To deduct expenses related to the part of your home used for business, the IRS advises that you must meet specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for business use of your home you must meet the following tests:
1. Your use of the business part of your home must be:
- Exclusive (however, see Exceptions to Exclusive Use, later),
- For your business, and
2. The business part of your home must be one of the following:
- Your principal place of business (defined later),
- A place where you meet or deal with patients, clients, or customers in the normal course of your business, or
- A separate structure (not attached to your home) you use in connection with your business.
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. However, you do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Example: You are an attorney and use a den in your home to write legal briefs and prepare clients’ tax returns. Your family also uses the den for recreation. The den is not used exclusively for your profession, so you cannot claim a business deduction for its use.
Exceptions to exclusive use: You do not have to meet the exclusive use test if you use part of your home in either of the following ways:
- For the storage of inventory or product samples
- As a daycare facility
For an explanation of these exceptions, see IRS Publication 587, Business Use of Your Home (Including Use by Daycare Providers).
To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. You do not meet the test if you use the area for business only occasionally or incidentally, even if you do not use that area for any other purpose.
Principal place of business.
You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. To determine your principal place of business, you must consider all the facts and circumstances. Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements:
- You use it exclusively and regularly for the administrative or management activities of your business.
- You have no other fixed location where you conduct administrative or management activities regarding your business.
Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, determine your principal place of business based on the following factors:
- The relative importance of the activities performed at each location.
- The time spent at each location
After considering your business locations, if your home cannot be identified as your principal place of business, you cannot deduct home office expenses. However, for other ways to deduct home office expenses, see IRS Publication 587.
If the gross income from your business use of the home equals or exceeds your total business expenses (including depreciation), you can deduct all of your business expenses related to the use of your home. If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.
Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), is limited to the gross income from the business use of your home minus the sum of the following:
- The business expenses that you can deduct even if you did not use your home for business, such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on IRS Schedule A (IRS Form 1040).
- The business expenses that relate to the business activity in the home — e.g. business phone, supplies, and depreciation on equipment — but not to the use of the home itself.
Do not include in (from point 2 above) your deduction for one-half of your self-employment tax.
Use IRS Form 8829, Expenses for Business Use of Your Home, to figure your deduction.
For more information on deducting expenses for the business use of your home, see IRS Publication 587.
Other Expenses You Can Deduct.
See IRS Publication 535 to find out whether these are deductible items for you.
- Clean-fuel vehicles and refueling property
- Donations to business organizations
- Education expenses
- Environmental cleanup costs
- Impairment-related expenses
- Interview expense allowances
- Licenses and regulatory fees
- Moving machinery
- Outplacement services
- Penalties and fines you pay for late performance or nonperformance of a contract
- Repairs that keep your property in normal efficient operating condition
- Repayments of income
- Subscriptions to trade or professional publications
- Supplies and materials
Expenses You Cannot Deduct.
You typically cannot deduct the following as business expenses. For more information, see IRS Publication 535.
- Bribes and kickbacks
- Charitable contributions
- Demolition expenses or losses
- Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs
- Lobbying expenses
- Penalties and fines you pay to a governmental agency or instrumentality because you broke the law
- Political contributions
- Repairs that add to the value of your property or significantly increase its life
Adapted from IRS Publication 334, Tax Guide for Small Businesses.