Business Use of Home (December 2017)

Tax Tips

Business Use of Home

By Michael Aston, E.A.
Alhambra Tax Center


You can deduct part of your home expenses on your tax return. But to take a Home Office deduction, a taxpayer must use their personal residence under one of the following situations:

·       An area in the home is exclusively and regularly used as the taxpayer’s principal place of business.

·       An area in the home is exclusively and regularly used as a place where the taxpayer meets or deals with customers in the normal course of a trade or business.

·       A separate structure which is not attached to the home is used in connection with a trade or business.

·       An area in the home is used on a regular basis for storage of inventory or product samples.

·       The home is used for rental activity.

·       The home is used as a day care facility.

All of the below test must be met to qualify for the business expense:

1.     Exclusive Use Test – is a specific area of the home is used only for business. The area can be a room or other separately identifiable space. This test is not met if the taxpayer uses the area both for business and personal use, such as a bedroom, business during the day and sleeping at night.

2.     Regular Use Test – A taxpayer must use a specific are of the home for business on a regular basis.

3.     Trade or Business Use Test – A taxpayer must use part of the home in connection with a trade or business. If the use is for a profit seeking activity that is not a trade or business, the business use of the home is not allowed.

4.     Principal Place of Business Test – A trade or business can have more than one location. To qualify, the home must be the principal for that trade or business.

In addition to the tests above, an employee must meet three more requirements to deduct an expense for business use of the home.

·       The home office must be for the convenience of the employer.

o   The employer must either provide no or inadequate facilities for the employee to perform services for the employer.

o   Use that is merely appropriate and helpful to the employer’s business does not satisfy the convenience of the employer requirements.

·       The employee must be able to itemize on Schedule A.

·       The employee is not renting the home office to the employer.

There are two options to determine the qualified expenses: Simplified and Regular Method.

SIMPLIFIED METHOD – As stated in the title, this is the simplest method to use. This option can only be used if your home office is 300 square feet or smaller. Basically, you will receive $5.00 for each square foot, a 200 square foot office would get a $1000 deduction.

REGULAR METHOD – This method the taxpayer will use actual expenses by dividing home operating expenses between personal (indirect) and business use (direct), determining the business use percentage of the home. For example, if somebody had a 1000 square foot home and use 100 square feet as an office, they will be able to deduct 10% of the expenses. If utilities were $1500 for the year, they will get a $150 deduction.

There is more information that can be covered in this article. To get more information you can look at the instructions for form 8829, IRS publication 587 or consult a tax professional.