Many people whose small businesses qualify them
for a home office deduction are afraid to take it because they've heard it will trigger an audit. But if you
deserve it, take advantage. These tips can help you determine if you qualify and rest easy when you do.
Take the deduction, carefully
Will a home office deduction trigger an audit? The answer is generally "no." Changes in the rules in the
late 1990s made it easier for people who work out of their homes to qualify for these write-offs. So if you
qualify, by all means, take it.
Generally speaking, to qualify for the home office deduction,
- Exclusive and regular use: You must use a portion of your home exclusively and
regularly for your business.
- Principal place of business: Your home office must be either the principal location of
that business, or a place where you regularly meet with customers or clients.
- Exceptions: Some exceptions to these rules, such as for daycare and storage facilities,
are discussed below.
The biggest roadblock to qualifying for these deductions is that you must use a portion of your home
exclusively and regularly for your business.
- The office is generally in a separate room or group of rooms.
The office can also be a section of a room if the division is clear—thanks to a partition, perhaps—and
you can show that personal activities are excluded from the business section.
The law is clear and the IRS is serious about the exclusive-use requirement. Say you set aside a room in
your home for a full-time business and you work in it ten hours a day, seven days a week. Let your children
use the office to do their homework, though, and you violate the exclusive-use requirement and forfeit the
The exclusive-use rule doesn’t mean:
- You’re forbidden to make a personal phone call from the office.
- You have to rush outside whenever a family member needs a moment of your time.
Although individual IRS auditors may be more or less strict on this point, some advisors say you meet the
spirit of the exclusive-use test as long as personal activities invade the home office no more than they
would be permitted at an office building. (Two exceptions to the exclusive-use test are discussed
There’s no specific definition of what constitutes regular use.
Clearly, if you use an otherwise empty room only occasionally and its use is incidental to your
business, you’d fail this test.
- If you work in the home office a few hours or so each day, you’d probably pass.
- This test is applied to the facts and circumstances of each case the IRS challenges.
Principal place of business
In addition to passing the exclusive- and regular-use tests, your home office must be either,
- the principal location of that business, or
- a place where you regularly meet with customers or clients.
If your home office is in a separate, unattached structure—a loft over a detached garage, for example—you
don’t have to meet the principal-place-of-business or the deal-with-customers test. As long as you pass the
exclusive- and regular-use tests, you can qualify for home business write-offs.
What if your business has just one office—in your home—but you do most of your work elsewhere?
First, remember that the requirement is that the office be the principal place of business, not your
As long as you at least use the home office to conduct your administrative or management chores and you
don’t make substantial use of any other fixed location to conduct those tasks, you can pass this test.
If you are an employee of another company but also have your own part-time business based in your home,
you can pass this test even if you spend much more time at the office where you work as an employee.
This rule makes it much easier to claim home office deductions for individuals who conduct most of their
income-earning activities somewhere else (such as outside salespersons, tradespeople, or professionals).
What qualifies as a business?
There is the question of what constitutes a business. As with the regular-use test, whether
home-office deductions qualify as a business
depends on the circumstances - the more substantial the activities, in terms of time and
effort invested and income generated, the more likely you are to pass the test.
Making money from your efforts is a prerequisite, but for purposes of this ta`x break, profit alone isn’t
If you use your den solely to take care of your personal investment portfolio, you can’t claim home
office deductions because your activities as an investor don’t qualify as a business.
Taxpayers who use a home office exclusively to actively manage several
they own, though, may qualify for home office tax status—as property managers rather than
Day care facilities and storage
The exclusive-use test does not apply if you use part of your house:
- To provide day care services for children, the elderly or handicapped individuals. If
you care for children in your home between 7 a.m. and 6 p.m. each day, for example, you can use that part
of the house for personal activities the rest of the time and still claim business deductions. To qualify
for the tax break, your day care business must meet any applicable state and local licensing requirements.
