The purpose of this lesson is to provide information on figuring and
claiming the deduction for business use of your home. The term home
can include a house, apartment, condominium, mobile home or boat. It also
includes structures on the property, such as an unattached garage, studio,
barn or greenhouse.
Most taxpayers with home-based businesses
accurately report their income and expenses, while still enjoying the
benefits that a home-based business can offer. However, some individuals
have received advice that they can operate any kind of unprofitable
"business" out of their home and claim personal expenses as business
expenses. Non-deductible personal living expenses cannot be transformed into
deductible business expenses, regardless of how convincing the information
in marketing materials may seem. For additional information on home-based
tax avoidance schemes, see
IRS
Publication 4035, Is It Too Good to Be True?
Home-Based Tax Avoidance Schemes
.
Objectives
- Determine if you are eligible for the
business use of the home deduction.
- Complete
Form 8829, Expenses
for the Business Use of Your Home (PDF).
Qualifying for a
Deduction
To deduct expenses related to the business
use of part of your home, you must meet specific requirements. Even then,
the deduction may be limited. To qualify to claim expenses for the
business use of your home, you must meet the following tests.
- Your use of the business part of your home
must be:
- exclusive (see Exceptions to exclusive
use, later);
- regular, and
- for your business
- The business part of your home must be one
of the following:
- your principal place of business,
- a place where you meet with patients,
clients or customers in the normal course of your business, or
- a separate structure (not attached to
your home) you use in connection with your business.
Exclusive Use
To qualify under the exclusive use test, you must use an 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.
Example:
You are an attorney and use a den in your home to write legal briefs and
prepare client tax returns. Your family also uses the den for recreation.
Since the den is not used exclusively in your profession, you cannot
claim a business deduction for its use.
Exceptions to
Exclusive Use
You do not have to meet the exclusive use test if:
- you use part of your home for the storage
of inventory or product samples, or
- you use part of your home as a day-care
facility.
Regular Use
To qualify under the regular use test, you must use a specific area
of your home for business on a continuing basis. You do not meet the test if
your business use of the area is only occasional or incidental, even if you
do not use that area for any other purpose.
Principal Place of
Business
You can have more than one business location, including your home,
for a single trade or business. One way to qualify to deduct the expenses
for the business use of your home is if your home is your principal
place of business. To determine this, you must consider all of the facts and
circumstances.
Your home office will qualify as your
principal place of business for deducting expenses for its use if:
- you use it exclusively and regularly for
administrative or management activities of your trade or business, and
- you have no other fixed location where you
conduct substantial administrative or management activities of your trade
or business.
The following activities that are
administrative or managerial in nature:
- billing customers;
- keeping books and records;
- ordering supplies;
- setting up appointments and
- forwarding orders or writing reports.
The following activities will not
disqualify your home office as your principal place of business:
- employing others to conduct your
administrative or management activities at locations other than your home;
- conducting administrative or management
activities at places that are not fixed locations of your business, such
as in a car or a hotel room;
- occasionally conducting minimal
administrative or management activities
at a fixed location outside your
home;
- conducting substantial nonadministrative
or nonmanagement business
activities at a fixed location outside your
home; and
- having suitable space to conduct
administrative or management activities outside your home, but choosing to
use your home office for those activities instead.
Example A: Jon is a
self-employed plumber. Most of Jon's time is spent at customers' homes and
offices installing and repairing plumbing. He has a small office in his
home that he uses exclusively and regularly for the administrative or
management details of his business, such as phoning customers, ordering
supplies and keeping his books. Jon does not do his own billing. He uses a
local bookkeeping service to bill his customers.
Jon's home office qualifies as his
principal place of business for deducting expenses for its use. He uses
the home office for the administrative or managerial activities of his
plumbing business and he has no other fixed location where he conducts
these administrative or managerial activities. His choice to have his
billing done by another company does not disqualify his home office as his
principal place of business. Because he meets all the qualifications,
including principal place of business, he can deduct expenses (to the
extent of the deduction limit) for the business use of his home.
Example B: Clyde is a
self-employed anesthesiologist. He spends the majority of his time
administering anesthesia and postoperative care in three local hospitals.
One of the hospitals provides him with a small, shared office where he can
conduct administrative or management activities. Clyde does not use the
office the hospital provides. He uses a room in his home that he has
converted, as an office. He uses this room exclusively and regularly to
conduct all the following activities:
- contacting patients, surgeons and
hospitals regarding scheduling;
- preparing for treatments and
presentations;
- maintaining billing records and patient
logs;
- satisfying continuing medical education
requirements; and
- reading medical journals and books.
