When it comes to tax time for business owners, entrepreneurs, and commissioned salespeople, one of the most utilized deductions is that for home office expenses.
However, it’s still largely misunderstood, with the fine print of what makes a working space in your home an actual home office often used erroneously.
Of course, you want to claim every legal and ethical deduction the IRS grants, so it’s important to understand the finer points of home office deductions. While the following is a vastly simplified version of complex and lengthy IRS tax codes, you’re welcome to schedule a call or make an appointment with my office for a more thorough analysis.
Let’s look at a summary of the requirements for a space in your house to be eligible as a home office in the IRS’ eyes:
- Must be the principal place the business is conducted,
- Meeting place for clients, customers, or patients,
- There are no separate structures that are attached and used by the business,
- If the home is the sole fixed location for the business and a portion of that space is used to store inventory, merchandise, or samples.
Let’s look closer at the IRS stipulations and requirements for home office deductions:
Regular and exclusive use
According to the IRS, a home office must be used regularly and exclusively in day-to-day operations of the business. That means if you do you work at the kitchen table every day, you cannot claim that area as a home office space since it is not exclusively an office (but a kitchen, too).
However, your home office does not have to be in a separate, dedicated room. The IRS does grant a “separately identifiable space” to be used, which means you can have a desk and area in the corner of the room as your home office, without utilizing the whole room.
But if you have the family’s television in that space, your kids do homework at that same desk, etc., the space will not qualify as a home office per the IRS.
The working space must also be regularly used – so you can’t just put a desk in half of a room, stack it with work documents, and try to claim the home office deduction come tax time.
There are some exceptions made for the storage of products or samples.
It must be your principal place of business
To determine if a home office is the “principal place of business,” a combination of facts and circumstances are factored in. For instance, the IRS takes into account the amount of each workday the owner spends there, if there are other work locations or satellite offices, how important the location is for the business’ activities, and more.
Additionally, if a business’s home office is used for most of the administration, management, and revenue activities, it may pass the “principal place of business” test.
A meeting place for clients, customers, and patients
Even if it is not the main place of business, meeting clients, patients, or customers in your home allows that dedicated space to be deducted come tax time.
So, if you are a counselor and meet clients in your home two days a week and at an office the other three days, you still qualify for a home office deduction. However, the meetings must be “substantial and integral” to qualify, so video conferencing like Zoom meetings or sporadic meetings will not pass the IRS test.
The easiest way to meet the IRS’ standard for home office deductions is if a non-attached structure is used for the business but is still “accessory or incident to” the home. For instance, a small workshop or craft or professional studio in the backyard qualify.
For a more thorough analysis of your home office deductions, please schedule a call or make an appointment with my office by clicking here.