Six Questions to Determine Taking the Home Office Deduction

Is your home office used in a trade or business activity?
You cannot take a deduction if you use your home for a profit-seeking activity that is not a trade or business. For example, if you use part of your home to manage your personal investments, you cannot take a home-office deduction 

Do you regularly use your home office exclusively for business?
You must regularly use a room or other separately identifiable area of your home only for your business. You do not meet this requirement if you use the area for both business and personal purposes. For example, an attorney who writes legal briefs at the kitchen table cannot claim a home-office deduction.

You do not have to meet the exclusive use test if you use part of your home to store inventory or product samples or as a day-care facility.

Is your home your principal place of business?
If you conduct business at more than one location, you determine your principal place of business based on the relative importance of the activities performed at each location, or the time spent at each location. Your home office also will qualify as your principal place of business if you use it regularly for administrative activities and you have no other fixed location where you conduct substantial administrative activities.

Is your home used as a place to meet with patients, clients or customers in the normal course of your business?
Doctors, attorneys and other professionals who maintain offices in their homes will generally meet this requirement. Using your home for occasional meetings and telephone calls is not sufficient. However, the part of your home you use exclusively and regularly to meet patients, clients or customers does not have to be your principal place of business.

Is the portion of your home used for business activities a separate structure not attached to the dwelling unit?
You can deduct expenses for a separate free-standing structure, such as a studio, garage or barn. The structure does not have to be your principal place of business or a place where you meet patients, clients or customers. For example, John operates a floral shop in town. He grows the plants in a greenhouse behind his home. Since he uses the greenhouse exclusively and regularly in his business, he can deduct the expenses for its use.

If you are an employee, do you use your home office for the convenience of your employer?
Whether your home’s business use is for your employer’s convenience is a factual question.  Consider the following example: As a teacher, Kathleen is required to teach and meet with students at the school and to grade papers and tests. The school provides her with a small office where she can work on her lesson plans, grade papers and tests, and meet with parents and students. The school does not require her to work at home. Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. She uses this home office exclusively and regularly for the administrative duties of her teaching job. Because her employer provides her with an office and does not require her to work at home, she does not meet the convenience-of-the-employer test and cannot claim a home office deduction.

 –AICPA Tax Insider October 18, 2011