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Home Office Deduction

In using this flow chart to determine whether you qualify for a home office deduction, keep the following in mind:

• If you are an employee, you will only be allowed a home office deduction if you maintain the office for your employer’s convenience, not for your own convenience. For instance, if you have an office available to you at your employer’s physical location but you choose to work at home some days because it is a long commute, your home office would not be deductible because it is for your convenience. But if your employer doesn’t provide physical office space for you, then your home office would be deductible because it is for their convenience.

• Your office space within your home must be regularly and exclusively used for business. There are a few things to note out of this:
o You don’t need to have a whole room devoted to business use. It can be a portion of a room that can be clearly identified, for example, a 5’ x 5’ area with a desk in the corner of your living room can qualify as a home office if it meets all the tests.
o Regular use is not completely defined, but this test will generally only be problematic if you have a different place of business that you use more often than your home office. For instance, if you are a real estate agent who has an office at your brokerage’s location but you also occasionally use your home office for business, you will probably not meet the regular use test.
o The issue of exclusive use is what generally trips up taxpayers that have their home office deduction denied by the IRS or the courts. If the space has a bed or a TV, the IRS is probably going to assert that there is not exclusive use of the space for business, and you would have to prove them wrong.

• The space needs to be either your principal place of business or a place where you meet patients, clients or customers. For the principal place of business requirement, you will meet this test if you use the space regularly and exclusively for administrative/management activities (e.g. keeping the books, doing billing, setting appointments) and you have no other fixed location where you do these activities. For example, a handyman with just his home office and various customer job sites has no fixed location other than his home office, so, as long as he meets the regular and exclusive use tests, his home office will be considered his principal place of business and he will be allowed a deduction.