Home Office Tax Deduction

You may deduct expenses if you use your home for business purposes regularly and exclusively

• as the principal place of business,
• as a place to meet or deal with clients in the normal course of the business, or
• in connection with the business if it is a separate structure not attached to your personal residence.

Regular use means an office used on a continuing basis. Occasional or incidental business use of your office does not meet the regular- use test even if the office is not used for any other purpose.

Exclusive use means a specific part of your home is used for business purposes only. Two exceptions to this rule involve the following:

1. Storage of inventory if
   1. inventory and product samples are stored for the business,
   2. the business is a wholesale or retail business,
   3. the home is the only fixed location of the business,
   4. the storage space is used on a regular basis, and
   5. the space used is separately identifiable space suitable for storage.
2. Day-care facility. A taxpayer operating a day-care service out of his or her home may deduct a portion of the dwelling as an office even if the area used for the day-care center is not set aside exclusively for the business. A room, for example, can be a living room at night and a day-care playroom by day. The day-care center must be operated as a full-time business, not an occasional one. A school cannot be run under the cloak of a day-care center the services must be primarily custodial.

Home office costs are deductible only to the extent of net income from the business activity. Telephone charges above basic service (i.e., toll calls and additional extensions related to business) are deductible. Deductions that are disallowed because they are in excess of net income can be carried forward. Home office users should save their receipts and other records indefinitely.

Concerning employee use, home office deductions for employees (or outside salespersons) are affected by the 2 percent floor on miscellaneous itemized deductions.