Maintaining an office in your home has tax advantages. When a portion of your home is used regularly and exclusively as your principal place of business or as a place to meet clients or customers, an equivalent portion of your home’s mortgage principal, maintenance costs, insurance, and depreciation are deductible. For example, if you live in a 3,000 square foot house and you use your 300 square foot den regularly and exclusively for business purposes, 10 percent of your home costs are deductible as business expenses. Exclusivity is important. The office space must not be used as a play room for your children, a spare bedroom, or for any other non-business use.
The IRS provides a special form for taxpayers claiming this deduction. One should note that anecdotal evidence shows that these forms are audited more often than other forms. Therefore, taxpayers who wish to claim this deduction should carefully document the exclusive business use of the property. The IRS will consider various factors including whether the home office is essential to the business, whether you spend a substantial amount of time there, and whether another location is available to do the work. If you are an employee, you must also show that maintaining the home office is for the employer’s benefit, not for your personal convenience.