The rules for business use of your home are have changed dramatically in recent years. For instance, the 2017 tax law changes removed this deduction for people who use their homes working for a W-2 employer. There is a new Safe Harbor rule to simplify claiming the credit. And this deduction can now be only claimed by those filing Schedule C (sole proprietorship filing status or single-member LLC).
To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for business use of your home, you must meet both of the following tests.
1. Your use of the business part of your home must be all of the following:
a. Used only for your business. (You can't use it also for a guest or TV room.)
b. It must be used on a regular basis.
c. It must be for your trade or business2. The business part of your home must be one of the following:
a. It must be your principal place of business (defined later)
b. It must be a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
c. A separate structure (not attached to your home) you use in connection with your trade or business
Exclusive use. To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Exceptions to exclusive use. You do not have to meet the exclusive use test if either of the following applies.
- You use part of your home for the storage of inventory or product samples (like part of your garage).
- You use part of your home as a daycare facility.
For an explanation of these exceptions, check out IRS Publication 587, Business Use of Your Home.
Principal place of business.
You home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.
- You use it exclusively and regularly for administrative or management activities of your trade or business.
- You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors.
- The relative importance of the activities performed at each location.
- If the relative importance factor does not determine your principle place of business, the time spent at each location.
If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses.
Home office expenses include expenses such things as rent/mortgage interest, property taxes, utilities, certain house maintenance and home owners/renters insurance, house depreciation, as well as expenses specific to the office area. (The cost of painting your kitchen does not count, but the cost of painting your office would.) The amount of household expenses that can be claimed is figured by multiplying the percentage of your house that is used for the office (based on square footage).
Instead of adding up all of your household expenses and multiplying the percentage of your house you use for business against it to find the deduction, a new Safe Harbor rule allows you to just multiply the square feet of dedicated office space by $5.00. For instance, if you have a 10'x10' room you use exclusively for your business, then you simply take 100 Sq Ft x 5 for a deduction of $500.