In addition to using part of your home regularly and exclusively for a business, your home must be your "principal place of business." If you conduct your business only from home, then you meet this requirement. But if you have more than one business location (including your home) for a single trade or business, you must determine whether your home is your principal place of business for that enterprise.
Your home automatically qualifies as your principal place of business if both of the following are true:
- You conduct the administrative or management activities of your business from home.
- You have no other fixed location where you conduct those activities.
In other words, your home doesn't have to be the place where you generate most of your business income. It's enough that you regularly use it for tasks such as keeping your books, scheduling appointments, doing research, and ordering supplies. As long as you have no other fixed location where you do these things -- for example, an outside office -- you should be able to take the deduction.
Alternatives to principal place of business rule. Even if your home is not your principal place of business or you have another location, there are two other ways to fulfill the principal place of business requirement:
- You meet clients or customers at home. If you regularly use part of your home to meet with clients, customers, or patients, you may qualify for the deduction. Doing so even one or two days a week is probably sufficient. You can use the business space for other business purposes, too -- doing bookkeeping, for example, or other business paperwork -- but you'll lose the deduction if you use the space for personal purposes, such as watching videos.
Keep records. Maintain an appointment book in which you carefully note the name of the client or customer and the date and time of each meeting at your home. Save these books for at least three years. These logs will document your business use of your home if your tax return is audited by the IRS.
- You use a separate building for your business. You can deduct expenses for a separate, freestanding structure that you use regularly and exclusively for your business. This might be a studio or a converted garage or barn, for example. The structure doesn't have to be your principal place of business or a place where you meet patients, clients or customers. But be sure you use the structure only for your business: You can't store garden supplies there or use it for the monthly meeting of a club.
How to Claim the Home Office Deduction
If you qualify for the home office deduction, you must figure the amount of your deduction on IRS Form 8829, Expenses for Business Use of Your Home. (You can find this and other tax forms at the IRS website, www.irs.gov.) Then you enter the total amount of the deduction on Schedule C, Profit or Loss from Business. Attach both Form 8829 and Schedule C to your Form 1040 tax return.
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.
For more information on the home office deduction as well as many other deductions for small business owners should take, see Home Business Tax Deductions: Keep What You Earn, by Stephen Fishman (Nolo).
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