First, you generally need to make sure your home office is used exclusively and regularly for business. The IRS offers the following example: Suppose you’re a lawyer and use your den at home to write legal briefs and prepare clients’ tax returns. Your family also uses the den for recreation. Because the den isn’t used exclusively for your work, you can’t claim the deduction on your tax return.
The area used for business can be a room or some other “separately identifiable” space, the IRS says. It doesn’t need to be marked off by a permanent partition.
There are many other key rules to consider. For example, the home office typically must be your “principal place of business,” or a place where you meet or deal with patients, clients or customers in the normal course of your work. Or it can be in a separate structure that isn’t attached directly to your home and that you use for work. If you’re an employee, your home office must be for your employer’s convenience, not yours. This is a tricky issue for many people, especially with the increase in telecommuting. The IRS says that whether the business use of your home is for your employer’s convenience depends on “all the facts and circumstances.” See Publication 587 for more details.
If you can jump over all the qualifying hurdles, you may be eligible to deduct a significant part of your expenses, such as insurance, depreciation, repairs and utilities, for that part of your home. Some people who work at home fear claiming the home-office deduction inevitably will lead to an IRS audit. Not so, an IRS spokesman told me. One New Jersey tax adviser I know has deducted his home office for decades and says he has never been challenged on this subject by the IRS. Just be sure you understand all the fine print and keep good records, including photographs of your office, in case the IRS challenges you.
Thanks for the link, Tim.