Home Office Deduction Reminders
FS-2006-25, September 2006
Overstated adjustments, deductions, exemptions and credits account for up to $30 billion per year in unpaid taxes,
according to IRS estimates.
In order to educate taxpayers regarding their filing obligations, this fact sheet, the fourth in a series, explains the
rules for deducting home office expenses.
Home Office Deduction: Basic Requirements
Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence may not be
deducted as a business expense. However, taxpayers who use a portion of their home for business purposes may
be able to take a home office deduction if they meet certain requirements. Expenses that may be deducted include
the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and
depreciation. Note: The amount of depreciation deducted, or that could have been deducted, decreases the basis
of your property.
In order to claim a deduction for that part of a home used for business, taxpayers must use that part of the home:
• Exclusively and regularly as their principal place of business, as a place to meet or deal with patients, clients or
customers in the normal course of their business, or in connection with their trade or business where there is a
separate structure not attached to the home; or
• On a regular basis for certain storage use such as inventory or product samples, as rental property, or as a
home daycare facility.
In addition, taxpayers working as employees can claim this deduction only if the regular and exclusive business use
of the home is for the convenience of their employer and the portion of the home is not rented by the employer.
“Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the
area is used regularly for trade or business. Incidental or occasional business use is not regular use.
Non-business profit-seeking endeavors such as investment activities do not qualify for a home office deduction,
nor do not-for-profit activities such as hobbies.
Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also
uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction
cannot be claimed for its use.
These requirements are discussed in greater detail in Publication 587, Business Use of Your Home.
Computing the Amount of Home Office Deduction
Generally, the amount of the deduction depends on the percentage of the home that is used for business. The
deduction will be limited if gross income from the business is less than the total business expenses.
A taxpayer can use any reasonable method to compute business percentage, but the most common methods are
• Divide the area of the home used for business by the total area of the home, or
• Divide the number of rooms used for business by the total number of rooms in the home if all rooms in the home
are about the same size.
Taxpayers may not deduct expenses for any portion of the year during which there was no business use of the
home. If the gross income from business use of the home is less than the total business expenses, the deduction
for certain expenses is limited. Publication 587 includes examples, worksheets and additional information on
computing the allowable deduction.
Personal Expenses Are Not Business Expenses
It is important for taxpayers to realize that business expenses may be deducted only if they are ordinary and
necessary for the particular type of business. Personal, family and living expenses are not deductible under any
circumstances. A common error is to deduct expenses for a portion of the home that is not used regularly and
exclusively for business.
Example: The basic local telephone service charge, including taxes, for the first telephone line into a home is a
nondeductible personal expense. However, charges for business long-distance phone calls on that line, as well as
the cost of a second line into a home used exclusively for business, are deductible business expenses.
The IRS encourages taxpayers to familiarize themselves with the requirements before taking a home office
deduction and to keep complete and accurate records to substantiate deductions. According to IRS research,
understated business income, including underreported receipts and overstated expenses, is an area where
compliance is a concern. In addition to increasing outreach and education in these areas, the IRS will also be
focusing enforcement efforts, including examinations, on these issues.
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