Whether you work for yourself or are a business partner, there are certain expenses that you may be able to deduct for the portion of your home that you use for business purposes. In order to qualify for these deductions, you must use part of your home for one of the following purposes:
1. Exclusively and regularly as your main place of business for your trade or business.
2. Exclusively and regularly as a place where you meet or interact with your patients, clients, or customers in the normal course of your trade or business.
3. As a separate structure that is not attached to your home, used exclusively and regularly in connection with your trade or business.
4. Regularly for storage of inventory or product samples used in your trade or business of selling products at retail or wholesale, as long as your home is the only fixed location of your business.
5. For rental use.
6. As a daycare facility.
If the exclusive use requirement applies, you cannot deduct business expenses for any part of your home that you use for both personal and business purposes. For example, if you use the den of your home to write legal briefs as an attorney but also use it for personal purposes, you cannot deduct any business use of your home expenses. Additionally, to qualify as your principal place of business, you must determine that your home is where you perform your most important business activities and spend most of your business activity time. If you use a portion of your home for administrative or management activities and have no other fixed location for these activities, it may qualify as your principal place of business.
There are also deductions available for business storage purposes and for using your residence for daycare services, where exclusive use is not required. Deductible expenses for the business use of your home include real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. However, expenses for parts of your home that are not used for business, such as lawn care or painting a room not used for business, are not deductible.
There are two methods for calculating the business use of home deduction:
1. Regular method: This method involves dividing the expenses of operating your home between personal and business use. Direct business expenses can be deducted in full, while indirect total expenses are allocated based on the percentage of home floor space used for business. If you are a qualified daycare provider who does not exclusively use your home for business purposes, you must calculate the percentage based on the amount of time the applicable portion of your home is used for business. Self-employed taxpayers file Schedule C (Form 1040) to compute this deduction.
2. Simplified option: While the regular method is still available, many taxpayers find the optional safe harbor method easier to use. This method allows qualifying taxpayers to deduct $5 per square foot of the portion of their home used for business (up to a maximum of 300 square feet). Depreciation is treated as zero under this method, and the deduction is claimed directly on Schedule C (Form 1040). Deductions for home-related expenses that are otherwise allowable without regard to business use can be claimed in full on Schedule A (Form 1040). More information on this simplified option can be found on the IRS website.
Regardless of the method used, business expenses cannot exceed the gross income limitation. Under the regular method, some expenses can be carried forward to the next year, subject to the gross income limitation for that year. There is no carryover provision under the safe harbor method, but taxpayers can elect to use or not use this method each year.
If you are in the farming business and file Schedule F (Form 1040), or if you are a partner using actual expenses, there are specific worksheets available in Publication 587 to help you calculate your deduction.
For more detailed information on the rules for the business use of your home, including determining if your home office qualifies as your principal place of business, refer to Publication 587.
