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Business Use Of Home | Sole Proprietor | Self-Employment
To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.
To qualify to claim expenses for business use of your home, you must meet the following tests.
Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:
Whether the business use of your home is for your employer's convenience depends on all the facts and circumstances. However, business use is not considered to be for your employer's convenience merely because it is appropriate and helpful.
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.
You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Example. You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Your family also uses the den for recreation. Since the den is not used exclusively in your profession, you cannot claim a business deduction for its use.
You do not have to meet the exclusive use test if either of the following applies.
Storage of inventory or product samples. If you use part of your home for the storage of inventory or product samples, you can claim expenses for the business use of your home without meeting the exclusive use test. However, you must meet all of the following tests.
Example. Your home is the sole fixed location of your business of selling mechanics' tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.
To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose.
To qualify under the trade or business use test, you must use part of your home in connection with a trade or business. If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use.
Example. You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. You do not make investments as a broker or dealer. Since your activities are not part of a trade or business, you cannot take a deduction for the business use of your home.
You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. To determine your principal place of business, you must consider all the facts and circumstances.
Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.
Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors.
If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. However, see the later discussions under Place To Meet Patients, Clients, or Customers or Separate Structure for other ways to qualify to deduct home office expenses.
Administrative or management activities. There are many activities that are administrative or managerial in nature. The following are a few examples.
Administrative or management activities performed at other locations. The following activities performed by you or others will not disqualify your home office from being your principal place of business.
For examples and more information, visit the IRS web site, click here.
For more articles and help on this subject visit the IRS web site here: Business Use Of Home Information
You are a sole proprietor if you are the sole owner of a business that is not a corporation. Report your income and expenses from your sole proprietorship on Schedule C (Form 1040), Profit or Loss From Business, or on Schedule C-EZ (Form 1040), Net Profit From Business.
You may use Schedule C-EZ to determine your net profit if you have only one sole proprietorship and you meet all the requirements listed in Part 1 of Schedule C-EZ. If you can use Schedule C-EZ, gross receipts from your business and total expenses are reported in Part II. The difference between gross receipts and total expenses you reported is your net profit. Report Net profit on line 12 of your Form 1040.
You cannot use Schedule C-EZ if your business expenses were more than $2500, your business used the accrual method of accounting, you deducted expenses for the business use of your home, or if you had employees, a net loss, or inventory.
If you cannot use Schedule C-EZ, you must report your business income and expenses on Schedule C.
If you have more than one sole proprietorship business, or if you and your spouse have separate businesses, you must use a separate Schedule C for each business.
Report the income from your business in Part I of Schedule C and the expenses in Part II. If you make or buy goods to sell, use Part III to figure the cost of goods sold. The difference between total income and total expenses is your net profit or loss, which will be taken from Schedule C and entered on line 12 of your Form 1040. If you deduct these expenses, you must use Schedule C.
If you use part of your home in your business, you should complete Form 8829. For more information, see Publication 587, Business Use of Your Home, Including Use by Day-Care Providers. You may also select Topic 509.
If the total of your net profit from all businesses is $400 or more, you must pay into the Social Security System by filing Schedule SE (Form 1040). For more information, get Publication 533, Self-Employment Tax, or select Topic 554.
If you are new in business, you may want to see Publication 1635, Understanding Your EIN - Employer Identification Numbers. Select Topic 103, Small Business Tax Education Program, for additional information on beginning a new business. Publications and forms may be downloaded from this site or ordered by calling 1-800-829-3676.
You are self-employed if any of the following apply to you:
Trade or business. A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.
Part-time business. You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business may also be self-employment.
Example. You are employed full time as an engineer at the local plant. You fix televisions and radios during the weekends. You have your own shop, equipment, and tools. You get your customers from advertising and word-of-mouth. You are self-employed as the owner of a part-time repair shop.
Sole proprietor. You are a sole proprietor if you own an unincorporated business by yourself.
Independent contractor. People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to SE tax.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to SE tax. However, your earnings as an employee may be subject to SE tax under other rules discussed in this section.
More information on self-employment tax can be found in Publication 533, which can be ordered by calling 1-800-829-3676.
For more complete detailed information visit the IRS web site here: Information About Self-Employment.
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January 06, 2003