IRS Publication 587: Business Use of Home
I am not a big fan of this deduction for a wide variety of reasons but mostly because there can be a substantial administrative burden associated with recapturing depreciation expense taken in previous tax years upon the sale of one’s home in the current tax year.
The secret to this deduction though in my opinion – like most all deductions – is to have accountable substantiating documentation in support of each report-able entry. This of course requires maintaining good record keeping habits on a regular and consistent basis which most small or home office business owners aren’t necessarily equipped to afford.
According to the IRS when claiming a business deduction for your home part of it must be used exclusively and regularly as your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business, or in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
The amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses. There are special rules for qualified daycare providers and for persons storing business inventory or product samples. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.