Clyde's home office qualifies as his
principal place of business for deducting expenses for its use. He
conducts administrative or management activities there for his business as
an anesthesiologist. He has no other fixed location where he conducts
administrative or management activities for this business. His choice to
use his home office instead of one provided by the hospital does not
disqualify his home office as his principal place of business. His
performance of substantial nonadministrative or nonmanagement activities
at fixed locations outside his home also does not disqualify his home
office as his principal place of business. Because he meets all the
qualifications, including principal place of business, he can deduct
expenses (to the extent of the deduction limit) for the business use of
his home.
Meeting Place for
Customers
If you do not meet the principal place of
business test, your home office may qualify if you meet or deal with
patients, clients or customers in your home in the normal course of your
business, even though you also carry on business at another location. You
can deduct your expenses for the part of your home used exclusively and
regularly for business if:
- you physically meet with patients, clients
or customers at your home, and
- the use of your home is substantial and
integral to the conduct of your business.
Using your home for occasional meetings and
telephone calls will not qualify you to deduct expenses for the business use
of your home.
Separate Structure
You can deduct expenses for a separate freestanding structure, such
as a studio, garage, storage shed or barn, if you use it exclusively and
regularly for your business. The structure does not have to be your
principal place of business or a place where you meet patients, clients or
customers.
Business
Percentage
Most expenses related to the business use
of your home are limited to the percentage of your home used for
business (business percentage).
To find the business percentage, compare the
size of the part of your home that you use for business to your whole house.
You can use any reasonable method to determine the business percentage. The
following are two commonly used methods for figuring the percentage.
Area Method
Divide the area used for business by the total area of your home.
Example: Your office
is 240 square feet. Your home is 1200 square feet. Your office is 20%
(240/1200) of the total area of your home. Your business-use percentage is
20%.
Number-of-Rooms
Method
Divide the number of rooms used for business by the total number of
rooms in your home. You can use this method if the rooms in your home are
all about the same size.
Example: Peggy has an art
studio in her home. She is allowed to take a deduction for the business
use of her home. The rooms in her house are all about the same size.
There are ten rooms and she uses one for a studio. Her business-use
percentage is 10%.
Note: Use Part I of
IRS
Form 8829, Expenses For Business Use Of Your Home (PDF), to
figure your business percentage.
Types of Expenses
There are two types of expenses related to
using your home for business:
- Expenses related to the business activity
in the home but not to the use of the home itself;
- Expenses for the business use of the
home.
Expenses for the business use of the home
are divided into three categories:
- Direct expenses;
- Indirect expenses; and
- Unrelated expenses
Expenses Not
Related to Business Use of the Home
Business expenses related to the business activity in the home, but
not to the use of the home itself, are deductible in full on
Schedule C (PDF) (Form 1040) or
Schedule F(PDF) (Form 1040).
These expenses are not limited to the
business use of the home percentage or the deduction limit (discussed
later). Examples of some of these expenses include the following:
- advertising;
- business taxes;
- car and truck expenses;
- salaries;
- supplies; and
- travel.
Expenses for
Business Use of Your Home
You must divide the expenses of operating your home between personal
and business use. The part of a home operating expense that you can use to
figure your deduction depends on:
- whether the expense is direct, indirect or
unrelated, and
- the percentage of your home that is used
for business.
Direct Expenses
Expenses only for the business part of your
home are generally deductible in full unless subject to the deduction
limit, discussed later.
Example:
Painting or repairs only in the area used for business.
Indirect
Expenses
Expenses for running your entire home are deductible based on
the percentage of your home used for business. They may also be subject to
the deduction limit, discussed later.
Examples:
Insurance, utilities and general repairs.
Unrelated Expenses
Expenses for the parts of your home not used for business are
not deductible; (i.e. lawn care, painting a room not used for
business).
Example: Jeff is allowed
to take a deduction for the business use of his home. He has the
following expenses:
| Item |
Cost |
|
Landscaping |
$1,500 |
|
Painting the business office |
$700 |
|
Utilities for the entire house |
$1,060 |
|
Repairs to the roof of the house |
$500 |
|
Repairs to the business office |
$100 |
|
Painting the bedroom |
$400 |
Painting the bedroom and landscaping are unrelated
expenses. They cannot be deducted. The painting and repairs to the office
are direct expenses and can be deducted in full. The repairs to the roof
and utilities are indirect expenses. They are divided between business and
personal parts of the house. The business part is deductible.
