Tax Article - General Exception for Certain Business Use of Home

Taxpayers may deduct home business expenses, which may include such items as a portion of utility bills, mortgage interest, repairs, and depreciation, subject to the gross income limitation, in which the taxpayer uses both exclusively and regularly. Qualified business activities must be used exclusively and regularly for business and:

(i) be the principal place of business;
(ii) be used to personally meet or deal with patients, clients, or customers in the normal course of business

One must be able to establish the "regular use" of the business with convincing evidence of the type and frequency of the business use of the home, or part of the unit, for which the taxpayer seeks to deduct expenses. Deductions are disallowed if the portion of your home is used just occasionally. "Exclusive use” means that the business part of the home may not be used for any personal, family, or investment activities. 

The "principal place of business" requirement includes the place used for management or administrative activities if there is no other place to consult substantial management or administrative activities.

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In addition, the home office must also be for the convenience of the employer. The Tax Court has held that this condition is met if the home business use is mandatory as a condition of employment, essential for the performance of the business, or compulsory for the employee to properly complete his duties. An employee should acquire a written statement from the employer to confirm that the home business use is indeed for the convenience of the employer. Examples of a written statement include a letter from the employer to the employee or, if there is an employment contract, by an amendment to the employment contract.

An exception to the rule is if your home office is a separate structure that is not attached to your residence. One may qualify for the home office deduction without meeting the exclusive use requirement; the structure merely has to be used in for business activities.

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