Business Portion of the Home

An important part of the qualification requirements for the home office deduction is that a portion of your residence be used regularly and exclusively for business purposes, whether it be as an office, a conference room, a lab area, storage room, or some other type of business usage.

But, if you do have an area that you use regularly and exclusively for business, the tax law permits you to deduct a portion of certain expenses relating to your home. For most types of home office expenses, the amount you may deduct depends primarily on the percentage of the space in the residence that is used for business.

There are two common ways to determine this, and the tax laws permit you to use whichever method results in the larger deduction. The first method looks at the number of rooms used for business, divided by the total number of rooms in your house. The second method looks at the square footage of the space used for business, divided by the total square footage of the house.

Example If you have an eight-room house and use one room as an office, your business use percentage will be 1/8 or 12.5 percent. Alternately, if your home office is 168 square feet and your home is a total of 2000 square feet, your business use percentage will be 168/2000 or 8.4 percent. Most of your home expenses (such as rent or real estate taxes and mortgage interest) must be multiplied by the larger of these two fractions to determine the portion that's deductible as a home office.

Our home office deduction calculator will automatically compute your business use percentage using the most favorable method, and use it to estimate your allowable home office deduction.

The IRS provides a special tax break for home day care operators. These business owners can count all the space they regularly use for their day care business as the "business portion of the home" even though the same space is used for personal or family purposes. For example, they may include the bathroom, the kitchen where day care meals are prepared, and the family bedrooms where naps are taken. However, unlike most home business operators, they must prorate these expenses for the hours in which the day care is offered.