When Work at Home Yields Tax Deductions

Robert W. Wood for Forbes writes You sometimes work at home, but should you claim a deduction on your taxes? People worry it will flag their return, yet more than half of working Americans own or work for a small business. Many are home-based or have home offices. Some businesses go virtual and recruit home-based employees.

But no matter how much you work at home, do you qualify for a deduction? Starting with 2013 tax returns filed in 2014, the IRS is easing some home office deductions. See IRS simplifies the home-office deduction, for 2013. In the meantime, Section 280A(c) of the tax code is strict.

To qualify, a home office must be used regularlyand exclusively for business. You can’t use your home office as a family room and you shouldn’t have a TV or chess table in the corner. It sounds silly, but taxpayers lose over such details. In Bulas v. Commissioner, an accountant claimed one room—plus an adjacent hallway and bathroom—was exclusively business. But because his children occasionally used the bathroom, it wasn’t exclusively business.

In addition, the deduction is limited to income from the business. If you run a home-based eBaybusiness from a spare room off your garage–and you don’t use that room for anything else–you could deduct the cost of utilities attributable to that space. You could even depreciate that portion of your home. But if you lose money on your eBay venture before you get to your home office deduction you don’t qualify. See Tax Tip 2011-53.

Home office deductions involve filling out a 43-line form (Form 8829) with complex allocations of expenses, depreciation and carryovers of unused deductions. You generally must use part of your home exclusively and regularly:

• As your principal place of business;
• As a place to meet or deal with patients, clients or customers in the normal course of your business; or
• If the business portion of your home is a separate structure not attached to your home, then “in connection with your trade or business” (a more watered-down standard).
• Other deduction possibilities include certain storage use, rental use, or daycare-facility use. In these cases, you must use the property regularly for business, but not exclusively for business.
• If you are an employee, the regular and exclusive business use must be for the convenience of your employer.  That usually means the employer must require you to work at home (get it in writing).

A section of a room can qualify if it is clearly partitioned and you can show personal activities are excluded from the business portion. Still, these rules are unforgiving and the IRS tends to interpret them strictly.