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Tax Topics - Topic 509 Business Use of Home

Tax Topics - Topic 509 Business Use of Home Topic 509 - Business Use of Home Whether you are self-employed or are an employee, you may be ableto deduct certain expenses for the part of your home you use for businessdespite the general denial of business expense deductions for thehome. To deduct expenses for business use of the home, part of your homemust be used as one of the following: Exclusively and regularly as your principal place of businessfor your trade or businessExclusively and regularly as a place where you meet and deal withyour patients, clients, or customers in the normal course of yourtrade or business; orA separate structure used exclusively and regularly in connectionwith your trade or business that is not attached to your homeOn a regular basis for certain storage useFor rental useAs a daycare facility When the exclusive-use requirement applies, you cannot deduct businessexpenses for any part of your home that you use for both personaland business purposes. For example, if you are an attorney and usethe den of your home to write legal briefs and for personal purposes,you may not deduct any business use of your home expenses. Further,under the principal place of business test, you must determine thatyour home is the principal place of your trade or business after consideringwhere your most important activities are performed and most of yourtime is spent, in order to deduct expenses for the business use ofyour home. Additionally, a portion of your home may qualify as yourprincipal place of business if you use it for the administrative ormanagement activities of your trade or business and you have no otherfixed location where you conduct substantial administrative and managementactivities for that trade or business. An employee may only deductbusiness use of the home expenses when the business part of the homeis used regularly and exclusively and for the employer's convenience. Deductions also may be taken for business storage purposes whenthe dwelling unit is the sole fixed location of the business or forregular use of a residence for the provision of day care services;exclusive use is not required in these cases. For more information,see Publication 587, Business Use of Your Home. Deductible expenses for business use of your home include the businessportion of real estate taxes, mortgage interest, rent, casualty losses,utilities, insurance, depreciation, maintenance, and repairs. Youmay not deduct expenses for lawn care in general or for painting aroom not used for business. Historically, the business use of home deduction has been computedby allocating the total expenses of the home to the percentage ofthe home used for business. Typically, this is done by floor space,but qualified daycare providers who do not use their home exclusivelyfor business purposes must also figure the percentage based on theamount of time the applicable portion of the home is used for business.For self-employed taxpayers filing Form 1040, Schedule C (PDF), Profit or Loss From Business (Sole Proprietorship) this deduction is first computed on Form 8829 (PDF), Expenses for Business Use of Your Home. While the deduction can still be computed in the same manner asbefore, many taxpayers may find a new optional safe harbor methodless burdensome. Beginning in 2013, Revenue Procedure2013-13 allows qualifying taxpayers to use a prescribed rate of$5 per square foot of the portion of the home

used for business (upto a maximum of 300 square feet) to compute the business use of homededuction. Under this safe harbor method, depreciation is treatedas zero and the deduction is claimed directly on Form 1040, ScheduleC; Form 8829 is not used. Instead, two entries will be made directlyon the Schedule C for the square footage of the home and square footageof the office which the taxpayer completes indicating their electionto use the safe harbor option. Deductions attributable to the homethat are otherwise allowable without regard to business use (suchas qualified residence interest, property taxes and casualty losses)are allowed in full on Form 1040, Schedule A (PDF), Itemized Deductions, as they areunder the regular method. For more information, see Home Office Deduction and Simplified Option for Home Office Deduction. Regardless of the method used to compute the deduction, you maynot deduct business expenses in excess of the gross income limitation.Under the regular method for computing the deduction, you may be ableto carry forward some of these business expenses to the next year,subject to the gross income limitation for that year. However, underthe safe harbor method there is no carryover provision, but you mayelect in and out of the safe harbor method in any given year. If you are in the farming business or are an employee, use theworksheet in Publication 587, Business Use of Your Home, (including use by daycare providers) to figure your deduction.As an employee, you must itemize deductions on Form 1040, Schedule A (PDF) to claim expenses forthe business use of your home. Farmers claim their expenses on Form 1040, Schedule F (PDF). Publication 587 has detailed information on rulesfor the business use of your home, including how to determine if yourhome office qualifies as your principal place of business.