Today, 52% of small businesses are home based. Working from home may entitle an owner to treat a portion of personal living expenses as a deductible business expense called a home office deduction.
There are certain misconceptions about this write-off that I hope to clear up:
Myth 1: Minimal personal use won’t disqualify a home office.
Reality: Even minimal personal use of space in a home prevents a deduction. The tax law requires that in order to claim a home office deduction, space must be used regularly and exclusively for business. Exclusive use means use solely for business; use for personal purposes, even one or two time during the year, fails the exclusive use test. So using a den/office a couple of times a year as a family room will prevent a home office deduction for that space.
However, as demonstrated in a recent Tax Court decision, mere nonbusiness passage by a family member, friend, or other nonbusiness person from one room to the next can be classified as a de minimis personal use of the room and will not disqualify the room from meeting the exclusivity test.
Myth 2: Occasional telework or after hours work creates a home office deduction.
Reality: The costs of home office are deductible only if the space is used as the taxpayer’s principal place of business or a place to meet and deal with customers or clients on a regular basis.
Many people spend hours working from home, but it doesn’t mean the costs of the space are tax deductible. Those who telework exclusively (i.e., there is no other fixed location for their work) may be able to take a home office deduction. If they are employees, working from home must be for the convenience of the employer and not merely a personal choice.
Myth 3: Claiming a home office deduction is a red flag for an audit.
Reality: There is no evidence that this deduction exposes a taxpayer to greater audit risk.
If you are entitled to a home office deduction because you meet all tax law requirements (e.g., you are a home-based freelancer who uses a space bedroom solely as an office), then take it.
Suggestion: It’s a good idea to photograph your workspace, just in case your home office deduction is questioned. In the case linked above, several photos showing that part of a room was used for business were considered “reliable evidence” of the business use.
Familiarize yourself with the home office deduction rules (they’re explained in Chapter 18 of J.K. Lasser’s Small Business Taxes 2011). When in doubt about your situation, consult with a tax advisor.