Learn How to Claim the Home Office Tax Deduction for Your Home-Based Business

Written by Caron Beesley

Did you start a home-based business in 2011? Confused about what home office costs you can deduct when you file your tax return for 2011?

The IRS home office deduction gives many small business owners a tax advantage allowing them to write-off certain home costs. However, it’s important to understand the rules of the road so that you don’t raise red flags with the tax authorities.

The following tips will help you assess whether you are eligible to claim the deduction, what it covers, and how to go about it.

What is the Home Office Deduction?  

According to the IRS, in order to claim a business deduction for a home-based business, you must use part of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home

But what does “exclusively and regularly” mean?

Well, essentially you must use a certain area of your home solely for the purposes of trade or business.

Now this is where it gets a little fuzzy. Consider this scenario: You park your laptop on your dining room table and use that space for work for six hours a day, and then move everything away and dine at that table in the evening. Can you claim the deduction? No, because the IRS does not consider this “exclusive” use of the space for business purposes.  

If, however, you have a separate room or blocked off area that is identifiable as being used solely for business purposes such as an office space or work area (and you use it “regularly”), then this would qualify you for the deduction.

(Note that if you regularly operate an in-home day care, the “exclusive” rule does not apply. Find more details on this exception here.)

The IRS considers a “home” more than just a house. Condominiums, free-standing structures on your property, mobile homes, and even boats can qualify for the deduction.

What if you use your home office to run your business, but do work outside the home?

There are many gray areas to the Home Office Deduction. For example, many home-based business owners use their home for business administration, but often work at other locations. For example, if you have a painting or landscaping business, then most of your work is done outside the home.  In these instances you can claim the home office deduction as long as you use a dedicated area in your home exclusively to run or manage your business and can prove that you couldn’t conduct these activities elsewhere. 

How much can you deduct?

The deduction you can take depends on the percentage of your home used for business.  To calculate this amount, you’ll need to calculate the total square footage of your home and then the total square footage of the space you use for your business.  IRS Form 8829 also helps you figure out this calculation.

What home expenses can you deduct?

So, what home expenses apply to the deduction? IRS Form 8829 lists these, but here are some of the main expenses:

• Rent
• Deductible mortgage interest
• Real estate taxes
• Utilities
• Insurance
• Repairs and maintenance to your office space
• Depreciation of your home

Note that your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

Reporting Income and Expenses

Use Schedule C Form 1040 to report income and expenses and the deductible amount for the business use of your home (which you calculate using Form 8829).

Additional Resources and Articles

• SBA Guide to Small Business Expenses and Tax Deductions
• IRS Small Business and Self-Employed “Filing Season” Central
• Tax Strategies for a Mobile Office

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley