Definition
A home office can be defined in two principal ways:
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Company Headquarters: The headquarters location of a company. Employees often refer to their central office or the office where they report as the home office.
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Personal Residence Office: An office located within a person’s home that is used exclusively for business purposes on a regular and ongoing basis. To qualify for tax deductions, the home office must be the taxpayer’s principal place of business, where the majority of work is performed, or a place to meet clients or customers. If the taxpayer is employed by someone else, the home office must be used for the convenience of the employer.
Tax Regulations
Beginning in 1999, the definition of principal place of business also encompasses the use of the home office for administrative or management activities if no other fixed business location exists where the taxpayer conducts substantial administrative tasks. For a qualifying home office, the taxpayer may claim a portion of utilities and depreciation deductions for the office space, as well as for furniture and equipment used.
Upon the sale of the home, any gain attributable to the business portion of the home is not tax-exempt.
Examples
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Company Headquarters Home Office:
- A multinational corporation based in New York City where the CEO and executive teams hold meetings and make significant strategic decisions.
- An employee in Los Angeles refers to the New York office as their “home office.”
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Personal Residence Home Office:
- A freelance graphic designer working from a designated space within their home in San Francisco, which they use for seven hours daily for client work.
- A small business owner in Dallas using an entire room in their residence to manage business operations and meet with clients.
Frequently Asked Questions
Q: Can I deduct home office expenses if I am working remotely for my employer?
- A: Yes, but it must be for the convenience of your employer, and the space must be used exclusively and regularly for business purposes.
Q: How do I determine the amount of home office expenses I can deduct?
- A: The IRS allows you to deduct a portion of utilities, mortgage interest, insurance, repairs, and depreciation based on the percentage of your home used for business.
Q: Can the same space be used for personal and business purposes?
- A: No, the space must be used exclusively for business to qualify for tax deductions.
Q: If I sell my home, is the gain on my home office portion subject to tax?
- A: Yes, the gain attributable to the business portion of your home is not exempt from taxes.
Q: Are there simplified methods for calculating home office deductions?
- A: Yes, the IRS offers a simplified method of $5 per square foot of home-office space, up to 300 square feet.
Related Terms
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Administrative Activities: Tasks including accounting, recordkeeping, and managerial functions that can justify the home office as the principal place of business.
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Principal Place of Business: The main location where one conducts substantial administrative or management activities if no other fixed location exists.
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Depreciation Deduction: A tax deduction for the decrease in value of home office furniture, equipment, and improvements over time.
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Business Law: A legal field concerning the regulations of commercial entities, relevant to setting up and managing business operations from a home office.
Online References
- IRS Home Office Deduction
- TurboTax Guide on Home Office Deduction
- Investopedia: Home Office Definition
Suggested Books for Further Studies
- “Home Business Tax Deductions: Keep What You Earn” by Stephen Fishman J.D.
- “Deduct It! Lower Your Small Business Taxes” by Stephen Fishman
- “Tax Savvy for Small Business” by Frederick W. Daily
Fundamentals of Home Office: Taxation and Business Law Quiz
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