If you use a portion of your home exclusively and regularly for the use of a business, you may be eligible to claim the home office business deduction on schedule A, C, or F. Whether you are employed or self-employed, the real question lies in whether your home office is your principal place of business.
If your home office qualifies as your principal place of business it is the primary place where your trade or business is conducted or where you meet with patients or clients in the regular course of your business. It may also qualify if it is regularly and exclusively used for administrative or management activities associated with your business. Activities that may be considered administrative are bookkeeping, billing, ordering supplies, scheduling appointments, and similar activities. Your home office must be the only place where such activities are completed. However, if you set up a home office for this exact purpose, it may be a beneficial way to take advantage of the home office deduction.
You may also claim a portion of your home for this purpose if it is used for storing inventory or product samples. However, for this purpose, your home must be the only fixed location of your business and your business must be selling retail or wholesale products. Otherwise, storing inventory would not be necessary. The “reasonable and necessary” test is one often applied to tax issues. If a question arises about the deductibility of an expense, asking whether the expense is reasonable and necessary in the regular course of business is a good way to determine if a deduction should be taken.
There are also special allowances for your home if it is used as a daycare facility on a regular basis. To qualify for this aspect of the deduction, your business must be a licensed or certified daycare facility. With this exception, areas that are used for personal and business uses may still be deductible even though the area is not “exclusive”.
For years, the home office business deduction was considered a red flag to the Internal Revenue Service and would cause further scrutiny of your return. However, this is no longer necessarily the case. As long as you are diligent in complying with all of the tax regulations, you should have nothing to worry about. Nevertheless, it is a good idea to read publication 4035, Home-Based Business Tax Avoidance Schemes, to be sure you are not crossing a line with your home office or other home business deductions. It is important that you not claim personal expenses as business expenses or inflate your expenses to lessen your tax burden. This is one of the primary reasons home-based businesses once received scrutiny.
If you are self-employed, you would claim the home office business deduction on schedule C; however, if you are employed, schedule A should be used as an employment expense. If your home office is used for the purpose of a farm, schedule F would be used.