I am now using a converted bedroom in my house exclusively as my main office for my business. Can you please explain the tax rules and the benefits, if any, for having a home office?

Barry Dolowich for the Monterey Herald writes: Question: I am now using a converted bedroom in my house exclusively as my main office for my business. Can you please explain the tax rules and the benefits, if any, for having a home office?

Answer:  Home office expenses are generally deductible only if they meet the specific requirements provided in the Internal Revenue Code Section 280A. These requirements provide that a taxpayer must use a portion of their home on an exclusive and regular basis for business purposes. Additionally, a taxpayer's home office must meet any one of the following requirements to qualify for the home office deductions:

• The home office is the taxpayer's principal place of business;

• The home office is a place of business that is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of business; or

• The home office is used in connection with a taxpayer's trade or business, and is a separate structure that is not attached to the dwelling unit.

The Taxpayer Relief Act of 1997 expanded the definition of "principal place of business" for tax years beginning after 1998 to include a home office that:

1. Is used exclusively and regularly by the taxpayer to conduct administrative or management activities of a trade or business.

2. Is the only fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.

To qualify as the taxpayer's principal place of business, the home office must pass both a "relative importance" and a "time test." According to the IRS, the relative importance test will be applied first to determine the importance of the activities performed at the home office relative to those performed at other locations. For example, a doctor who performs all his administrative duties from his sole office at home may be allowed to deduct his home office expenses even if he sees and treats his patients outside the office (at hospitals, clinics, their homes, etc.).

After the taxpayer first passes the relative importance test, he must then show that more time is spent at the home office than at any other location in order to be allowed the home office deduction (hence, the time test).

A taxpayer qualifying for a home office deduction should be aware that there are specific guidelines that must be followed when computing deductible home office expenses. Expenses need to be segregated between direct and indirect, and then must be classified within three specific tiers to determine the order of deductibility. Of primary importance is that a taxpayer's deductions attributable to a home office are limited to the taxpayer's gross income from qualified uses of the home office. Home office expenses disallowed one year because of this gross income limitation may be carried forward for use in subsequent years. In subsequent years, these expenses once again are subject to the gross income limitation.

Effective in 2013, taxpayers can now choose an optional safe harbor method to calculate their home office deduction. Under this method, a taxpayer may claim a home office deduction equal to $5 times the number of square feet of the home office (subject to inflation). However, no more than 300 square feet may be taken into account, limiting the safe-harbor deduction to $1,500 for 2013. The deduction may also not exceed the taxpayer's gross income from the business.

Due to the complexity of the requirements and calculations to achieve the home office deductions, I strongly recommend that you consult with your tax advisor.