January 15, 2016
Home Office Tax Deductions for Business- Part Two of Four- Meeting the Requirements
Business Use of Home Deduction- Part Two of Four- Meeting the Requirements
The business use of home deduction is often misunderstood as there are very specific requirements you must satisfy to qualify for the deduction. This article is part of a four part series starting with the basics, meeting the requirements, business use of home as an employee and ending with how to calculate the business use of home deduction. In this article we will focus on meeting the requirements to take the deduction.
Requirements to Qualify for the Home Office Deduction
To qualify for the home office deduction, you must satisfy three threshold requirements:
- You must be in business or an employee that must maintain a home office, and
- You must use part of your home exclusively for business (unless you store inventory at home or run a day care center), and
- You must use your home office for business on a regular basis.
If you satisfy all three threshold requirements, you must also meet any one of the following requirements:
- Your home office is your principal place of business, or
- You regularly and exclusively use your home office for administrative or management activities for your business, or
- You meet clients or customers at home, or
- You use a separate structure on your property exclusively for business purposes, or
- You store inventory or product samples at home, or
- You run a day care business from your home.
Threshold Requirement #1: You Must Be in Business
You must be in a business or activity for the purpose of producing a profit to take the home office deduction. You cannot get the deduction for a hobby or other non-business activities you conduct out of your home. Note you do not have to work full time in a business nor produce a profit, to qualify for the home office deduction. You must be working in an active for the purpose of producing a profit.
Threshold Requirement #2: You Must Use Your Home Office Exclusively for Business
You cannot take the home office deduction unless you use part of your home exclusively for your business. If you use part of your home—such as a room or studio—as your business office, but also use that space for personal purposes, you won’t qualify for the home office deduction.
Threshold Requirement #3: You Must Use Your Home Office Regularly
It’s not enough to use a part of your home exclusively for business—you must also use it regularly. For example, you cannot place a desk in a corner of a room and claim the home office deduction if you never use the desk for your business. How does IRS define the term “regularly”? It’s not entirely clear. The IRS says only that you must use your home office for business on a continuing basis—not just for occasional or incidental business use. You should keep track of how much you use your home office by making simple notations on a calendar.
One Additional Requirement
Using a home office exclusively and regularly for business is not enough by itself to qualify for the home office deduction: You also must satisfy at least one of the following additional requirements.
Additional Requirement #1: Your Home Is Your Principal Place of Business
The most common way to satisfy the additional home office deduction requirement is to show that you use your home as your principal place of business. If you do all or almost all of your work in your home office, your home is clearly your principal place of business.
If you work in more than one location, your home office still qualifies as your principal place of business if you perform your most important business activity. The most important business activates are those that relate most closely with how you generate your income.
If you perform equally important business activities in several locations, your principal place of business is where you a significant portion of your time (more than half).
Additional Requirement #2: You Do Administrative Work at Home
You can also qualify for the home office deduction if (1) you use the office to conduct administrative or management activities for your business, and (2) there is no other fixed location where you conduct substantial administrative or management activities.
Administrative or management activities include, but are not limited to:
- Billing clients or patients
- Keeping books and records
- Ordering supplies
- Setting up appointments, and
- Writing reports.
You don’t have to perform all the administrative or management activities your business requires at home to qualify for the home office deduction. Your home office can qualify for the deduction even if you:
- Have others conduct your administrative or management activities at locations other than your home—for example, another company does your billing from its place of business;
- Conduct administrative or management activities at places that are not fixed locations for your business, such as in a car or a hotel room;
- Occasionally conduct minimal administrative or management activities at a fixed location outside your home, such as your outside office.
Additional Requirement #3: You Meet Clients or Customers at Home
Even if your home office is not your principal place of business, you may deduct your expenses for any part of your home that you use exclusively to meet with clients, customers, or patients. You must physically meet with client, customer or patient in this home office. Also, these meetings must be a regular part of your business; occasional meetings don’t qualify. The IRS has indicated that meeting clients one or two days a week is sufficient.
Additional Requirement #4: You Use a Separate Structure for Business
You can also deduct expenses for a separate free-standing structure, such as a studio, garage or barn, if you use it exclusively and regularly for your business or profit motivated activity. The structure does not have to be your principal place of business or the place where you meet patients, clients, or customers.
Additional Requirement #5: You Store Inventory or Product Samples at Home
You can also take the home office deduction if you’re in the business of selling retail or wholesale products and you store inventory or product samples at home. To qualify, you cannot have an office or other business location outside your home. And you must store your inventory in a particular place in your home—for example, a garage, closet or bedroom.
Business Use of Home Deduction- Part One of Four- The Basics
Business Use of Home Deduction- Part Three of Four - For An Employee
Business Use of Home Deduction- Part Four of Four-Calculating the Deduction
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