Tax-Payers often get confused with the various terms used relating to Home Office Deductions. Following are the explanations for some important terms used as per IRS guides. This is only for reference purpose and not meant to replace professional advice, in case of any confusion.
Home: The term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. However, it DOES NOT include any part of your property used exclusively as a hotel, motel, inn, or similar establishment.
Important Terms for Home Office Deduction
Exclusive Use: To qualify under the exclusive use test, you must use a SPECIFIC AREA of your home ONLY FOR YOUR TRADE OR BUSINESS. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.
You DO NOT meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Example: You are an attorney and use a den in your home to write legal briefs and prepare clients’ tax returns. Your family also uses the den for recreation. The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den.
Trade or Business Use: To qualify under the trade-or-business-use test, you must use part of your home in connection with a trade or business. If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use.
Example: You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. You do not make investments as a broker or dealer. So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home.
Separate Structure: You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of busi-ness or a place where you meet patients, clients, or customers.
Example: John Berry operates a floral shop in town. He grows the plants for his shop in a greenhouse behind his home. He uses the greenhouse exclusively and regu-larly in his business, so he can deduct the expenses for its use (subject to certain limitations, explained later).