What Are the IRS Home Office Rules?
Review IRS rules for taking a home office deduction on your income taxes.
Determining if you qualify under the IRS home office rules to write off your home office expenses on your income taxes is not simple.
According to IRS home office rules, home office expenses can only be deducted when a "specific area of your home" is used "regularly and exclusively as your principal place of business." However, if you use the home office space as a "place to meet or deal with patients, clients, or customers," even if it is not your principal place of business, you may still qualify to take a home office deduction. *
That's a lot of very specific language. And keep in mind that there are additional IRS rules and different filing procedures for a telecommuting employee's home office.
So to help determine whether you should take a home office deduction, let's take a look at the meanings of some of those specific terms in bold above in the IRS rules. Keep in mind that 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 "separately identifiable space" and that permanent partitions are not necessary to mark off that space. But 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. So this means, if you want to deduct your home office, it shouldn't be the place you pay your bills and email your friends.
Also it must be used regularly for business, so "incidental or occasional business use" does not qualify.
Some exceptions to exclusive use apply for licensed daycare owners and those that store inventory in their home. See IRS Publication 587 or consult a tax specialist for details.
Principal Place of Business
Defining your principal place of business is trickier for those conducting business in multiple locations. But even if you don't spend the majority of your work time in your home office, you can define your home office as your principal place of business if you use it regularly and exclusively for administrative activities, such as billing, setting appointments, writing reports and recordkeeping (and have no other fixed location where you do this).
For example, a sales rep who spends a large amount of time outside her home office visiting clients should still qualify to take a home office deduction. But her home office should be the only place she does administrative activities, and she must meet all the other home office deduction rules.
Meeting Clients, Patients and 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. But you must physically meet with them (virtual conferencing doesn't count!) and use of the office must be "substantial and integral" to conducting your business. So that means occasional meetings held in your home don't count.
For example a self-employed attorney who meets clients in her home office two days a week but works out of another office for three would qualify for a home office deduction, even though her other office might be considered her principal place of business.
Now that you know the IRS rules about whether you can take a home office deduction. Check out what qualifies as a home office deduction.