Qualifying for the Business Use of Home Deduction

Whether you are a business owner using home as your work space, an employee who works from home or someone who sees and serves clients at home, you may qualify for the business use of home deduction. It’s one of the deductions many home-based businesses forget about or simply don’t take the trouble to claim, as the IRS regulations can be complex and difficult to interpret. But no worries, our Maryland tax preparation specialists are here to tell you everything you need to know about qualifying for the business use of home deduction.

What is the purpose of this deduction?

Business use of home deduction offers partial relief for such home maintenance expenses as mortgage interest, utilities, real estate taxes, depreciation, insurance, etc. However, you must first show that a part of your home is being used to run your business.

What is considered a home?

For the purposes of this deduction, a home is defined as a house, apartment, condo, studio, detached garage, barn, motor home and similar structures that offer “basic living accommodations.” Even though you don’t technically live in a barn or a greenhouse, these separate structures may still qualify for the deduction if you use them exclusively to run a part of your business, such as growing plants for sale in your greenhouse. However, if you use a part of your home exclusively to sell lodging, i.e. as a motel or inn, these establishments are not included in the definition of a home.

Exclusive Use and Regular Use

When it comes to the business use of home, the IRS has two rules. The exclusive use rule means that a part of your home is used only for business and nothing else. So if you work from your family room where your son watches TV, this doesn’t qualify. There are a few exceptions to the exclusive rule requirement, which we will discuss later.

The regular use rule means that a part of your house has to be used for business regularly. The IRS doesn’t specifically define “regularly,” so use your best judgment or consult with your Maryland tax preparation expert.

What is considered business or trade use?

The IRS has identified several ways in which a home can be considered to be used for business purposes. If you meet one or more of these criteria, you may qualify for certain deductions.

Principal Place of Business

Part of your home must be used exclusively and regularly as a “principal place of business.” This means that out of all the places where you conduct business, your home should be the main one. To determine this, compare how much you contribute to your businesses at home versus other places (if there are other places). This should include both the type of work you do and the amount of time you spend.

For example, your home office will be considered a principal place of business if you use it consistently and only for management and administration of your business. And there is no other place where you do this type of work.

Place Where You Meet Clients

If you don’t administer your business from your home, but rather use your home to see clients or patients, it may still qualify as business use. However, a part of your home must be exclusively dedicated to seeing clients on a regular basis. If you are a lawyer, doctor, dentist or a similar professional who sees clients in your home, you likely qualify for this deduction.

Storage Use

If you use a part of your home to store inventory for shipping or manufacturing, it may qualify for the deduction. In this case you don’t have to meet the “exclusive use” requirement, but your home must be the only fixed location for your business.

Rental Use

If you rent your primary residence out, you may also qualify for deductions. There are many laws and IRS regulations pertaining to residential rental properties. Take a look at the IRS Publication 527 that talks about it in detail.

Daycare Facility

Daycare facilities, whether they are for children or the elderly, also don’t have to meet the exclusive use requirement. However, your daycare business has to be licensed or exempt from licensing that pertains to your industry.

By now, you probably get an idea whether you qualify for the business use of home deduction or not. It’s best to speak with your accountant or tax preparation expert to know for sure. Calculating this deduction is a whole other story and can be difficult and time-consuming without professional help. Feel free to give The CFO source a call if you have any questions! For more information, check out the official publication from the IRS.