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Tuesday's Tax Tip: Deducting Your Home Office

Posted by Gayle Kesten Tuesday, Mar 4, 2008, 11:11 AM ET

I have a huge bedroom, thanks to my home's previous owners, who converted two smaller rooms into a master suite. (OK, the term "master suite" may be stretch, but, trust me, it's a big room.) So when I started to work from home full-time, it was the natural candidate to house my office.

I know that breaks all the rules of a bedroom being one's sanctuary, but that's the way it goes. For tax purposes, though, it makes things a little more complicated than having a room devoted for the sole purpose of an office.

In determining whether you qualify for a tax break, the IRS has two measures: exclusive use and regular use. Straight from the IRS' Publication 587 handbook (PDF):

  • 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.

  • To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use. You must consider all facts and circumstances in determining whether your use is on a regular basis.

    Which one you qualify for is a question for an accountant. But the good news, at least in my case, is a portion of a room used for business is kosher to claim. According to Bankrate.com, to figure out how much to deduct: Measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses -- rent, mortgage, insurance, electricity, etc.-- that you can claim.

    Interestingly, an article on CBS' Real Small Business site says if you plan to move, you might not want to deduct your home office: If you run a business at home and take the home office deduction, you have turned part of your house into a business property. When you sell you will have to pay tax on at least some of the depreciation you've taken on the portion of the house the IRS now considers a business.

    If you work from home, how have you handled the deduction? Any auditing horror stories to share? Better yet, share you tips below.

    Previous Tuesday's Tax Tips:

  • Overlooked Deductions

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