Home Business Tax Deductions

Home based businesses can be an effective tax shelter. If you use a room or other space as an office in your home your home business tax deductions allow you to expense items such as utilities, insurance, repairs, and depreciation allocated to your business use of the given area. If you have a home business you may also be able to deduct business vacations, cars, and meals with colleagues as deductions as well.

Home Business Definition

Per IRS Publication 587, “Business Use of Your Home”, the IRS term “home” includes a house, apartment, condominium, mobile home, or boat. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. It does not include any part of your property used exclusively as a hotel or inn.

Note that if you think the IRS will not come to your house to examine your office to determine if you are actually using a portion of your home exclusively for business, think again! An IRS agent may pay you a visit if you claim home business tax deductions. Although the odds are small, it’s best that you remove all personal items OUT of the home office area. Don’t play games on your computer, get rid of all books and literature not related to your business, and remove all non-essential furniture (couch, futon, etc..). When in doubt, place all non business related items in another room.

Home Business Tax Deductions IRS Requirements

To qualify to claim expenses for the business use of your home you must meet each of the following tests:

      1. Exclusive Use for Home Business
      2. Regular Use – You must use a specific area of your home for business on a continuing basis, not from time to time as you please.
      3. For your trade or business – You must use part of you home in connection with a trade or business. If you use your home for a profit seeking activity that is not a trade or business, you cannot take a deduction for its business use.

      Home Business Example: If you carry out investment activities related to your own investments, you cannot take the deduction for the business use of you home because you don’t make investments as a broker or dealer.

The business part of you home must be one of the following:

      1. Principal Place of Business
      2. A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
      3. A separate structure (not attached to your home) you use in connection with your trade or business

Note that if you are an employee and you use part of your home for business, you may qualify for a deduction for the business use of your home if you meet the tests above plus:

      1. Your business use must be for the convenience of your employer. This means that your employer does not provide you with a place to work. So, if you are an employee and could do work at the employer’s office but decide to work at home because it is convenient for you, you do not qualify for a home business deduction.
      2. You do not rent any part of your home to your employer and use the rented portion to perform services as an employee.

If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

More Than One Home Business

If you use a home office for more than one business, “Multiple Business Use of a Home Office”, you need to make sure that the home office tests are met for all businesses. If one business use qualifies and another business use does not, the IRS will disallow home business tax deductions including the qualifying one.

To learn about the “Business Use of Home” rule, click here.

Home Business Tax Deductions

To learn more about home business expenses that are deductible, visit our home business expenses examples page.

Business Percentage of Home Business Use

If you qualify for the home business tax deductions you will need to determine how much you can deduct. You must figure the percentage of your home used for business.

Learn about determining the business percentage use of your home here.

Net Income Limitation for Home Business Tax Deductions

If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.

Learn more about the Home Business Deduction Limit here.

Part-Year Use

Home business tax deductions are not allowed for expenses for the business use of your home incurred during any part of the year you did not use your home for business purposes. For example, if you begin using part of your home for business on July 1, and you meet all the tests from that date until the end of the year, consider only your expenses for the last half of the year in figuring your allowable deduction.

Separate Structure

You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers.

Home Business Tax Deductions Example: Karl Eggertsen operates a floral shop in Valencia, California. He grows the plants for his shop in a greenhouse behind his home. He uses the greenhouse exclusively and regularly in his business, so he can deduct the expenses for its use, subject to the deduction limit.

Home Business Tax Deductions – Daycare facility

If you use space in your home on a regular basis for providing daycare, you may be able to deduct the business expenses for that part of your home even though you use the same space for non-business purposes.

Learn all about the Home daycare facility tax deduction here.