Business Use of Your Home Tax Deduction Text Size:

For many taxpayers today, their homes are more than the place where they live, sleep, and take meals with their families. It's not uncommon for employers and employees to work from home. Maybe it's for a few hours or days a week, or maybe it's full-time; maybe it's because the employee has family obligations, or the employer wants to cut-down on office-related costs. Maybe you're self-employed.

Regardless of the reason, and in addition to the other benefits that may come with a work-from-home arrangement, there are some federal tax benefits you need to know about. Specifically, there is a tax deduction for the business use of your home that could reduce your tax bill significantly. There are a lot of restrictions and limitations on the deduction, so look at the tax code carefully, or ask your tax lawyer so that you take the deduction properly.

"Home Office" Deduction

The tax deduction for the business use of your home is often called the "home office" deduction. There are different requirements for persons who are self-employed and those who work for others. Nonetheless, the basic requirement is the same for both types of workers: in order to deduct expenses in connection with the business use of a home, it must be used on an exclusive and regular basis for trade or business purposes.

This "exclusive test" looks at the use of a space during the entire day. For instance, even if you use a specific part of your home for business purposes from 9-5 Monday through Friday, it's not being used on an exclusive basis if your child uses the space for doing homework in the evenings. Likewise, it's not being used exclusively for business if you use the space to pay your personal bills in the evenings or the weekend.

Who and What Qualifies?

To qualify for the deduction, part of your home must be used regularly and exclusively as:

• The principal place of business for your trade or business, such as if your self-employed
• The place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business
• In connection with your trade or business, if you use a separate structure that is not attached to your home

In addition to those requirements, if you're an employee, you can take the deduction only if:

• Your business use is for the convenience of your employer, and
• You don't rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer

For example, as a teacher you're required to teach and meet with students at the school and to grade papers and tests, and the school provides you an office to those duties. The school does not require you to work at home. However, you like to use an office you've set-up in your home and you use it for grading papers, making your lesson plans, etc. You can't take the deduction because the business use of your home isn't for the school's convenience - it doesn't require you to work from home.

You can also take the deduction if you use a separate, free standing structure on your residential property. For example, if you're self-employed and you keep supplies or inventory in a detached garage, you can deduct the expenses of the garage, such as maintenance and even depreciation.

The tax code doesn't recognize the differences between a house and an apartment. So, qualifying taxpayers who use their apartments to conduct their business can deduct a portion of the expenses of their apartments that are associated with their businesses.

How Much of a Deduction?

Generally, the amount of your deduction for whole-house related expenses, like utilities, is limited to the square footage of the area that you're using for business purposes. However, there are some expenses that are fully-deductible, like a cell phone that's used for business only.

For example, your home is 2,000 square feet and you use 200 square feet as your home office. You can take a deduction of 10% of your whole-house expenses (2,000 divided by 200). So, if your homeowner's insurance is $1,000, then $100 ($1,000 x 10%) can be deducted.

Some other examples of deductible expenses include:

• Depreciation and rent
• Mortgage interest
• Real estate taxes

Limits on the Deduction

For purposes of claiming the home office deduction, expenses fall into three categories:

• Expenses directly related to the trade or business, like painting your home office
• Expenses that can be itemized, like mortgage interest and real estate taxes, and
• Depreciation related to the portion of the home used as the office

The first category of expenses is deducted from the gross income of the trade or business. If the gross income is greater than the expenses in the first category, then the expenses in the second category are deducted to the extent of the excess. If the amount of the gross income from the business is greater than the expenses in the first two categories, then depreciation can be deducted to the extent of any excess.

For example, you use 10% of your home in running your own small business. The business's gross income is $10,000. Your direct business expenses are $7,000. The portion of mortgage interest and real estate taxes related to the business are $2,600. The depreciation on the business use of the home is $1,000. Here, you can only deduct $400 ($10,000 - $7,000 - $2,600) of depreciation.

How Do I Take the Deduction?

If you're self-employed and you normally file Schedule C with Form 1040, you need to complete and attach Form 8829.

Most employees have to itemize deductions on Schedule A with Form 1040 to claim a deduction for the business use of your home, along with other work-related expenses you may have.

Questions for Your Attorney

• I didn't know about the home office deduction when I filed my taxes in 2007. Can I claim my 2007 expenses on my 2008 return? Can and should I file an amended 2007 return?
• If I run more than one business from my home office, do I have to divide my deduction between the two businesses?
• I work for a company and keep a home office, which I use three days per week. On the other days of the week and sometimes on weekends, I run my own small business from the same home office. How do I take the home office deduction for both my job and my business?
• Do I have to work full-time to claim the deduction? What if I only work part-time, and don't use that space for anything else?

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