Home Office Tax Tips
by John Goodner

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You can claim this tax deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:

• As your principal place of business for any trade or business
  
  
• As a place to meet or deal with your patients, clients or customers in the normal course of your trade or business

Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses.

What do you need to do in order to classify your home office? First, you must decide what part of your home you plan to use as your office, and that room can be used for business purposes only. The space must be used regularly for business use, and must be your primary place of business to qualify for the home office deduction.

Regular and Exclusive Use

Your office can’t just be the room in your home that you store your records in, only using it once a month to store more paperwork. While the IRS does not offer a concise definition of what qualifies as "regular use," if business is conducted several times a week in your office, you should have no trouble meeting this requirement.

"Exclusive use" means that the space you wish to define as your home office is used only for business. If you have a room that you use for both personal and business use, the entire space does not qualify for the deduction. Many people have rooms that serve multiple purposes, such as a TV and office desk in a spare bedroom. While the personal use of the TV does not qualify as exclusive use, the desk area does. You can set aside the space used for business, as long as the personal activities in the room don’t make use of the office space. One exception to the exclusive use rule is storing inventory or prototypes at home. Storage space can be used for other purposes, as long as it is used regularly for storage of business items.

Principal Place of Business

The second requirement for the home office tax deduction is that your office space must be a "principal place of business." If you conduct your business only from home, then you clearly meet this requirement. But, if you have more than one location for a single business, you must determine whether your home is your principal place of business for that enterprise.

Your home office qualifies as your principal place of business if you must spend most of your working hours in your office and you conduct the administrative and management activities from home, and you have no other fixed location where you conduct any of these activities. As long as you have no other fixed location where you do these things -- for example, an outside office -- you should have no trouble taking the deduction.

Even if your home is not your principal place of business or you have another location, there are two other ways to fulfill the principal place of business requirement: If you regularly meet with clients or customers at home, or if you use a separate building to conduct business. The same rules regarding exclusivity still apply, and the space must be used solely for doing business, not for personal use.

Here are some steps you should take to establish your legal right to deduct home office and related expenses:

• Take photographs of your home office and draw a diagram showing its location in your home. Keep this information in your tax folder.
  
  
• Have business mail sent directly to your home.
  
  
• Use your home address on all of your business cards and stationery and in all business advertisements.
  
  
• Get a separate phone line to be used exclusively for the business.
  
  
• Have clients or customers visit your home -- and keep a detailed log of those visits.
  
  
• Keep track of the amount of time you spend working at home.

Tax laws are often very complicated. Figuring out whether your home office qualifies for a tax deduction can be a difficult and tedious process. Be very careful, as the IRS will call you on any of your questionable strategies. Proper documentation is absolutely essential, and it is best to consult with a tax professional before filing your return to help you determine the kind of expenses that can be deducted given your unique set of circumstances.

OSSN provides members with more Tax Tips on this OSSN.com page.

(Credits: OSSN)