Deducting your home office
by Doug Florzak

Note: Although this information is as accurate as possible, please check with your accountant or other qualified professional for the most up-to-date information appropriate for your situation.

Although there has been a great deal of confusion and paranoia surrounding the home office deduction, you may decide it's appropriate to use it. Here are some considerations.

C corporations need not apply. Only sole proprietors filing IRS Schedule C and S corporations qualify for the home office deduction. C corporations do not qualify.

Basic requirements. IRS Publication 587 describes the requirements for deducting expenses related to the business use of part of your home. To qualify to claim expenses for the business use of your home, you must meet the following requirements:

Your use must be:

Exclusive. You must use a specific area of your home only for your trade or business. The area used for business can be a room or other separate space. The space does not need to be marked off by a permanent partition. You do not meet the requirements of the exclusive use test if you use the area in question for both business and personal purposes.

Regular. You must use a specific area of your home for business on a continuing basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose.

For your trade or business. You must use part of your 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.

In addition to all of the above criteria, the business part of your home must be one of the following:

• Your principal place of business for your trade or business, or
• A place of business where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
• A separate structure (not attached to your home) that you use in connection with your trade or business.

Use IRS Form 8829. This form, titled Expenses for Business Use of Your Home, steps you through the calculations necessary to establish the business use of your home. This form is required in conjunction with your  Schedule C or S corporation tax return.

Related deductions. Once you establish your qualifications for the home office deduction, you calculate your business percentage on Form 8829. You then use this business percentage to calculate deductions for items such as real estate taxes, deductible mortgage interest, casualty losses, rent, insurance, depreciation (if you own your home), repairs, security system, and utilities and services.

Selling your house. The biggest problem with the home office deduction is that when you sell your house you are liable to reimburse the IRS for the depreciation deduction you've taken while living in your home. Currently, the IRS sets the depreciation recapture tax at 25 percent of the total depreciation deduction you've taken all the years you've filed Form 8829. You report the depreciation recapture tax on Form 1040, Schedule D.