Home business tax deductions

Whether you own your home or rent it, you may be able to deduct a portion of the costs of your home if you use it for business. This is so for both employees and self-employed individuals. However, the law is very strict on what constitutes business use of a home.

First, you must use the portion of your home exclusively and regularly for business. Then you must meet one of three tests. The home office must be:

• Your principal place of business,
• A place to meet or deal with patients, clients, or customers in the normal course of your business, or
• A separate structure (not attached to your house or residence) that is used in connection with your business.

Exclusively and Regularly

Exclusive use of a home office means that it is used solely for your business activities and not for personal purposes, including investment activities. If you have a spare bedroom or a den that you have equipped with a computer, telephone, and perhaps a fax/modem, you cannot meet the exclusive use test for a home office if you also use that room as a guest room or family den.

The exclusive use test does not require you to set aside an entire room for business purposes. You can meet this test if you clearly delineate a portion of a room for business. It must be a separately identifiable space. However, you need not mark off this separate area by a permanent partition to satisfy the separately identifiable space requirement.

There are two important exceptions to the exclusive use requirement:

• daycare facility and
• storage space.

The home office must also be used on a regular basis for your business activity. This determination is based on all the facts and circumstances. Occasional or incidental use of a home office will not satisfy this requirement, even if such space is used exclusively for business purposes.