Economic conditions often dictate that many of us work out or our homes. This creates an opportunity for a home office deduction which could reduce your tax burden if you qualify for it. Usually the home office deduction applies to self employed individuals. Here are some things to be aware of if you think you might be able to take a home office deduction:
The home office must be used in a trade or business activity. It must be used in operations which are intended to be profit making. Usually these operations would be reported on Schedule C or Schedule F of your federal tax return. You cannot take a home office deduction to manage your personal investments or finances.
The home office must be used regularly and exclusively for business. It must be in a separate room or space which is specifically identifiable. You cannot conduct any personal activities within that area. All activities must be business related. The equipment and computers located in that area must only be used for business purposes.
The home office must meet one of the following three qualifications:
1. Principal place of business. That means where nearly all business activity takes place or where the focus of your business activity occurs. It can also qualify as the principal place of business if you have no other fixed location where you conduct administrative activities; or
2. Meet with customers. Occasional meetings or phone calls is insufficient. It should be the place where a large portion of your contact with customers, clients, or patients takes place; or
3. Separate structure. If your home office is a separate structure not attached to your dwelling, it does not have to be the principal place of business or a place where you meet customers.
If you store inventory or product samples the storage space does not have to meet the exclusive use test to qualify for the home office deduction. If your home is used as a day care center, you do not have to meet the exclusive use test. If you are an employee, the home office must be for the convenience of the employer which generally means the employer does not have another place of business where the employee could have an office. If you are an employee the home office deduction is taken via form 2106 and would show up on your Schedule A as an itemized deduction subject to various limits.
Note that even if you qualify for the home office deduction, your deduction may be limited by a variety of factors. In particular it is limited to income from the business prior to the home office deduction.