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Rules for Home Office Deduction for Businesses

Posted By Jim On 10/16/2006 @ 3:07 pm In Business,Government,Taxes | 12 Comments

One of the things I’ve learned when running a business is that you should try to take all the business deductions you can and the one that has always scared many business owners is that of the home office. The rules behind taking a home office deduction is quite simple since there are only two but since many folks skirt the line between an official home office and a pseudo home office, they haven’t taken it for fear of an audit. Luckily, the house I own has a whole bunch of rooms that I can’t possibly be utilized at 100% – so my home office really is a home office.

How Do You Qualify For The Deduction?

Essentially there are two tests you must pass for your home office to actually count as a home office:

1. You must use your home office regularly and exclusively for business

In order to take the full deduction, the office itself must be entirely used for business and nothing else. Now, the office can be an area so you can deduct 50% of your family room if half of it is business and half is pleasure. For me, one of the bedrooms in my house is entirely used for business so I can deduct that area but the closet has some of my clothes so that part isn’t deductible (I won’t include it).

2. Your home office must be your principal place of business

To qualify as a principal place of business, you must do the most important part of your work in that office OR you must do your administrative or management activities in that office AND you can’t perform those admin and management activities in another office. For me, I do 90% of my blog writing at home and all of my administrative activities here since my books reside locally on this computer.

How Do You Calculate The Deduction?

Again, there are two methods for calculating the deduction but any “reasonable method” will suffice. I recommend that you go with the percentage use method: measure the square footage of the home office area and divide by the total square footage of your home. Why that one and not the percentage based on the number of rooms? Publication 587 [3] explicitly spells out the percentage rule (page 25) I just explained so it’s a “safer” bet.

How Much Of A Deduction Can You Get?

Here’s the fun part… you can deduct a whole bunch of stuff (whatever percentage you calculated above) like mortgage interest to real estate taxes (jackpot!). Everything is pretty self-explanatory and explained on Form 8829 Expenses for Business Use of Your Home in plain English. There’s another deduction for depreciation of your home but I’ll go into that in another post as it gets pretty involved.

Please let me know if I got anything wrong or I misinterpreted something. As with everything I write, especially when it deals with taxes and the government, be sure to consult with a professional before you do something stupid like listen to me.


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[3] Publication 587: http://www.irs.gov/pub/irs-pdf/p587.pdf

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