Business Deductions

Quick Links

Hot Topics

Paychex Payroll Services: Sign up Today!

Need Some Deductions for 2011?

Don't overlook these!

10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Small Business Deductions: Home Office Deduction

<< Previous

Qualifying for the Home Office Deduction

Only one of the following two tests must be met to qualify for the home office deduction:

You use space in your home regularly and exclusively as either:

  1. Your principal place of business for any trade or business in which you engage, or
  2. A place to meet or deal with patients, clients, or customers in the normal course of your trade or business.

The key is:

This means, if you use a corner of your bedroom as your office space, say to do your bookkeeping and paperwork, you MUST NOT use that space for anything else at any time.

For example, if an IRS auditor discovers that you use your office computer to play computer games, you'll have a problem.

By the way, it is not necessary to have a partition between your office space and the rest of the room as long as the space is being used exclusively as your office.

Principal Place of Business Test

Your principal place of business is generally the location where you spend most of your working time and earn most of your business income.

However, the administrative and management rule (covered next) gets around this requirement; it allows people who earn most of their business income outside of their homes to qualify for the home office deduction.

For example, self-employed electricians and plumbers who do their work in other people's homes benefit from this rule.

Administrative and Management Rule

Your home office will meet the principal place of business test and qualify for the home office deduction even if you don't spend most of your working time there or generate most of your business income from that location providing:

Examples of administrative and management activities:

A home office meets the principal place of business test if:

  1. You use your home office to conduct administrative or management activities of a trade or business, and
  2. You have no other fixed location where you do a substantial amount of administrative or management activities.
    • However, certain activities performed outside your home will not disqualify you from meeting Test 2. (See Allowable outside activities, next.)

Historical Note -

The Administrative and Management Rule:

Passage of the Tax Relief Act of 1997 overturned the more stringent requirement, set by the U.S. Supreme Court, regarding what constituted a principal place of business.

Prior to the 1997 act, for a self-employed person's home office to be considered his/her principal place of business...

  • most of his/her time had to be spent there, and
  • most of his/her business income had to be generated from that location.

This requirement prevented millions of self-employed individuals, such as electricians, plumbers, painters, and outside sales persons, who spent most of their time outside the home but performed administrative activities in their homes, such as bookkeeping, recordkeeping, appointment setting, invoicing customers/clients, preparation of financial statements, etc.

Now, a home office may qualify as the principal place of business even if is only used to perform administrative or management activities. Once in while, the government gets it right!

Next:

Home Office Deduction: Using Outside Services; Employees With a Sideline Business; Deducting Storage Space for Business Products; Setting Up Your Home Office; Separate Business Structure

Next >>