Home Offices
If you operate a business out of your home, you may be able to claim a home office deduction.
A home office will qualify as your "principal place of business" if the following conditions are met:
- You use the office to conduct administrative or management activities for the business, and
- There is no other fixed location at which you conduct these activities.
The home office space must be used regularly and exclusively for business. Any personal use of the area will make you ineligible for the deduction. Also, if you're an employee, the exclusive use of the home office must be for the convenience of your employer.
You may deduct a percentage of your homeowner's insurance, home repairs, and utilities equal to the percentage of space the office occupies. Plus, you can deduct all improvements to the office if they relate to the conduct of business.
If you own your home, you can depreciate the portion you use for business; and if you rent, you can deduct a portion of your rent. The amount you deduct cannot be more than the income you receive from the business, but excess deductions can be carried forward. You may also deduct the portion of your home used on a regular basis to store inventory or product samples.
The IRS often audits individuals who take the deduction, so make sure you have documentation supporting your deductions. When you sell your home, ordinary income gain is recognized to the extent of depreciation taken after May 6, 1997, and will be taxed in the year of the sale. However, any appreciation gain (in excess of the depreciation amount) on the office portion of your home is eligible for the home sale exclusion. |
