From the Nolo eCommerce Center
Running a business from home can save not only the cost of renting a separate office, but it can also save you tax dollars.

You may be able to take a tax deduction for business use of your home. The deduction is available not only for a home office but for other business uses as well, such as a workshop or studio at home.

Basically, if you meet the technical requirements of the tax law, you can deduct the cost of utilities, rent, depreciation, home insurance and repairs when you use part of your home for business.

Keep in mind that whether or not you can deduct expenses that relate specifically to your home, such as rent, utilities, insurance and repairs, you can still take a deduction for regular business expenses, such as photocopies, stationery, paper clips, wages, travel, equipment, professional memberships and publications. You can also deduct the cost of long-distance calls you make from home and a separate phone line used for business calls.

According to the IRS, your “home” can be a house, condo or apartment unit – or even a mobile home or boat. But wherever you live, before you can deduct expenses for using part of your home as a business, you must meet two tax law requirements.

Requirement #1: You must regularly use part of your home exclusively for a trade or business (see Section 1, below).

Requirement #2: You must be able to show that:

  • you use your home as your principal place of business (see Section 2, below), or
  • you meet patients, clients or customers at home (see Section 3, below), or
  • you use a separate structure on your property exclusively for business purposes (see Section 4, below).

1. Regular and Exclusive Use

The first requirement for taking deductions related to your home is that you regularly use part of your home exclusively for a trade or business. The notion of regular use is a bit vague. The IRS says it means you’re using a part of your home for business on a continuing basis – not just for occasional or incidental business. A few hours a day on most days is probably enough to meet this test.

Exclusive use means that you use a portion of your home only for business. If you use a room of your home for your business and also for personal purposes, you don’t meet the exclusive use test.

Example

Brook, a lawyer, uses a den in his home to write legal briefs and prepare contracts. He also uses the den for poker games and hosting a book club. Result: Technically, Brook can’t claim business deductions for using the den.

2. Principal Place of Business

In addition to using part of your home regularly and exclusively for business, to take deductions relating to your home, your home must be your “principal place of business.” Establishing that your home is your principal place of business is simple if you conduct your business only from home.

Example

Alma teaches school. As a teacher, her principal place of business is the school where she teaches. She also runs a public relations consulting company and uses a part of her home as the headquarters for that business; she should be able to take the home-office deduction for this business use of the home.

If you have more than one business location, including your home, for a single trade or business, you must figure out if your home is your principal place of business for that enterprise. Your home qualifies as your principal place of business if:

  • you conduct the administrative or management activities of your business there, and
  • you have no other fixed location where you conduct those activities.

In other words, your home doesn’t have to be the place where you generate most of your business income. It’s enough that you regularly use it to do such things as keeping your books, scheduling appointments, doing research and ordering supplies. As long as you have no other fixed location where you do such things – for example, an outside office – you should be able to take the deduction.

Example

Ellen, a wallpaper installer, performs services for clients in their homes and offices. She also has a home office that she uses regularly and exclusively to keep her books, arrange appointments and order supplies. Ellen is entitled to deduct home-office expenses for that part of her home.

 

Home-connected expenses

 These IRS rules discussed in this chapter apply only to home-connected expenses such as utilities, rent, depreciation, home insurance and repairs. You needn’t conform to these rules in order to deduct other business expenses. If you have a bona fide business and don’t qualify for deducting home-connected expenses, you can still deduct many other business expenses – for example, the cost of supplies, postage, advertising and long-distance phone calls.

 

Storing Inventory or Product Samples at Home

If you sell retail or wholesale products and you store inventory or samples at home, you can deduct expenses for the business use of your home. There are two limitations, however: First, you won’t qualify for the deduction if you have an office or other business location away from your home. Second, you have to store the products in a particular place – your garage, for example, or a closet or bedroom. It’s OK to use the storage space for other purposes as well, as long as you regularly use it for inventory or samples.

Example: Jim sells heating and air conditioning filters to small businesses. His home is the only fixed location of his business. Jim regularly stores his inventory of filters in half of his basement. He sometimes uses the same area for working on his racing bikes. Jim can deduct the expenses for the storage space even though he doesn’t use that part of his basement exclusively for business.

3. Meeting Clients or Customers at Home

If your home isn’t your principal place of business, you may still be entitled to deduct expenses for business use of your home if you regularly use part of your home exclusively to meet with clients, customers or patients. Doing so even one or two days a week is probably sufficient. You can use the business space for other business purposes as well – doing bookkeeping, for example, or other business paperwork – but you’ll lose the deduction if you use the space for personal purposes, such as watching movie videos.

Example

Julie, an accountant, works three days a week in her downtown office and two days a week in her suburban home office, which she uses only for business. She meets clients at her home office at least once a week. Since Julie regularly meets clients at her home office, she can take a home-office deduction. This is so even though her downtown office is her principal place of business.

 

Keep a log of the clients or customers you meet at home.

 Good records can be key if the IRS challenges your right to deduct home-office expenses. Maintain an appointment book in which you carefully note the name of the client or customer and the date and time of each meeting at your home. Save these books for at least three years; they can be crucial to documenting business usage if your tax return is audited by the IRS.

4. Using a Separate Building for Your Business

If your home isn’t your principal place of business, and you don’t meet clients or customers at home, you can deduct expenses for a separate, freestanding structure that you use regularly and exclusively for your business. This might be a studio or a converted garage or barn, for example. The structure doesn’t have to be your principal place of business or a place where you meet patients, clients or customers. But be sure you use the structure only for your business: you can’t store garden supplies there or even use it for the monthly meeting of your investment club.

Example

Norm is a self-employed landscape architect. He has his main office in a professional center near a shopping mall, but most weekends he works in his home office, which is located in a converted carriage house in his backyard. Since Norm uses the carriage house regularly and exclusively for his landscape architect work, it qualifies for the home-office deduction.

 

Ways to Document Your Home-Office Deduction

Here are some steps you can take to help establish your legal right to deduct home-office expenses.

  • Photograph your home office and draw a diagram showing the location of the office in your home.
  • Have your business mail sent to your home.
  • Use your home address on your business cards and stationery and in all business ads.
  • Get a separate phone line for the business.
  • Have clients or customers visit your home office – and keep a log of those visits.
  • Keep track of the time you spend working at home.

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