Tax Tips
Business Use of the Home - Part I - July 2000
Richard Scrivanich - Partner
Recent tax law changes have made using your home office as a place of business easier, but this area of the tax law can be confusing for many people. Here are answers to the most common questions regarding business use of your home.
Q: I have heard you can claim a deduction for the business use of your home. How do you know whether you qualify?
A: You can claim the deduction for the portion of your home you use for business, but you must meet the following two tests:
- Your use of the business part of your home must be:
- Exclusive (there are exceptions to this rule),
- Regular, and
- For your trade or business;
and
- The business part of your home must be one of the following:
- Your principal place of business,
- A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
- A separate structure (not attached to your home) you use in connection with your trade or business.
Q: I work for a company and sometimes use my home for my employer's business. Can I claim a deduction?
A: If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed previously, plus:
- Your business use must be at the convenience of your employer, and
- You do not rent all or part of your home to your employer and use the rented portion to perform services as an employee.
Whether you home's business use is for your employer's convenience depends on all the facts and circumstances. However, business use is not considered to be for your employer's convenience just because it is appropriate or helpful.
Q: The test says the use of the business part of your home must be "exclusive." How does the IRS define "exclusive"?
A: To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. The test is not met if you use the area both for business and for personal purposes.
Example: You are an attorney and use a den in your home to write legal briefs and prepare client tax returns. Your family also uses the den to watch TV. Since the den is not used exclusively in your profession, you cannot claim a business deduction for its use.
Q: Are there exceptions this exclusive use rule?
A: Yes. You don't have to meet the exclusive use test if:
- You use part of your home for the storage of inventory or product samples, or
- You use part of your home as a day-care facility.
When you do use part of your home for the storage of inventory or product samples, the exclusive test does not apply. However, you must meet all the following five tests:
- You keep the inventory or product samples for use in your trade or business.
- Your trade or business is the wholesale or retail selling of products.
- Your home is the only fixed location of your trade or business.
- You use the storage space on a regular basis.
- The space you use is an identifiably separate space suitable for storage.
Example: Your home is the sole fixed location of your business of selling mechanics' tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.
Q: What else do you need to do to qualify?
A: To qualify, you must also pass the other two parts of the use test, that is, a portion of the home must be used regularly and for trade or business. Under the regular use criteria, you must use a specific area of your home for business on a continuous basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose.
To qualify under the trade or business use criterion, you must use part of your home in connection with a trade or business. If you use your home for a profit-seeking activity that is not a trade or business, you can't take a deduction for its business use.
Example: You use part of your home exclusively and regularly to read financial periodicals and reports, and you carry out similar activities related to your own investments. You don't make investments as a broker or dealer. Since your activities are not part of a trade or business, you can't take a deduction for the business use of your home.
Q: I meet those three parts of the test. Do I qualify for the deduction?
A: Not necessarily. You must still meet the second part of the test. If you do, then you can take the deduction. In the second part of the test, your home must meet one of three criteria listed previously. The first criterion is that your home is your principal place of business. Beginning in 1999, a new definition of principal place of business applies. Your home office qualifies if:
- You use it exclusively and regularly for the administrative or management activities of your trade or business, and
- You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
To determine your principal place of business, you must consider all of the facts and circumstances. If, after considering your business locations, you can't identify one as your principal place of business, you can't deduct home office expenses. The two primary factors to consider are the relative importance of the activities performed at each location, and the time spent at each location.
Example 1: John Stone is a self-employed plumber. His only office is a room in his home that he uses regularly and exclusively to phone customer, order supplies, and review books of the business. He also employs a full-time administrative assistant to answer phone, do bookkeeping, etc. John spends 40 hours a week at clients' homes and 10 hours a week in his office. His home office activities, though essential, are less important and take less time than the work he does at his clients' homes. Therefore, his home office is not his principal place of business.
Example 2: Sarah James is a sales person. She makes most of her sales to customers by telephone or mail from her home office. She spends an average of 30 hours a week in her office and 12 hours a week visiting potential customers and making deliveries. The essence of Sarah's business requires her to make telephone or mail contact mainly from her office, which is in her home. Visits to customers actually are less important; therefore, she can deduct the expenses for the business use of her home.
Q: I don't meet the "principal place of business" criterion. Is there another option?
A: Yes. If you meet or deal with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if:
- You physically meet with patients, clients or customers on your premises, and
- Their use of your home is substantial and integral to the conduct of your business.
Using your home for occasional meetings and telephone calls won't qualify you, but doctors, dentists, attorney, and other professionals who maintain offices in their homes to meet patients or clients generally will qualify under this criterion.
Example: June Quinn, an attorney, works three days a week in her city office. She works two days a week in her home office, which is used only for business. She regularly meets clients there. Her home office qualifies for a business deduction because she meets clients there in the normal course of her business.
Q: I don't meet either the "principal place of business" or the "place to meet clients" criteria. Is there any way to still qualify?
A: Yes. You must meet the third criterion of having a separate structure on your home premises dedicated for business. You can deduct expenses for a separate freestanding structure such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or a place where you meet clients, customers, or patients.
Example: Chris Berry operates a floral shop in town. He grows plants for his shop in a greenhouse behind his home. Since he uses the greenhouse exclusively and regularly in his business, he can deduct the expenses for its use, subject to a deduction limit.
In summary, to qualify for the deduction for the business use of your home, you must meet a two-part test. The first part has three criteria, that is, the use must be exclusive, regular, and for your trade or business. The second part of the test requires you to meet only one of the following criteria: The business part of your home must be 1) your principal place of business, 2) a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or 3) a separate structure (not attached to your home) you use in connection with your trade or business.
In next month's tax tips, we'll take a look at figuring the deduction and the deduction limit. In the meantime, however, if you have any questions, please feel free to call me at (562) 698-9891.
Return to Tax Tips Archives
All rights reserved. For personal use only.
Do not duplicate or distribute without permission. All information in this
article is for informational purposes only.
Some of the articles included here were written in a prior
year or before a current tax law change. Therefore some of the information in
the older articles may not still be valid. Any dollar thresholds indicated
relate only to the year for which the article was written and could be different
for the current year. Please discuss with us your personal situation before
acting on any of the information provided. If you have any questions,
please give us a call at (562) 698-9891.
|
