Home Office Deductions Essay

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Home Office Deductions

Cameron Gombatz
ACCT 4611
Dr. Hagen

Table of Contents

Introduction………………………………………………………………….…………………… 3

Requirements of a Home Office Deduction…………………………………………………….....3

Exclusive Use ……………………………………………………………………………..4

Principal Place of Business……………………………………………………………..…5

Convenience…………………………………………………………………………….....5

Commuting………………………………………………………………………...……………...6

Refurnishing………………………………………………………………………………………6

Approaches to Home Office Deductions………………………………………………………….7

The Safe Harbor Method………………………………………………………………………….8

Conclusion………………………………………………………………………………………...9

Bibliography…………………………………………………………………………………….11

Introduction Figuring out if you qualify for a home office deduction can be a challenge. Many people do not take advantage of home office deductions for a couple of reasons. First, they are blind to the fact that home office deductions even exist thus they do not deduct. Second, they are fearful of getting into trouble with the IRS by deducting something that does not meet the qualifications for a home office deduction, therefore they play it safe and do not deduct anything. The home office deduction was designed as a way to provide tax relief to individuals who use their home for business. People who use their home for business may able to deduct business expenses pertaining to the use of their home. Home office deductions are not made simply for homeowners, renters are also able to take advantage of this opportunity as well. There are many qualifications one must look at to determine is he/she is qualified for a home office deduction. This paper discusses the requirements, exceptions, rules, and deduction methods of home office deductions. A home office deduction can be a huge advantage to taxpayers who work from the home, it is just up to the taxpayer to know the law and elect if they are able to take advantage of the opportunity or not.

Requirements of a Home Office Deduction Deductions are generally reserved for “ordinary and necessary expenses incurred in conducting a trade or business,” deductions for personal living or family expenses are usually forbidden (Barnett). The exception is when a taxpayer’s home is also its functioning place of business. There are many requirements for a home office deduction but almost all of them can be broken down into three main categories: exclusive use, principal place of business, and convenience. According to the IRS exclusive use means that “you must use a specific area of your home only for your trade or business.” 1 This means that even though your home office may be your primary spot of business, if you use it personally it will not qualify for deductions. This provides an extra challenge for owners of small houses and renters because they must set aside a portion of their space that is strictly for use on business. There are two exceptions to the exclusive use test:
1. You use part of your home for the storage of inventory or product samples
2. You use part of your home as a daycare facility2
If your home office does not meet these two requirements then it must meet the exclusive use test. If you use your home for the storage of inventory or product samples as stated in exclusion #1 you must meet a different set of requirements for a deductions:
1. You sell products at wholesale or retail as your trade or business.
2. You keep inventory or product samples in your home for use in your trade or business.
3. Your home is the only fixed location of your trade or business.
4. You use the storage space on a regular basis
5. The space you use is a separately identifiable space suitable for storage.3
Only if your home office passes the exclusive use test, meets either of the exclusions of the exclusive use test, or meets one of the 5 other requirements may it be considered for deduction.
The next requirement your home office must meet to be considered for deduction is the
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