by Isabel M. Isidro
Managing Editor

Home-based business operators should remember that tax rules, requirements and restrictions are sometimes different for businesses operated inside and outside the home. If your home is also your place of business, you may be entitled to deduct a portion of the operating expenses and the depreciation of your home.

A house, apartment, condominium, mobile home, motor home, boat or just about anywhere with sleeping and cooking facilities can qualify for the home
office deduction. If the business use of your home meets specific tests, you
may be able to deduct a percentage of your regular expenses, such as rent,
interest, taxes, insurance, repair and maintenance, etc.

However, since an asset is jointly by your family as well as your business, tax filing becomes an even more complicated process. As a result, the red flag of the dreaded "audit" comes up more often for home-based businesses. The good news is that the government has recently loosened up a bit on the rules regarding the home-office deduction. Be warned though: bending the rules is still a good way to attract audit.

To qualify for home business deductions, you must pass the following test stipulated by the IRS:

• Exclusive Use - that part of your home must be
  set aside exclusively for the business.
• Regular Use - the place must be regularly used for business
• Trade or Business Use - Your principal place of business for any trade or business in which you engage; 
• Principal Place of Business
• Place To Meet Patients, Clients, or Customers -- As a place to meet and deal with clients or customers in the normal
  course of your business
• Separate Structure - In connection with your trade or business if you are using a separate structure that is not attached to your home or residence (e.g. a studio, garage, or barn).

Many home business entrepreneurs make the mistake of claiming deductions for a space used for both business and personal life. The exclusivity test specifically requires that the area in question should be used solely for business purposes only. If you use the space for personal use -- e.g. a swimming pool where kids in your daycare swim is also the pool where your family relaxes and swims; or a family room you use to write reports is also the room where your family watches TV and plays games.

Note, however, that the government in recent years liberalized the primary-and- exclusive-use rule to include the use of your home office to conduct administrative and managerial activities (e.g. record-keeping), in addition to using your home office as a primary place of business where you actually met customers or clients. The caveat is that there must be no other location for you where you can conduct those activities. This ruling impacts favorably on self-employed consultants, sales representatives, and financial advisers who do more of their work elsewhere but uses the home to perform managerial and administrative tasks.

If you qualify for the home-office deduction, you may be able to claim a a
portion of certain types of expenses that are associated with your home but
aren't deductible by the average homeowner. These expenses include
insurance, utilities, repairs, security system expenses, office supplies,
depreciation of furniture and other business assets, local and long distance
telephone calls on the home phone (but not the cost of the monthly service
charge), business use of vehicles, repairs and taxes, among others. The
homeowner also can deduct the depreciation on the part of the home used for business. You can also claim the home-office deduction if you use part of
your home to store inventory or product samples, or if part of the home is
used as a day-care facility.

If you have employees who work out of their home, they may be entitled to
deduct expenses for the business use of their homes too. In this situation,
though, they must work at home for your convenience and not just because it is appropriate and helpful in their jobs.

2. Divide the rooms used for your business by the number of rooms in your home. While easier, it is important that all of the rooms in your home must be approximately the same size for this method to become more accurate.

Once you have determined the percentage of your home expenses that is
deductible, multiply this figure by each expense in order to obtain the
dollar amounts of your deductions. (For example, 20 percent times a $1,000
home utilities expense equals a $200 business utilities expense.) Those
expenses that benefit only your business, such as painting or remodeling the specific area occupied by the business, are 100 percent deductible. Expenses that benefit only your home and are in no way related to the business, such as lawn care and landscaping, may not be deducted.

Make sure that you have sufficient evidence to prove a home office. Have its
address on your business cards and stationery, keep a log of who you see,
when you use the office, and what you do. You can even have someone
photograph you in your home office holding up a newspaper to prove the date, and all of the contents of your office.

To make certain you have accurately defined those expenses that benefit both your home and your business, it is advisable to consult with an accountant. This is especially important if you own rather than rent your home. Better to be sure than sorry! You really don't want an IRS agent actually in your home if you can avoid it. If he does show up, however, make him sign the guest log!

For more information on the home office tax deductions, download IRS

• Publication 587: Business Use of Your Home (Including Use by Day Care Providers) and

• Form 8829 Expenses for Business Use of Your Home

All materials contained in this site are the copyrighted property of PowerHomeBiz.com,LLC. To reproduce, republish, upload, post, transmit, modify, distribute or publicly perform or display material from this site, you must first obtain written permission from PowerHomeBiz.com, LLC. You may view and download material from this site for your personal, non-commercial use only.  Contact us for reprint or purchase of this article