Accountants CPA Hartford
William Brighenti, Certified Public Accountant
Certified QuickBooks ProAdvisor
Office Address:  46 Mildrum Road, Berlin, Connecticut 06037-2423      Phone:  (860) 828-3269      Email:  [email protected]
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Do You Qualify for a Home Office Deduction?
Confused by Publication 587's 35 pages on "Business Use of Your Home"?

For years as a tax preparer, I have witnessed countless small business owners failing to claim a home office deduction on their tax returns.  Many of those taxpayers feared that listing home office expenses would invite an audit; others never thought of doing so; and some thought it was too much work for too little tax benefit.  Moreover, I have prepared tax returns for employees who were eligible for the deduction and who failed to take the deduction on tax returns for prior years.  In addition, a number of individuals did not claim the deduction because they simply did not know if they were entitled to the deduction because the rules for determining eligibility can be a bit daunting, if not intimidating, to small business owners and employees with home offices. 

A home office tax deduction can save a taxpayer thousands of dollars in taxes.  If you are self-employed or an employee who works at home, you may be eligible for this significant tax deduction.   In order to claim this tax deduction, you must meet the following tests:
  1. Part of your home must be used in a business.
  2. Its use must be regular.
    • Incidental or occasional use is not regular.
  3. Its use must be exclusively for business.
    • It cannot be used both for business and for personal purposes.
    • The area must be a separately definable area.
    • It need not be a separate room.
  4. The home must be the principal place of business for your business.
    • It must be used exclusively and regularly for administrative or management activities of your business.
    • There is no other fixed location where substantial administrative or management activities of your business are conducted.
    • Administrative and management activities include, among many others:
      • Billing customers, clients, or patients.
      • Keeping books and records.
      • Ordering supplies.
      • Setting up appointments.
      • Forwarding orders or writing reports.
  5. If the business use of your home fulfills all of the above "basic" criteria, then you are allowed to deduct  home office expenses on your business tax return.  If you are an employee, you are entitled to a home office deduction as long as you meet the following two conditions in addition to those above (i.e., items 1 - 4):
    • You work at home for the convenience of your employer.
      • If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
    • You do not rent part of your home used for business to your employer. 
  6. However, if your home is not the principal place of business for your business, you may still be eligible to deduct your home office expenses as an expense of your business as long as you meet all of the other previously listed "basic" conditions (i.e., items 1 -3) and satisify one of the following conditions:
    • The area of the home is a separate structure (e.g., studio, garage, barn), or
    • It is a place used to meet patients, clients, or customers in the normal course of your business.
      • Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home.
  7. If the part of your home used for business is not used exclusively for your business but also for personal reasons, and you meet all of the other above "basic" requirements (i.e., items 1, 2, and 4), then you still may be able to deduct home office expenses if either of the following applies:
    • You use part of your home for the storage of inventory or product samples, meeting all of the following tests:
      • You sell products at wholesale or retail as your trade or business.
      • You keep the inventory or product samples in your home for use in your trade or business.
      • Your home is the only fixed location of your trade or business.
      • You use the storage space on a regular basis.
      • The space you use is a separately identifiable space suitable for storage.
    • You use part of your home as a daycare facility and satisfy the following two conditions:
      • You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.
      • You must have applied for, been granted, or be exempt from having, a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. You do not meet this requirement if your application was rejected or your license or other authorization was revoked.
Let's summarize and review.  If you are self-employed and you use a part of your home regularly and exclusively as your principal place of business (items 1 - 4, the "basic" criteria)—or if you are an employee, and in addition to these conditions, you work at home for your employer's convenience without renting this work area to your employer (item 5)—you are entitled to deduct your home office expenses.  In addition, there are exceptions to the principal place of business criterion for those operating their business from a separate structure, or those meeting customers there (item 6); and to the exclusivity criterion for those storing inventory or product samples, and those operating daycare facilities at home (item 7).

If you are visually oriented, the IRS provides a flowchart in its Publication 587 to assist you in determining whether you can deduct the business use of home expenses; however, it excludes items 6 and 7 as well as supporting, explanatory, qualifying details of its criteria and terminology:

Can You Deduct Business Use of the Home Expenses?

Have a tax or an accounting question?  Please feel free to submit it to William Brighenti, Certified Public Accountant, Hartford CPA Accountants.  For information and assistance on any tax and accounting issue, please visit our website:  Accountants CPA Hartford.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.  The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein.  The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor .
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