Who can deduct home office expenses?
One of the most frequently asked questions by small-business owners is, "Can I deduct expenses for my home office?" To deduct expenses related to business use of your home, you must meet specific requirements. The business part of your home must be:
- Used exclusively and regularly for your principal trade or business. If you meet with patients, clients or customers in your home, even though you also conduct business at another location, you may deduct home office expenses.
- If you are an employee, additional tests must be met. The home office must be for your employer's convenience, and you cannot rent any part of your home to your employer. There is a specific prohibition in Section 280A of the Internal Revenue Code. Basically, it states: If you are an employee of a business, you cannot take any deductions for renting space in your home to your employer. So what would otherwise make sense — renting the space to your business and taking the deductions — no longer applies. In fact, what would happen in this situation would be a rental deduction by the corporation, but equal rental income with no additional deductions by the employee.
What Expenses Are Deductible?
Deductible items include the business use portion of mortgage interest or rent paid, real estate taxes, insurance, utilities, maintenance and repairs, depreciation, and casualty and theft losses. Two methods are acceptable to calculate the business use portion of your home:
- Divide the square footage of your home used for business by the total square footage of your home, or
- Divide the number of rooms used for business by the total number of rooms in your home. This method is allowed if the rooms in your home are all about the same size.
Day-care providers who work in their home have special rules that may allow the deduction even though the same space is used for non-business purposes, i.e., it does not meet the "exclusively used for business" requirement.