Do You Qualify for a Home Office?

By Michelle E. Botwinick, C.P.A.
If you’re self-employed and work out of an office in your home, and if you satisfy the strict rules that govern those deductions, you will be entitled to favorable home office deductions—that is, above-the-line business expense deductions for both the direct expenses of the home office (such as the costs of painting or repairing the home office) and the indirect expenses of maintaining the home office (a percentage of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and casualty losses.) The three tests are:
Principal place of business. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. (What exclusively and on a regular basis means is not entirely self-evident. Your home office is your principal place of business if it satisfies either a management or administrative activities test, or a relative-importance test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative-importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.
Home office used for meeting patients, clients, or customers. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients, or customers must be physically present in the home office.
Separate structures. You’re entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that’s located in a separate unattached structure on the same property as your home—for example, an unattached garage, artist’s studio, workshop, or office building.
Space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.
The amount of your home office deduction is subject to limitation based on the income attributable to your use of the home office. But any home office expenses that can’t be deducted currently, may be carried over and deducted in later years.
If you maintain your office in your home, you may also be entitled to a special tax break on your commuting costs. For most people, the cost of daily travel between home and a regular work location is a nondeductible commuting expense; however, taxpayers who have an office at home can deduct the daily costs of travel between home and another work location in the same business, regardless of distance and regardless of whether the other location is regular or temporary. You get this break only if your home is your principal place of business. In other words, you must meet the tests for deducting expenses of an office at home.
If your office at home isn’t your principal place of business, the costs of travel between your home and the first and last business stops of the day are nondeductible commuting expenses; however if you have a regular work location away from home, the costs of going between home and a temporary work location are deductible,. Generally speaking, employment at a work location is temporary if it is realistically expected to last (and does in fact last) for no more than a year.