Whether you are self-employed or an employee of a company, there is the possibility that you can take deductions when using a part of your home to work. The Internal Revenue Service (IRS) has guidelines for qualifying and requirements to meet in order to deduct some specific expenses. To understand better the full benefits of home office tax deductions read IRS Publication 587 titled Business Use of Your Home.

According to the IRS a “home” is defined as a house, an apartment, a condominium, a mobile home, a boat, or a similar property, which is used to provide basic living accommodations. In addition, it can include structures not attached to the main home like a garage, studio, barn, or greenhouse.

Who Is Qualified to Deduct?

There are tests to take in order to determine if a taxpayer is eligible to deduct expenses. See IRS Publication 587 to determine eligibility. In order to deduct expenses for using part of the residence as a home office, the following criteria must be met:

- The home office must be exclusively used for work.

- The home office must be used regularly as a place of business; not necessarily full time.

- The home must be exclusively and regularly a place to meet with patients, clients, or customers in the course of business.

- The home office can only be claimed if the space is used as a convenience of the employer, not the employee.

Figure out the Business Percentage

Only the area that is actually used as a home office is eligible to be considered for deductions on taxes. First, it must be determined what percentage of the home is exclusively used for the business. Only a portion of the expense can be used as a home-office deduction. This is decided based upon size.

- Example: If a room that is 300 square feet (15 feet x 20 feet) is used exclusively for business in an apartment that is 1,500 square feet, then 20% (300 ÷ 1500) of the total expenses for the whole apartment can be deducted.

- Example: If half of a room that is 400 square feet (20 feet x 20 feet) is used exclusively for business and the other half is used as a hobby room for kids, in a house that is 2,000 square feet, then 10% (400 ÷ 2/2000) of the total expenses for the whole house can be deducted.

If the garage, basement, or attic is used to store inventory, it can be considered as home-office space. However, the entire garage, basement, or attic cannot be included; only the portion of the space that is used as storage is eligible. To figure out the boundaries of “home office space” versus “personal living space,” use duct tape to partition the “business” section of the garage, basement, or attic. This will prepare the taxpayer in the event of an audit.

What Can Be Deducted?

- Real estate taxes

- Qualified mortgage insurance premiums

- Deductible mortgage interest

- Casualty losses

- Depreciation of home

- Insurance

- Rent

- Repairs

- Security System

- Utilities and services

Recordkeeping

Keep canceled checks, receipts, and other documents that support expenses for the business use of the home. Keep records for three years from the return due date or the date filed; or for two years after the tax was paid.

Here are some records to keep:

- Copies of Form 1098 showing the interest paid on the mortgage each year

- Property tax bills

- Utility and insurance bills

- A copy of the lease (if renting)

- Documentation for any other expenses you deduct

Depreciating the Home

If the taxpayer qualifies and owns their home, then a deduction can be claimed for depreciation. In order to figure out depreciation, you need to know the following information:

1. The month and year the home was initially used as a home office.
2. The adjusted basis and fair market value of the home when it was first used as a home office.
3. The cost of any improvements for both before and after the home was used as a home office.
4. The percentage of the home used as a home office.

More Tips

- If the taxpayer meets all the criteria, then deductions must be itemized in order to take a home-office tax benefit.

- Fill out IRS Form 8829 titled Expenses for Business Use of Your Home

- Read IRS Instructions for Form 8829 to learn how to fill out the form.

- To learn more about this type of taxpayer deduction, read Topic 509 - Business Use of Home at the IRS Web site.