1. The area in your home being utilized as an office must be used regularly and exclusively for business reasons. You cannot mix uses in the office. In other words, you cannot store personal items or use the area from time to time to entertain guests. It must be dedicated solely to use as a business office.
In addition, it must qualify as one of the following:
a. Your principal place of business
b. A location where you meet and handle business with customers or patients
c. Be a completely separate building which is not attached to the house which is your home
Only one of these criteria need apply for the office to qualify for the deduction.
2. If you store inventory, parts or samples of product in your home or if your home is a day care facility, the office does not need to meet the criteria listed under item 1.
If your home office qualifies for the deduction, you may be able to include part of the cost of renting or owning the home. Some of the possible items that could be deductible include rent, mortgage interest, real estate taxes and utilities. The amount of the deduction is usually determined based on what percentage of the home is occupied by the office. In addition, the amount of the deduction allowed may be reduced or limited if your gross income as a result of the use of your home as an office is less than the total sum of your business-related expenses.
We recommend being very careful with this deduction because of the high level of scrutiny by the IRS. If you qualify for the deduction, take it. If you don’t it’s not worth the possible repercussions. The requirements are fairly clear but if you have questions, be sure to ask a tax professional for guidance.