What Are The IRS Regulations For a Home Office?

By David G Komatz

Having an office in your home can be a lucrative tax deduction if it is done right. What are the rules for having a home office for which you can create a deduction?

1. The part of your home you are claiming for a deduction must be used exclusively for the business.
2. The amount of the deduction should be based on the percent of your home used for the business.
3. If your office is for the benefit of an employer, the use must be for the convenience of your employer.

While these rules are general in nature, there are several other considerations. How much time are you spending in your office? Your home office must be used entirely and on a regular basis for organizational or management activities of your business and you must not have another permanent location to perform these same tasks.

What should you have in this office? This is really not a difficult question; however you might be surprised to see what some people have in their home office. The following types of furniture would typically be found in a home office:

1. Desk and chair
2. Filing cabinet
3. Computer and printer
4. Copy machine
5. Fax Machine
6. Business phone

There are some items that have been found in home offices which should not be there:

1. A bed
2. An exercise machine
3. A couch or sofa
4. A TV

Any items that would not be found in a typical office should not be found in this office. If you have these items there and you are audited, the IRS can disallow your deduction. At that point you will owe more taxes on the amount of your deduction. Since these audits do not typically occur right after you file your return, you can count on penalties and interest being added.

The best solution: keep items in your office that are found in most offices. Also, keep in mind, if you don't spend a substantial amount of time in your office (for instance you are a sales rep and only spend a few hours a week in your office), you should not take the deduction.

Several years ago I advised a tax client about the basics of a home office. This client spent a considerable amount of money creating one room in the home for an office. Unfortunately, the following year I advised the client not to take the deduction. Why? There was a case of a doctor who had a home office but since he did not spend a substantial amount of time in the office, and he also did not have another office, he lost the deduction. This client of mine was in a similar situation. Being a sales rep who spent most of the time on the road, the client would not meet the regular use test.

So, keep in mind, that in order to get this deduction, you must use the office regularly and spend much of your time in the office. If you are not, then don't consider the deduction at all. It is better to not take the deduction than to find out later through an audit that your deduction is disallowed.

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