If you work from home, you may qualify to deduct your home office expenses on your taxes. However, the Internal Revenue Service (IRS) has specific rules that detail who does and does not qualify for these deductions.
Determining if you qualify under the IRS home office rules to write off your home office expenses on your income taxes is not simple. You should only take the home office deduction if you meet every requirement and can provide proof of your eligibility if audited.
Learn the IRS home office rules to determine whether or not you qualify for the home office deduction.
What Are the IRS Home Office Rules?
The IRS home office rules help you determine whether you qualify for a tax deduction based on the business use of your home. A home, in this case, could be your:
- Apartment or condo
- Mobile home
- Unattached structure on your property, such as a studio, barn, garage, or greenhouse
- Any other structure that provides living accommodations
However, it does not include any part of your property that you exclusively use as a hotel, inn, or another similar establishment.
According to IRS home office rules, home office expenses can only be deducted when you regularly and exclusively use a specific part of your home as your primary place of business.
You may also be qualified to deduct home office expenses if you use the home office space to meet or deal with patients, customers, or clients, even if it isn't your primary place of business.
There are additional IRS rules and different filing procedures for a telecommuting employee's home office.
How the IRS Home Office Rules Work
Determining whether you should take a home office deduction relies on meeting the criteria outlined in the home office rules. These rules apply to both the old method of calculating the deduction and the new simplified home office deduction.
Specific Area of Your Home
Your home office can be a separate room, but it does not have to be. The IRS home office rules say it may be a separate, identifiable space, though permanent partitions are not necessary to mark off that space.
If you do not have permanent partitions, you should take care to define the space with furniture or some other way because you must only use this space for business purposes.
Regularly and Exclusively
The key point in taking the home office deduction is that the office space must not be for both personal and business use. If you want to deduct your home office, it cannot be the place you also pay your bills, email your friends, or watch TV.
Since the space must be used regularly for business, occasional or incidental business use does not qualify.
Some exceptions to exclusive use apply for licensed daycare owners and those that store inventory at home.
If you store inventory in your home, you can deduct expenses for the business use of your home if:
- You sell products retail or wholesale as your trade/business.
- You keep the inventory or product samples that you sell in your home.
- Your home (where you store the products) is the only fixed location of your business.
- You use the storage space on a regular basis for business.
- The storage space is a separately identifiable place (i.e., you aren't keeping products under your sink, in your closet, and on the dining room table).
If you are a daycare provider and regularly use a space in your home for daycare, you may still qualify to deduct it as a home office even if you occasionally use it for other purposes. To qualify, you must meet two requirements:
- You are in business providing daycare for children, people over age 65, or those who are unable to physically/mentally care for themselves.
- You have applied for, been granted, or be exempt from having a license or other official approval to work as a daycare center or a family/group daycare home under state law.
You cannot take this deduction if your application to be a daycare provider was rejected or your authorization was revoked.
If you meet all these requirements for either daycare providers or inventory, you may still be eligible for taking the home office deduction.
Principal Place of Business
Defining your principal place of business is trickier for those conducting business in multiple locations. You should either:
- Do the majority of your work in your home office; or
- Use it regularly and exclusively for administrative activities, such as billing, setting appointments, and recordkeeping, with no other fixed location where you do this
For example, a sales rep who spends a large amount of time outside their home office visiting clients should still qualify to take a home office deduction. However, the home office should be the only place they do administrative activities, and they must meet all the other home office deduction rules.
If a separate structure is integral to your business but not the principal location where your business happens, you may still qualify for the deduction. For example, a florist who grows flowers in a home greenhouse may qualify.
Meeting Clients, Patients & Customers
If you meet with clients in your home office, but your principal place of business is elsewhere, you may still claim the home office deduction if:
- You must physically meet with clients in your home (virtual conferencing doesn't count)
- Substantial use of the office is integral to conducting your business (occasional meetings in your home don't count)
For example, a self-employed attorney who meets clients in a home office two days a week but works out of another office for three would qualify for a home office deduction, even though the other office might be considered their principal place of business.
Do I Need the Home Office Deduction?
If you meet the IRS home office rules, you may be able to deduct all or part of the cost of:
- Property taxes
- Mortgage interest or rent payments
- Homeowner's or renter's insurance
- Painting and repairs
However, taking the home office deduction comes with pros and cons, and it is not always the best choice for your tax bill.
If you take the home office deduction, you may be limited in other deductions. For example, you cannot deduct mortgage interest both on your itemized deductions and as a home office deduction.
Before you take this or any other deduction on your taxes, consult a tax preparation specialist. A tax professional will be able to help you claim the most profitable deductions for both your business and personal taxes.
- The IRS home office rules help you determine whether you qualify for a tax deduction based on the business use of your home.
- Home office expenses can be deducted when you regularly and exclusively use a specific part of your home as your primary place of business.
- If your home is not your principal place of business but you regularly use a home office space to meet or deal with patients, clients, or customers, you may still qualify.
- Licensed daycare providers and business owners who store inventory in their homes may also qualify even without meeting all the rules.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.