Home-office Deductions: Terms of Tax Endearment
If you operate a business out of your home, you may be able to write off a portion of your everyday living expenses. But tax deductions for home-office expenses are not automatic.
Basic rules: Home-office expenses are deductible on your 2010 tax return if you use part of the home “regularly and exclusively” as either the principal place of your business or a place to meet or deal with patients, clients and customers in the normal course of business. Also, you may deduct expenses attributable to a detached structure—such as a garage or shed—used in connection with your business.
If you are an employee, the home office must be used for the convenience of the employer. Keep your employment contract as proof of the condition.
The basic rules are relatively straightforward, but several key terms require further explanation.
Regular and exclusive use: To meet this requirement, you must use a specific area of your home only for business reasons. The specific area can be a room or even an identifiable space within a room. It does not have to be permanently enclosed, but doing so strengthens your tax position.
If you use the office portion of the home occasionally or sporadically for personal reasons, the personal use “taints” the home office. Thus, no deductions are allowed.
Note that certain exceptions apply for day care centers and facilities for the aged or disabled. Furthermore, if a home is a principal place of business and a specific area is used for inventory or product storage, the area qualifies for depreciation deductions if it is used regularly for business.
Principal place of business: If you are self-employed and work exclusively from home, it is obvious that your home office is your principal place of business. But this determination is not always so clear cut. For instance, you might perform some business functions at home, but spend most of your time visiting clients, customers or patients at other locations.
The law in this area seesawed back and forth for years, but you can currently qualify for home-office deductions if you perform administrative and management functions at home and you have no other fixed business location for these functions. Administrative and managerial activities may include
- billing and invoicing
- keeping books and records
- ordering supplies
- setting up appointments
- researching and writing reports
However, you are not disqualified if you arrange to have administrative or managerial duties performed at other locations. For example, you might outsource payroll duties or handle customer inquiries on your laptop in hotels or airports. Similarly, you will not be penalized if you spend more time on the road than at home.
Convenience of employer: An employee is entitled to deduct home-office expenses only if he or she is specifically required by the employer to maintain a home office. Thus, a dedicated worker who brings work home nights and weekends usually does not qualify. It does not matter if the work at home results in a benefit to the employer—it must be an absolute condition of employment. In addition, keeping a home office must be justified by the nature of the job.
Contact a professional tax adviser for the application of these tax rules to your personal situation.