Examples of Expenses
Certain expenses are deductible whether or not you
use your home for business. However, if you qualify to claim business use
of the home expenses, you can use the business part of these expenses to
figure your business use of the home deduction. These expenses are:
- real estate taxes;
- deductible mortgage interest, and
- casualty losses.
Other expenses are deductible only if you use
your home for business. These expenses generally include (but are not
limited to):
- insurance;
- rent;
- repairs;
- utilities and services, and
- depreciation on your home.
Real Estate Taxes:
To figure the business part of your real estate taxes, multiply the real
estate taxes paid by the percentage of your home used for business.
Deductible Mortgage
Interest: To figure the business part of your deductible mortgage
interest, multiply this interest by the percentage of your home used for
business.
Casualty Losses:
If you have a casualty loss on your home that you use for business, treat
the casualty loss as a direct expense, an indirect expense or an unrelated
expense, depending on the property affected. If the loss is on a part of the
property used for both business and personal purposes, use only the business
portion to figure the deduction.
Insurance:
You can deduct the cost of insurance that covers the business part of
your home. However, if your insurance premium gives you coverage for a
period that extends past the end of your tax year, you can deduct only the
business percentage of the part of the premium that gives you coverage for
your tax year.
Rent: If
you rent, rather than own, a home and meet the requirements for business
use of the home, you can deduct part of the rent you pay. To figure your
deduction, multiply your rent payments by the percentage of your home used
for business.
Repairs:
The cost of repairs and supplies that relate to your business, including
labor (other than your own labor), is a deductible expense. For example, a
furnace repair benefits the entire home. If you use 10% of your home for
business, you can deduct 10% of the cost of the furnace repair.
Utilities and
services: You may deduct the business portion of your utilities
and services, such as gas, electricity, trash removal and cleaning services.
Generally, the amount deductible is the business-use percentage multiplied
by the utility expense. The basic local telephone service charge, including
taxes, for the first telephone line into your home is not deductible.
However, charges for business long-distance phone calls on that line, as
well as the cost of a second line into your home used exclusively for
business, are deductible business expenses. Deduct these charges on either
Schedule C (PDF) (Form 1040) or
Schedule F (PDF) (Form 1040). They are not part of your home
office deduction.
Depreciation:
Some expenses cannot be deducted all at once. The cost of any business
property that lasts for more than one year must generally be deducted over a
number of years. The annual expense is called depreciation. Depreciation
reflects the reduction in value of the property.
To calculate depreciation on the business
part of your home, you need to determine the depreciable basis of your home.
Generally, the depreciable basis of your home will be the lesser of:
- the fair market value of your home
(excluding land) on the date you first use it for business, or
- the purchase price (excluding land), plus
any major improvements you made and minus any casualty losses or other
changes to basis.
To determine how much of the depreciable
basis you can use to compute your depreciation deduction, multiply the
depreciable basis by the business-use percentage.
Example: Barry owns an accounting
service. He uses 10% of his home as a business office. When Barry started
his business, his home was worth $60,000. The home cost $50,000 and the
land $10,000. The depreciable basis of the home is $50,000. The
depreciable basis of the business part of the home is $5,000 ($50,000
depreciable basis multiplied by 10% business-use). For information on how
to calculate depreciation, see
Instructions to Form 8829 or IRS
Publication 946, How to Depreciate
Property (PDF).
Example: The following example shows
how to compute the business percentage of the various expenses using
Form 8829, Expenses for Business Use of
Your Home (PDF).
Renee operates a private detective agency
in her home. She is allowed to take a deduction for expenses related to
the business use of the home. Renee's business-use percentage is 20
percent. She has the following expenses:
| Item |
Cost |
|
Real estate taxes |
$1000 |
|
Dues |
$50 |
|
Repairs to the floor of the office |
$200 |
|
Utilities |
$800 |
|
Transportation expenses |
$150 |
|
Insurance premiums on entire house |
$600 |
|
Mortgage Interest |
$700 |
|
Depreciation on entire house |
$700 |
|
Advertising |
$100 |
|
Painting the office |
$400 |
|
Business cards |
$50 |
|
Roof repair |
$100 |
The
Form 8829 - Related Expenses for Renee Example
(PDF) shows Part II, for Renee. Dues, transportation, advertising and
business cards are expenses related to the business activity in the home,
but not to the business use of the home itself.
