At TeachUcomp, we offer CPE courses which qualify for CPE credits for CPAs and Enrolled Agents. These courses can be great for satisfying CPE requirements, or just for reminders about changing regulations. These courses are also valuable for anyone who wants to learn more about tax code. In this post, we will discuss qualifications for business use of the home.
When we think about a person using his or her home for business, most of us imagine someone sitting behind a desk in a home office. However, taxpayers are using their homes for business in a wide variety of ways. In fact, a home doesn’t just mean a freestanding house in a traditional neighborhood. The IRS defines a “home” as a house; apartment; condominium; mobile home; boat; or any similar property which provides basic living accommodations.
A home can also include separate freestanding structures on the property, like unattached garages; studios; barns; greenhouses; or other “outbuildings.” For tax purposes, however, a home does not include any of the taxpayer’s property which is being used exclusively as a hotel, motel, inn, or similar establishment.
The IRS has established several different tests that must be met in order for a taxpayer to take a deduction related to business use of his or her home. Before attempting to calculate a business deduction for use of the home, a taxpayer must be very sure that he or she meets the tests required to take such a deduction. Over the next few lessons, we’ll examine the tests which determine whether or not a taxpayer may qualify for a deduction related to business use of the home.
The Exclusive Use Test
The exclusive use test simply means that a taxpayer must use a specific area of the home only for his or her business. The space in which the taxpayer works does not have to be a separate floor or room in the home. In fact, the work space does not even need to be marked off by a permanent partition. The space must, however, be used exclusively for work.
Let’s look at an example. Say that Jerry works as a freelance writer. He and three friends rent a big, cool loft space in the city. They have an open floor plan with no walls. Let’s say that Jerry puts together a home office for himself, where he works on his writing. In order for Jerry to meet the exclusive use test, two things have to be true: First, nobody but Jerry can use the office space. Second, Jerry can only use the space to work on his writing business. If Jerry plays video games or watches movies on the computer when he’s not writing, then Jerry’s home office will not meet the exclusive use test.
The Principal Place of Business Test
To qualify to deduct the expenses for the business use of the home under the principal place of business test, the taxpayer’s home must be his or her principal place of business.
It is not necessary for the home workspace to be the only place that the taxpayer does business; but the home must be the principal place of business. To determine whether or not he or she meets this test, a taxpayer should consider both the relative importance of the work being done at each place where business is performed, as well as the amount of time spent at each place. For example, a self-employed land surveyor might spend a lot of time at different outdoor sites, taking measurements and such; and then spend an equal amount of time in a home office writing reports based on the data taken.
A taxpayer will be considered to have met the principal place of business test if both of the following are true: First, the taxpayer uses the home workspace exclusively and regularly for administrative or management activities for the business; and second, the taxpayer has no other fixed location where he or she conducts substantial administrative or managerial activities of the business.
Administrative activities include things like billing customers, managing books, record keeping, ordering supplies, keeping a schedule and making appointments, writing reports, and so forth. It is important to note, however, that paying an outside company or individual to perform these tasks will not disqualify a taxpayer from considering his or her home work space as the principal place of business.
*Tax code and tax laws can be very complicated. TeachUcomp urges anyone with questions to talk to someone certified in these areas (CPA, attorney, etc).
**Learn about these topics and more in our tutorial: Business Use of the Home.