There’s an old husband’s tale that contends deducting office-in-the-home expense on your tax return is a red, waving flag, so don’t do it. That’s hogwash. If you use your home for your self-employed business, then, by golly, don’t be afraid to take the deduction. By deducting expenses for your home workspace you’ll pay less tax. The only caveat: play by the rules.
The IRS has relaxed the rules in recent years, and they are simpler than you may have been led to believe. There are now only three home office rules.
RULE #1: Exclusive Use
The part of your home used for business must be used exclusively for business. It does not need to be an entire room, but may be a designated area of a room.
• If Lily Legal writes her briefs at the dining room table but also has dinner parties there, well, she has to forgo any deduction for the dining room.
• If Victor Visual and his wife Faye Fabrique, a textile designer, share the same studio-in-the-home, then neither gets the deduction because neither has exclusive use. (It seems unfair, but it's true.)
RULE #2. Used On A Regular Basis
The part of your home used for business must be used on a regular basis for business.
• Almost Sargent has a rented studio in town. He also has great light in a back room of his house. The room is always locked and seldom used. Once in a while he brings a potential buyer to his home to look at a painting and he uses the back room for the viewing. This is not regular use and so he cannot deduct the use of that room as a business expense.
RULE #3. Principal Place Of Business
Your home office or studio or workshop must be your principal place of business. The IRS term principal place of business is confusing. Even if you have more than one place of business, as long as the room or area in your home is used exclusively and regularly for business then your home office qualifies as a principal place of business if it fits any of the following three criteria.
** It is where you perform administrative tasks such as bookkeeping or scheduling.
** It’s a place where you meet clients, or patients, or customers.
** It’s a separate structure.
• Sally Ceramist rents a neighbor’s garage as her work studio. It’s always a mess. She has set up the small sunroom in her home as her showcase studio. Potential buyers come there by appointment to view her work. Although her works also show at a number of galleries throughout the United States Sally can deduct the sunroom as a home office.
• Kyla Chiropractor shares an office with an acupuncturist. They alternate days. Kyla does not keep patient records at the office. Each morning she brings from home that day’s patient folders. She keeps all her patient records, and her professional library, in a small barn on her farmland home. Kyla can deduct the barn.
There are exceptions to RULE #1, which requires exclusive use. The exceptions apply to home daycare businesses and storage of inventory.
What Can You Deduct?
Your home may be any kind of residence: house; apartment; condominium; cooperative; houseboat; mobile home.
And, all expenses for the portion of your residence used for business are deductible; that includes rent, repairs, utilities, security system, and upkeep expenses. If you own the home, deductions include mortgage interest and real estate taxes. If for instance 20% of your home is used for business then you can deduct 20% of all these expenses.
You cannot deduct lawn care unless there is an area that is for the exclusive use of your business.
The housekeeper that you have agreed to pay “off the books” – the one who takes cash only -- cannot be deducted as an expense. You can deduct the costs for a legitimate cleaning service or a housekeeper for whom you pay all payroll taxes.