Deduction Limit
If your gross income from the business
operated or managed from your home equals or exceeds your total business
expenses, you can deduct all your business expenses. If your gross income
from that use is less than your total business expenses, your deduction for
certain expenses for the business use of your home is limited.
Gross income is generally the total sales of
your business less cost of goods sold.
Your deduction of otherwise nondeductible
expenses, such as insurance, utilities and depreciation (with depreciation
taken last), is limited to the gross income from the business use of your
home, minus the sum of the following:
- The business part of expenses you could
deduct even if you did not use your home for business (such as mortgage
interest, real estate taxes and casualty and theft losses).
- The business expenses that relate to the
business activity in the home (for example, salaries or supplies), but not
to the use of the home itself.
Example: Your
deduction limit is $500. Your otherwise nondeductible expenses related to
the business use of the home are $800. The deduction for these
expenses is limited to $500.
Carryforward
Expenses that cannot be deducted because of the deduction limit can
be carried forward to later years, subject to the deduction limit in those
years.
Example: Computing the deduction and
carryforward.
Renee has gross income of $1,500.00 from her private detective agency. She
has $350 in business expenses that do not relate to the business use of
the home. Her tentative profit is $1,150 ($1,500-$350).
Using figures from the
Form 8829 - Related Expenses for Renee Example
(PDF), the business portion of her expenses are:
| Mortgage interest ($700 x 20%) |
$140 |
| Real estate taxes ($1,000) x 20%) |
$200 |
| Direct expenses |
$600 |
| Other indirect expenses |
$300 |
| Depreciation |
$140 |
Renee can take a deduction of $1,150 for
expenses related to the business use of the home. The remaining $230
(including all of the depreciation of $140) is not deductible, but can be
carried forward. (See the
Form 8829 - Unrelated Expenses for Renee Example
(PDF))
Where to Deduct
Expenses Related to the Business Use
of the Home
Self-employed individuals show their business
income and expenses on Schedule C (Form 1040), Profit or Loss from
Business, or on Schedule F (Form 1040), Profit or Loss from Farming.
If you file Schedule C, expenses related to the business use of the home are
figured on
Form 8829, Expenses
for Business Use of Your Home (PDF) and you report the
deductible amount on
Schedule C (PDF). If you file
Schedule F (PDF), figure your deduction using the worksheet at
the end of
Publication 587,
Business Use of Your Home (PDF), and report the deductible
amount on Schedule F. Write "Business Use of Home" on the dotted line
beside the entry.
Caution: Do not
take a double deduction for real estate taxes and mortgage interest. If you
report an amount for the business portion of the taxes and interest on
Schedule C (or Schedule F), make sure you report only the personal portion
on Schedule A, Itemized Deductions. The amounts reported on Schedule C (or
F) and Schedule A should be the total interest and taxes you paid for the
year.
Note: Employees must itemize
deductions on Schedule A (Form 1040) in order to claim the deduction for
business use of their home. See Publication 587 for more information.
Sale or Exchange
of Your Home
If you sell or exchange your home, you may be
able to exclude up to $250,000 (500,000 for certain married persons filing a
joint return) of the capital gain on the sale. However, you cannot exclude
any part of your gain that is equal to any depreciation allowed or allowable
for the business use of your home after May 6, 1997. For more
information on the sale or exchange of a home, see
Publication 523, Selling Your Home
(PDF).
Depreciation
If you used any part of your home for business, you must adjust the basis of
your home for any depreciation that was allowable for its business use, even
if you did not claim it.
Recordkeeping
You must keep records that provide the
information needed to figure your deductions for the business use of your
home. You should keep all canceled checks, receipts, invoices and other
evidence of expenses you paid. Your records must show the following
information:
- The part of your home you use regularly
and exclusively for business or that is a separate structure;
- That it is your principal place of
business, a place where you meet patients, clients or customers in the
ordinary course of your business;
- The depreciation and expenses for the
business part of your home.
Summary
In this lesson you learned:
- There are requirements that must be met to
qualify for a deduction for the business use of your home;
- How to determine the business percentage
of business use;
- The types of expenses you can and cannot
deduct either in full or according
to the percentage;
- How to determine the limits on business
use of the home deductions;
- Where to deduct the expenses on your
return;
- The effect of claiming these expenses when
you sell your home; and
- Recordkeeping requirements.
