Highbaugh Tax

1. You Must Use Your Home Office Both Regularly and Exclusively.

You must use a certain area of your home both regularly and exclusively for business. In most circumstances, the area should be a separate room in your home. However, a common area in your home that is not in a separate room can also qualify—as long as you use it exclusively for business.

If you have a desk located in a family room, for example, mixing your business correspondence with your personal mail could cause the deduction to be disallowed. The IRS takes this point very seriously. They once disallowed a home office deduction because they saw a dog’s bowl under the desk in a picture brought in by the taxpayer.

If you have an additional business with another location, you can’t perform any work for that business in your home office. For example, if you’re a teacher with a real estate business that you run from your home office, grading papers in your home office would invalidate your use of the home office for the real estate business. This may sound extreme, but it is just one of many true-to-life reasons why the IRS disallows home office deductions in audits.

Example: In a Tax Court case in 2001, a psychologist was not permitted to take a deduction for a home office in her small apartment because the size was so small that no part of it could be used exclusively for business. She did not meet with patients there but rather used rented office space for that purpose. The only business activities she performed in her apartment were scheduling private-practice appointments by phone and storing records and reading material.

And exclusive use means that your children cannot use your office computer to do research for school, or to play computer games. You can only shade this exclusivity if:

• You run a daycare center, and let the kids use the computer for games and applications
• You use part of your home to store inventory or product samples for wholesale or retail sales.

Regular use does not necessarily mean that you must use the office daily or even weekly—just that you use it on a continuing basis. Occasional or incidental use does not qualify, even if you use the office exclusively for business.

Can you prove regular use? Do you have a log of phone calls made from the office? Do you have invoices on a computer that show you used the office? Keep all records that can prove you use the office on a regular basis.

2. Your Home Office Must be Your Principal Place of Business.

To qualify as the principal place of business, your home office must be where you perform the most important part of your work, or you must use the office for administrative or management activities of a trade or business, and you can’t perform a substantial portion of these administrative or management activities at any another location, such as another office off-site.

Administrative and management activities include, but are not limited to

• Billing customers
• Keeping books and records
• Setting appointments
• Calling in orders
• Ordering supplies
• Writing reports

You may perform some of these activities at another location, but your home office must be the place where you perform “substantial” administrative or management activities.

Example: In a 2001 Circuit Court case, a violinist who regularly worked with recording studios and orchestras used her living room as a home office, in which she spent hours every day practicing. The court held that practicing was in fact necessary to her career and noted that she had no other office or practice location. It was also noted that to maintain her skills, the musician spent more time practicing than she did performing and recording. Therefore, a home office deduction was allowed for her practice space as it was considered her principal place of business.

For More Info

See IRS Publication 587, Business Use of Your Home.