Do You Run a Business Out of Your Home? You May Qualify for Tax Deductions
by NicoleD, Former Moderator
- Created: November 11, 2009, 7:51 pm
The IRS doesn't restrict the home definition to just houses. A business that operates in an apartment, condominium, mobile home, or boat can qualify. The home definition also includes unattached structures on the property, like a garage, studio, barn, or greenhouse.
Ask yourself the following to see if you are eligible for a business use of the home office deduction:
1. Is your use of the business part of your home exclusive, regular, and for your business?
To qualify under the exclusive use test you must use an area of your home only for your trade or business. The business area doesn't have to be in a separate room or blocked off by a partition, but it must be identifiable. For example, a workstation in the corner of a living room may qualify, but piling papers on your kitchen table would not. (Note: The exclusive test doesn't apply to daycare facilities, or in some other cases, for the storage of business inventory or product samples. Check irs.gov/smallbiz for the special rules.)
Regular use means that you use part of your home for your business on a continuing basis. Occasional business use is not enough to meet this requirement - even if you use an area designated exclusively for business purposes.
For more examples, see Business.gov's Home Office Deductions
2. Does the business part of your home serve as either
- your principle place of business,
- a place where you meet with patients, clients, or customers, or
- a separate structure not attached to your home, used for business purposes?
When your home is your principle business location
Even if your business has several locations, you may qualify for a deduction if your home is the principle place of business activity. You will need to prove that you use your home office exclusively and regularly for administrative or management activities and are unable to perform those activities at any other fixed location. You can still outsource administrative tasks from other locations - like hiring an accountant - and pass as the principle business location test.
When you meet with customers, patients, or clients in your home
If your business doesn't meet the requirements as a principle place of business, it might qualify as a meeting place. If you meet with customers in your home as a normal course of your business, you can deduct expenses for the area of your home used exclusively and regularly for meetings.
To qualify, the use of your home as a meeting location must be necessary and integral to your business. Using your home for occasional meetings or customer calls does not qualify you to deduct expenses for the business use of your home.
When your business is run out of a self-standing structure
You can deduct expenses for a separate free standing structure on your home property, such as a studio, garage, storage shed, or barn - if you use it exclusively and regularly for the business. A self-standing structure does not have to meet the requirements of a principle place of business or a meeting place.
Most deductions for the business use of your home are limited to the percentage of your home used for business or business percentage. Don't qualify for a deduction? When you have a business in your home you may be able to deduct a percentage of your home expenses such as insurance, utilities, and depreciation. You may have to do a little research, but it could be result in extra money in your pocket. For a refresher on business taxes, see A 101 in Small Business Tax Requirements.
Home Deduction Myths and Scams
Have you heard about home-based deductions that seem too good to be true? Chances are they're a common misconception. The IRS helps to separate the facts from myths:
- Non-deductible personal living expenses can not be transformed into deductible business expenses
- You can't use your home's operating expenses, or your home's depreciation deduction to create a net loss for a business operated out of your home.
Beware of scams that involve unprofitable home-based businesses claiming personal expenses as business expenses. No matter how convincing the information and marketing materials may seem, if you encounter what looks like a home based tax avoidance scheme, do your research and report it to your state tax department if necessary.
Coming soon: look for Part Two in this series on Small Business Tax Deductions: How to File Home-Based Deductions.
- Using Your Personal Vehicle for Business Purposes - Tax Deductions, Insurance and the Like!
- Starting and Growing a Home-Based Business - Uncle Sam Has Some Props That Can Help
- Small Business and Self-Employed Tax Center
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