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The requirements and benefits of the home office

Small business owners may qualify for a home office deduction that will help them save money on their taxes.

Most people are aware that they can deduct some of their home expenditures when claiming the business use of the home.  However, many people are unaware of one particular tax benefit that an office in the home provides.  If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business.  (See Pub.  587) If you don’t claim an office in your home, some of your work mileage will be considered commuting mileage, which is nondeductible.  When you have an office in your home, all of your work-related mileage is tax-deductible.  The additional business mileage can have a significant impact on saving taxes.

Taxpayers can take this deduction if they use a portion of their home exclusively, and on a regular basis, for any of the following:

  • As the taxpayer’s main place of business.
  • As a place of business where the taxpayer meets patients, clients, or customers.  The taxpayer must meet these people in the normal course of business.

If it is a separate structure that is not attached to the taxpayer’s home, the taxpayer must use this structure in connection with their business:

  • A place where the taxpayer stores inventory or samples.  This place must be the sole, fixed location of their business.
  • Under certain circumstances, the structure where the taxpayer provides daycare services.
  • Deductible expenses for business use of a home include property taxes, mortgage interest, rent, utilities, insurance, depreciation, repairs and maintenance, and casualty losses.

Certain expenses are limited to the net profit of the business.  These are known as allocable expenses.  They include things such as utilities, insurance, and depreciation.  Allocable expenses cannot create a business loss.  However, they can be carried forward to the next year.  If the taxpayer carries them forward, the expenses are subject to the same limitation rules.

There are two options for figuring and claiming the home office deduction:

  • Regular method.  This method requires dividing the above expenses of operating the home between personal and business use.  Self-employed taxpayers compute this deduction on Form 8829.
  • Simplified method.  The simplified method reduces the paperwork and recordkeeping for small businesses.  The simplified method has a set rate of $5 a square foot for business use of the home.  The maximum deduction allowed is based on up to 300 square feet.

There are special rules for certain business owners:

  • Daycare providers complete a special worksheet, which can be found in Publication 587.
  • Self-employed individuals use Form 8829 to claim the deduction.
  • Farmers frequently overlook this deduction.  Farmers claim this deduction on Schedule F, Line 32.

Although the business use of home increases the chance of an audit, I have not noticed an audit increase during my years of practice.

David Zubler is a tax accountant in East Tennessee, the author of four books, and a philanthropist.  All of his proceeds from the books go to a charitable foundation he created for underprivileged children.  He is also the founder of Your Tax Care which provides tax education. David can be reached for questions and consultation at yourtaxcare.com.