Does my Home Office Qualify for a Tax Deduction?

in Tax Deductions


The rise of the Internet has resulted in a boom of home businesses, usually based on some sort of Internet related activity. At the same time there has been a proliferation of outfits promoting what the Internal Revenue Service (IRS) defines as “abusive home-based business tax schemes” or schemes that sell the notion that by claiming a home-based business you can then write off many of your regular household expenses as business expenses. This is most assuredly not the case and since these schemes have become so prevalent, the IRS is now aggressively auditing and investigating business deductions based on home business expenses.

The basic guidelines for the tax treatment of your home-based business are given in IRS Publication 587 (online at: This document, coupled to an extent with IRS Publication 334 (the Tax Guide for Small Business) should provide you with the information you need to differentiate between legitimately deductible business expenses and non-deductible household expenses. The first section of IRS Publication 587 provides a comprehensive list of requirements that have to be met in order to qualify for a home-based business deduction and they are comprehensive. Just as an example, the area defined as the business area has to pass the “exclusive use test”, meaning that the area set aside for your home office has to be used exclusively for this purpose and cannot be used by either yourself or other members of the household for any other purpose.

Further, even if your home office meets all the initial qualifying tests, the possible deduction may be only partial in nature. Contrary to the claims of some of the online promoters of abusive tax schemes, there is no way to claim your home mortgage payments or whole utility bill as a business deduction if you live in the home in question. IRS Publication 587 provides a simple to follow flow chart (Figure A) that can walk you, step-by-step, through the various tests for qualification; but even if you do qualify it does not mean that the whole expense can be written deducted. One of the examples given in the publication specifically notes that if one room of your house is used for the business and otherwise qualifies and your house has ten rooms, then you can only claim ten percent of the household expenses as a deduction.

The IRS is actively pursuing abusive home-based business tax schemes today and regardless of the advice you received from some online promoter, it is you – not the promoter – that will be held liable for making false claims on your business return. In that the IRS is actively campaigning to stamp out this form of tax evasion, the penalties can be quite high and egregious abuse may even result in criminal prosecution and imprisonment. Therefore it is a good idea to study the relevant IRS publications as opposed to the claims made by promoters before deciding whether or not to attempt to claim deductions based on your home business. Further, as the IRS is actively pursing this matter, even if all of your deductions are completely legal and correct, just filing them significantly increases your chances of being audited.

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