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The Home Office Tax Deduction

You can pay less income tax if you run a home-based business.

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Home Office Tax Deductions

If you meet the technical requirements of the tax law, you should be able to deduct a portion of many operating expenses associated with running your homes, such as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, and some casualty losses, repairs, and improvements (if they relate to the part of the house you use for business).

Both homeowners and renters are eligible for the home office deduction. It is accessible for home offices as well as other spaces you use for work, including a studio, workshop, or garage. And as long as you can cook and sleep there, the IRS considers any structure to be your “home,” whether a house, condo, apartment, mobile home, or boat. However, in order to be eligible for the home office deduction,

you must fulfill two tax law requirements:

Requirement #1: Regular and exclusive use. 

You must routinely use a certain area of your home only for your profession or company.

Requirement #2: Principal place of business.

Additionally, you must be able to demonstrate that your house serves as your main place of business. Alternately, you must be able to demonstrate at least one of the things listed below:

You visit patients, consumers, or clients at their homes.
You only do business out of a separate building on your property.

Below, we’ll go over each criterion in detail. See The Simpler Home Office Deduction for details on a simplified home office deduction for expenses under $1,500 annually.

Ordinary business expenses are deductible even if you don’t qualify for the home office deduction.

Even if you don’t fit the criteria listed above, you may still write off routine and required business expenses incurred at home, such as long-distance calls, a dedicated business line, and the cost of supplies and equipment for your office. Only costs associated with actually operating and maintaining your houses, such as utilities, rent, depreciation, home insurance, mortgage interest, real estate taxes, and repairs, are covered by the aforementioned IRS regulations.

Regular and Exclusive Use.

You must consistently utilize a portion of your house entirely for your trade or business in order to deduct associated expenses.

Regular use.

You must utilize a portion of your house for business continuity, not just occasionally or incidentally, according to the IRS’s vague definition of regular use. By working from home a few days a week or for a short period of time each day, you can probably pass this test.

Exclusive use.

To use a piece of your home exclusively for business means that you do so. You don’t pass the exclusive use test if you use a room in your house for both personal and business functions. However, as long as your personal activities don’t intrude into it, you can designate a piece of a larger area to be used purely for business.

Examples of “Exclusive Use”

Lawyer Brook draughts legal documents and creates contracts in his home’s den. He hosts a book group and plays poker in the den as well. Brook cannot write off the use of the den as a business expense because he uses it for both business and pleasure.

Marvin has a den that he uses exclusively for work. He continues to cook and eat in his kitchen while simultaneously setting up a desk, computer, and work calendar there. The den is eligible for business deductions, but the kitchen is not.

The exclusive use restriction has two exceptions: If you operate a licensed daycare service at your house or utilize a portion of your home to store inventory or product samples, you are exempt from having to meet the exclusive use test. (We explain the storage exception just below. Visit www.irs.gov to review IRS Publication 587, Business Use of Your Home, for the daycare regulations.)

Storing inventory or product samples at home.

Whether or whether you utilize the storage space entirely for business, you can deduct expenses for the business use of your home if you keep inventory or samples there.

However, there are two restrictions: First off, if you have an office or other place of business away from your home, you won’t be eligible for the deduction. Second, you must keep the items in a specific location, such as your garage, a closet, or a bedroom. As long as you routinely use the storage area to keep inventory or samples, it’s acceptable to use it for other reasons as well.

Example of Home Business Storage
Jim offers filters for heating and cooling to small businesses. The sole fixed site for his business is his home. Jim frequently uses half of his basement to keep his collection of filters. He sometimes works on his racing bikes at the same location. Even if Jim does not use that portion of his basement strictly for business, he is still able to deduct the costs associated with the storage space.
Last but not least, the home office deduction is only accessible if you are truly operating a business. The IRS won’t allow you to claim the home office deduction if it determines that you are engaging in a hobby rather than working to make a profit. See How to Prove Your Hobby Is a Business for details on how to demonstrate that you are, in fact, operating a business.

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