- To store product samples or inventory you sell in your business. Assume your home-based
business is the retail sale of home-cleaning products and that you regularly use half of your basement to
store inventory. Occasionally using that part of the basement to store personal items would not cancel
your home office deduction. To qualify for this exception, your home must be the only location of your
Calculating the home office business deduction
Your home office business deductions are based on the percentage of your home used for the business or a
simplified square footage calculation.
Business percentage of house method:
The most exact way to figure this proportion is to measure the square footage devoted to your home office
and find what percentage it is of the total area of your home.
If the office measures 150 square feet, for example, and the total area of the house is 1,200 square
feet, your business percentage would be 12.5%
- 150 square feet ÷ 1,200 square feet = 0.125 (12.5%)
An easier way is acceptable if the rooms in your home are all about the same size. In that case, you can
figure the business percentage by dividing the number of rooms used in your business by the total number
of rooms in the house.
Special rules apply if you qualify for home office deductions under the day care exception to the
Your business-use percentage must be discounted because the space is available for personal use part of
To do that, you compare the number of hours the day care business is operated, including preparation and
cleanup time, to the total number of hours in the year (8,760).
Assume you use 40% of your house for a day care business that operates 12 hours a day, five days a week for
50 weeks of the year.
- 12 hours x 5 days x 50 weeks = 3,000 hours per year
- 3,000 hours ÷ 8,760 total hours in the year = 0.34 (34%) of available hours
34% of available hours x 40% of the house used for business = 13.6% business write-off percentage.
Simplified square footage method:
Beginning with 2013 tax returns, the IRS began offering a simplified option for claiming the deduction.
This new method uses a prescribed rate multiplied by the allowable square footage used in the home.
- For 2018, the prescribed rate is $5 per square foot with a maximum of 300 square feet.
- If the office measures 150 square feet, for example, then the deduction would be $750 (150 x $5).
- The space must still be dedicated to the business activity as described above.
NOTE: With either method, the qualification for the home office deduction is determined each year.
So you might qualify one year and not the next, or vice versa.
If you are eligible for home office deductions, the tax savings can be well worth the additional work
required to qualify.
Here are some examples of key home office deductions using the percentage of your home method:
Money spent to repair or maintain the business space is deductible.
- If you paint the room that is your home office, for example, the entire cost can be deducted.
Although no part of the cost of the first telephone line in your home can be deducted, the full cost of
a special line for your business can be deducted.
- Other direct expenses—such as the cost of long distance business calls—can be written off, as well.
Because part of your home qualifies as business property, part of the costs of running it can be converted
from non-deductible personal expenses to business write-offs
If your office space takes up 20% of the house, you can deduct 20% of your:
- bills for utilities,
- homeowners insurance,
- homeowners association fees,
- security, and
- general repairs and maintenance.
Interest and property taxes
Mortgage interest and property taxes are deductible expenses if you qualify for home office deductions.
As with indirect expenses, you convert part of those expenses from personal itemized deductions to
Because business expenses reduce self-employment income, they can also trim what you owe in Social
Deducting rent, or depreciating
If you rent the home where your office is located, this computation is easy:
You deduct the same percentage of your rent as the percentage of your home devoted to your business.
If you own your home, you depreciate the business part of the house.
Figuring the right amount to deduct can be complicated, but you only have to do it once; then you’ll enjoy
the savings year after year.
If you include home depreciation as part of the home office deduction and eventually sell your home at a
profit, you will have to pay a
capital gains tax
on the total amount of depreciation deductions you took while you were living there,
assuming you sold the home for a profit.
Limit on write-offs - the law puts a cap on how much you can deduct for the business use of the home.
Basically, your home office deductions can’t exceed your home-based business income. In other words, home
office expenses can’t create a tax loss to
shelter other income
The bottom line
- The home office deduction is not a red flag for an IRS audit.
- Whether you qualify for this deduction is determined each year.
- Deducting a home office is treated differently depending on your business type.
The simplified method can make it easier for you to claim the deduction but might not provide you with