I
am about to do my taxes for the year and would like to
take the home office deduction. I use my spare bedroom
to run a part-time business. Would I qualify?
Probably
not. A few years back, the IRS greatly tightened the rules
surrounding the home office deduction and as a result,
it is now much more difficult to take that deduction.
First,
some good news: Under IRS regulations, "home" is construed
liberally. According to the IRS, a home could be a house,
condo, houseboat, mobile home, or apartment.
For
example, when I first decided to advertise my law firm
on the radio, I wasn't sure which station to use. I called
one that I thought would be good and the advertising rep
asked me the same question - who are my customers? I didn't
really know. So I sat down with all of my cases from the
year before and realized that my clients were, mostly,
men and women in their late 30's through mid 50's. The
station I had called catered to a completely different
demographic than that. I then looked for stations whose
listeners fit my client profile and ended up successfully
advertising on a rock 'n roll oldies station. So you have
to do something similar. Once you have an idea as to whom
you are looking to attract, you can earmark your marketing
money much more wisely and specifically.
But
no matter where you live, the bad news is that before
you can deduct expenses for using part of your home in
a business, you must meet two stringent requirements.
The first requirement is that you must "regularly use
part of your home exclusively for a trade or business."
The first part of that sentence - regular use - is normally
not a problem for most taxpayers to meet. As long as you
are using part of your home for business on a continuing,
rather than haphazard, basis, you qualify. A few hours
a day a few days a week would likely be good enough.
The
problem you would have, along with many other people,
relates to the exclusivity part of that sentence. Exclusive
means just that - exclusive. If you use the room for any
other purpose, as a spare bedroom for example, you would
not qualify for the home office deduction. Any personal,
non-business use, would disqualify you.
For
example, say that Ryan has a basement that he uses to
run his e-commerce web site. If he hosted a poker game
in that room once a month, Ryan would not technically
qualify for the home office deduction.
The
second requirement is that your home be the principal
place for your business, or that you meet patients, clients
or customers there, or that you use a separate structure
on your property exclusively for business purposes. Let's
look at each of those:
1.
Principal place of business. If yours
is solely a home-based business, you would qualify. But
if, say, you sell doodads at the swap meet every weekend,
your home might not be your principal place of business,
and you then wouldn't qualify for the home office deduction.
The key question to ask yourself is whether your home
is the main place where you conduct business.
2. Meeting Customers at Home. Even if
your home is not your principal place of business, you
may still be permitted to qualify for the home office
deduction if you regularly use part of your home to meet
with clients, customers or patients. You need not meet
with them every day; even once a week is adequate.
For example, say that Jamie meets her public relations
clients in her office every Friday, and works the rest
of the week in an executive suite in town. Because she
regularly meets clients at home, she could legally take
the home-office deduction, even though her suite office
is her principal place of business.
3. Using a Separate Building. Assume
that Leo converted his detached garage into an art studio
that he uses to paint pictures that he sells on consignment.
Leo would qualify for the deduction, even if his home
is not his principal place of business, and even if he
doesn't meet customers there. As long as the separate
structure is used only for his business, he meets this
requirement.
