Many people who have small businesses also have home offices which may make them eligible for tax deductions. The home office deduction is available to both homeowners and renters in all types of homes. If you qualify, this can significantly reduce the amount you owe in taxes each year.

What are the Requirements for Home Office Tax Deduction?

There are two main requirements to qualify for a home office tax deduction, as follows:

  • Exclusive use; and,
  • Principal Place of Business.

What is Exclusive Use?

The most difficult aspect of qualifying for home office deductions is demonstrating that a portion of your home is exclusively and regularly used for your business. You can qualify if your office is in a separate room or sectioned off in a bigger room, especially by partition.

It’s important to note that the Internal Revenue Service (IRS) is very serious about this requirement. Even if you work in what you designated as your “home office,” if you allow others in your home to use the office for other purposes, it is not being exclusively used for business. In that regard, it cannot be considered a home office deduction.

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What is Principal Place of Business?

You must also demonstrate that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially to conduct business, you may still be able to qualify for the home office deduction.

For example, if you have in-person meetings with your clients, but you also conduct business at home, you can deduct your expenses for the part of your home that is used exclusively and regularly for business.

Typically, deductions for the home office are based on the approximate percentage of your home that you devote to running your business. By way of example, if you use an entire second bedroom for conducting business, you need to figure out what percentage your second bedroom is of your entire home.

Can I Deduct Home Office Expenses as an Employee?

If you’re an employee and you use a part of your home for business, you may still qualify for a deduction. However, you must meet the following test:

  • Your business use must be for the convenience of your employer; and
  • You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.

Even if you use a part of your home for business, if this is merely for convenience, you cannot deduct expenses for business use of your home.

What Expenses at My Home Office Are Tax Deductible?

There are several types of expenses at your home office which are classified as tax deductible:

  • Tax return real estate tax
  • Mortgage interest
  • Utilities
  • Operating expenses
  • Depreciation

However, it is more complicated than just simple deductions for all of these expenses. You must use the following methods to determine your allowable total for tax deduction:

  • If the rooms in your home are not equal size, divide the number of square feet used for home office space by the number of total square feet of your home. Apply the resulting percentage to your tax deductible expenses to figure out how much of each expense actually stems from your home office.
  • If the rooms in your home are the same size, you may base your home office tax deduction on a comparison of the rooms used for home office space against the total number of rooms.

Should I Seek Legal Counsel to Help with Home Office Deductions?

Tax law is a very complicated and frustrating subject. To make matters worse, tax law changes every year. Contact a tax attorney if you need help understanding current tax law and how it affects your home office expense deductions. If you have questions regarding the deductibility of your expenses, or you need to go to tax court, an attorney can represent you and help minimize your income tax bill.