It can be challenging to determine allowable deductions for a home office. Following is a summary of key IRS provisions.
Internal Revenue Code Section 280A
IRC Section 280A includes the rules for home office deductions. A freelancer who works from home, for instance, must pass three tests in order to claim home office deductions:
- The space must be dedicated exclusively for business work
- The space must be used on a regular basis for work
- The portion of the home claimed must be the principal place of business
When these three tests are met, otherwise nondeductible personal expenditures—a portion of everything from home insurance premiums and repairs, to utility bills, to depreciation if the home is owned or a percentage of rent—can become deductible business expenses.
'Exclusively' means just that
The area claimed, whether that is a single desk in one corner of a bedroom or an entire room, must be used for business reasons only. All home office deductions are disallowed if the space is used for family-related or personal activities.
It is helpful if the space claimed is closed off from all nonbusiness activities, or is just a small part of a room, as long as the business portion is physically separated from the rest of the room by a partition or something similar.
IRS examiners might require proof that absolutely zero personal activities take place within the business area. This can be challenging when freelancers take deductions for offices housed in cramped quarters, such as studio apartments.
The rules are strict. Introducing a television into the space can raise questions, though a possible exception might be made if it can be proved there is a business-related need for it. The space claimed as a home office cannot also be where children play video games or younger family members do their homework on personal computers. Even a closet filled with clothes could be problematic.
IRS examiners are mostly reasonable
Not all personal activities are forbidden. For instance, it is reasonable that an office phone or computer is used for personal conversations in the home office.
How the IRS defines 'regularly'
Section 280A sets no arbitrary standards for how often the home office is used to pass the regular-use test. Decisions will be based on the particular circumstances.
In most cases, deductions won't be challenged if the office space is used for a couple of hours per day for several days every week. However, the examiners probably will challenge claims if those couple of hours of use are spread over one week.
The business doesn't need to be full time
The business can be a part-time endeavor, as in a situation where a freelance writer moonlights from home while having a full-time job elsewhere.
'Principal place of business' has its own meaning
The home office must be the principal place of business. The home office must be the place in which meetings with clients or customers occur, and phone calls don't count. Another possibility is that the home office is the only fixed location where the business's key administrative or management activities are conducted. The IRS makes an important exception, though—as long as the regularity and exclusivity tests are met. The deduction remains available if (1) administrative or management activities are carried out from, say, a hotel room or car while traveling, or (2) occasional paperwork or administrative tasks are conducted at a fixed location other than the home.
If you need guidance regarding the IRS rules for home office deductions, contact your R&A professional. We can help.