More on the Home Office Tax Deduction

Written by Nickel - 5 Comments

The other day I wrote a bit about the home office tax deduction, and today I thought I’d expand on it a bit by talking about ‘regular and exclusive’ usage, as well as how you can substantiate your claim to the IRS…

What constitutes regular and exclusive usage?

Regular use. The IRS doesn’t offer a clear definition of regular use — only that you must use a part of your home for business on a continuing basis, not just for occasional or incidental business. You can probably meet this test by working a couple of days a week from home, or a few hours each day.

Exclusive use. Exclusive use means that you use a portion of your home only for business. If you use a room of your home for your business and also for personal purposes, you don’t meet the exclusive use test. However, you can set aside a portion of a larger room to be used only for business, as long as your personal activities don’t stray into it.

How do I substantiate my claim?

Be ready to prove to the IRS that you are entitled to take the home office deduction. Here are some steps you can take to help establish your legal right to deduct home office expenses:

– Photograph your home office and draw a diagram showing the location of the office in your home. Keep this information in your tax folder.
– Have your business mail sent to your home.
– Use your home address on your business cards and stationery and in all business ads.
– Get a separate phone line for the business.
– Have clients or customers visit your home office and keep a log of those visits.
– Keep track of the time you spend working at home.

[Source: Nolo.com]

Published on May 26th, 2006 - 5 Comments
Filed under: Taxes, Working
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

Comments (scroll down to add your own):

Before you start taking deductions for a home office, you should look into the real estate rules.

It is my understanding that when you sell the house, a larger percentage of the price goes to taxes because of the deductions for office deductions.

They always get thiers somehow!!!
Comment by Charles — May 26th 2006 @ 8:23 pm
Planning to sell your home sooner rather than later?
Before you claim an office-in-home deduction, consider when you plan to sell your home.

The sale of your personal residence is usually not taxable. However, by claiming an office-in-home deduction, you’ve turned a portion of your home into business property. The sale of business property is taxable.

To determine whether a house is your personal residence, the IRS asks whether you lived in the home for two of the last five years. If so, you can use the special rules for sale of personal residence. To avoid being taxed on any portion of your gain on the sale, you generally should not claim the office-in-home deduction for two full years before you sell the house.
Comment by Charles — May 26th 2006 @ 8:45 pm
Still one of the best tax write-offs there is. If you have any type of home business, it’s certainly worth taking the time to study up and qualify for all the tax incentives that come with a home business.
Comment by SavingAdvice — May 29th 2006 @ 3:06 am
Hi fivecentsnickel,

I talked to one of my friends who has a pretty big tax accounting business about taking home office deduction. He advised me not to take that for the following reasons:
1. You will need to RE-capture for all of the depreciation that you have taken on your own home when you sell.
2. Currently, tax laws already allowed most of the deductions for the home (such as property tax & mortgage interest) even if you don’t deduct those thru home office deductions.
3. I am pretty sure that home office deductions are limited to your business earnings. That means that if you don’t earn as much as your home office deductions, you can’t take advantage of it. I think it’s in schedule C.

Boy, I should probably have a post for this. Or you can research this further, and write a post for it. But in any case, I want to get all of these info to you, before you start to do it. Maybe I’m wrong because it has been a little while.

Best luck.
Comment by frugal — May 30th 2006 @ 7:02 pm

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