Probably the most difficult rule to adhere to is that you must use your home office exclusively and regularly as your principal place of business. The exclusive part means just that, only business use. You cannot use your office for business for some part of the day, and personal use at any other time. A good way to ensure exclusive use is to use a spare room for your office and avoid putting entertainment devices in it. Just keep business related furniture and equipment in your office. It’s even better if you have a separate structure not attached to your home that you can use as an office.
There are a couple of exceptions to the exclusive use test. The first is that you can use part of your home for storage of inventory or product samples. However, you must meet the following tests
· You sell products at wholesale or retail as your trade or business· You keep the inventory or product samples in your home for use
in your trade or business
· Your home is the only fixed location of your trade or business
· The space you use is a separately identifiable space suitable for storage.
Among others, individuals that sell mechanics tools from a truck or cosmetic salespeople might qualify for this exception if they keep an inventory in their home.
The second exception for the exclusive use test is for those that run a home daycare. In order to qualify for this exception,
· You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.· You must have applied for, been granted, or be exempt from having, a license,
certification, registration, or approval as a daycare center or as a family or group daycare
home under state law. You do not meet this requirement if your application
was rejected or your license or other authorization was revoked.
Regular use is not clearly defined by the IRS. Here is what one of their publications says on the topic, “To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use. You must consider all facts and circumstances in determining whether your use is on a regular basis.” They’re actually using the word “regular” in the definition of regular use.
In general, if you qualify to deduct the business use of your home, then you can deduct the business percentage of the home operating expenses that are proportional to the size of your home office. For example, suppose that you have a 2000 square foot home, and the size of your home office is 200 square feet. Then, the business use percent of your home is 10% (200/2000). If your utility bills for the year are $3000, then you can deduct $300 as a business expense. Similarly, if your annual homeowners insurance is $1200, then you can deduct $120 as a business expense.
If you are an employee, that is you are not self-employed, then you must be using your home office for the convenience of your employer and you must not rent out any part of your home to your employer. An example might be if you do phone sales and are required to work out of your home, using your own phone. Your business expenses are listed on Schedule A, under the Unreimbursed Employee Expenses section and you probably will need to complete Form 2106 too.
If you are self-employed and file Schedule C, then expenses for business use of your home are listed on the IRS Form 8829.
Remember, if you are claiming a home office related expense, you can only claim the business use percentage of the expense that relates to your home office. But if you qualify for the home office deduction, it's a great way to reduce your income tax liability.