paperwork, which meets the criteria for
deduction. (Note: Under pre-1999 law, he likely would NOT have qualified.)
2. Mary is a social worker. She maintains a home office in which she does reports and follow-up phone calls about four hours a week. The rest of her 40 workweek is spent visiting clients at home and at work. She bought one of those "car desks," which she has on her front seat, and she uses that to take notes, arrange her daily schedule, and return calls via a cell phone. Mary qualifies for a deduction for use of her home, since office space is needed, and Mary has no other *fixed* location of the business. (Note: Under pre-1999 law, she would not have qualified.)
3. Lisa is a real estate salesperson, who rents a desk at a busy downtown real estate office. She spends most of her time there, but does her paperwork and returns phone calls after hours, in an office in her home used only for that purpose. If Lisa can demonstrate that the real estate office is too busy/noisy for her to use to do the necessary paperwork and returning calls, or it is not accessible to her during the hours she needs to perform those jobs, she would qualify for a deduction under current law.
4. Mike has a store in a strip mall, in which he works 10am-6pm every day. The
store has a small office in the back, in which Mike could do his reports and paperwork once the store closes at 6. However, Mike prefers to go home for dinner, and does
his paperwork in an office in his home used only for that purpose. Mike does not
qualify for a deduction for use of his home, since he has a fixed location of the business
in which he can perform necessary administrative functions. The fact that he PREFERS not to do so doesn't change that fact.
If a self-employed person is entitled to claim expenses for business use of his or home, Form 8829 must be completed and attached to the tax return.
* A home office deduction may also be claimed by an employee (with the extra limitation that the use of the home office is required for the convenience of the employer, and NOT the employee) on Schedule A, with a detail similar to Form 8829 attached.
It can also be claimed by one partner in a partnership, or one shareholder in an s-corp, who uses his or her home as the ONLY fixed location of the business in which the administrative and managerial functions can be performed.
Deductions for a partner or shareholder would be claimed as an adjustment to the Sch K-1 pass-through income, and a schedule should detail the expenses in a format similar to Form 8829.
The deduction for business use of the home cannot exceed the net income from the business. For an employee, it cannot exceed wages paid by that employer. Any excess expenses can be carried forward to offset future business income.
Note that a qualified home office counts as a "permanent place of business" for purposes of deducting travel to other business locations. Therefore, in examples 1 through 3 above, the individuals can deduct the mileage from their home to all other business stops during the day. It is NOT considered non-deductible commuting!