Home Office Deduction
Your tax preparer is trained to prepare your taxes in your best interest. This means that he/she will look for any and every deduction and credits you may qualify for under the IRS tax code. If you are self-employed and you work from home, your tax preparer will inform you that you may be eligible to deduct your home office space in your tax return. Your tax preparer will probably also remind you that you are only eligible to deduct the space if it is exclusively and regularly used for business.
If you don’t know what the rules for an eligible home office are and you don’t follow the rule for the entire year, you might be disappointed at the end of the year when your tax preparer informs you that you cannot deduct your home office and you will be stuck with the loss of an entire year.
So why would that happen?
The IRS is a stickler about those two little words: exclusively and regularly.
Exclusively means that the space cannot be used for anything other than the business. This means that you cannot even pay personal bills from this space. The only exceptions to this rule are daycare facilities and use of home for inventory storage.
Regularly means that this space is used on the daily basis for your business. Incidental or occasional business uses do not qualify as regular use.
One other major rule is that the space is your “principal place of business.” In 1993 in the case of Soliman vs. Commissioner, the Supreme Court found that though Dr. Soliman saw patients at home, the home office was not his “principal place of business,” which made him ineligible to deduct the home space expense. In order for a home space to be considered as the “principal place of business” it must be "the place where the taxpayer performs his most important, income-generating function." In Soliman’s case, he saw patients in the hospital as well as at home and the court found that seeing patients at home was not a necessary function for generation of income for him.
In preparing your taxes, make sure that a deduction is legally allowed on your return. The IRS has long pages of guidelines for each line of deduction. Consult with your tax preparer at the start of your business about strategizing for appropriate deductions.
You can read more about IRS home office rules here.