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OFFICE IN THE HOME - OVERVIEW
IRS FORM 8829

Code Section 262(a) generally provides that a deduction is not allowed for personal, living, and family expenses, including expenses and losses attributable to a dwelling that is occupied by a taxpayer as her personal residence. Code Section 280A(a) restates the general rule that a deduction is not allowed with respect to a dwelling unit that is used by
the taxpayer as a residence, except as provided in Code Section 280A. The balance of Code Section 280A provides the circumstances under which a taxpayer may claim deductions with respect to a residence. The provisions
of Code Section 280A apply to individuals, trusts, estates, partnerships, and S corporations. Code Section 280A does not apply to C corporations.

The general disallowance provisions of Code Section 280A do not apply with respect to expenses that are allowable as deductions without regard to their connection to a trade or business, such as certain interest, taxes, and casualty losses (subject to their own limits). Furthermore, there are three circumstances under which the disallowance provisions will not apply if the taxpayer is using a portion of the dwelling for certain business use. Code Section 280A(c)(1). In the case of a taxpayer who exclusively uses a portion of his dwelling unit on a regular basis as a principal place of business for any trade or business of the taxpayer, as a place of business that is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of the taxpayer's trade or business, or, in the case of a separate structure that is not attached to the dwelling in connection with the taxpayer's trade or business, an allocable portion of expenses attributable to the residence is allowed as a deduction.

In the case of an employee, the home office deduction is allowable only if, in addition to satisfying the exclusive and regular use test, the home office is for the convenience of the employer. In addition, expenses allocable to the use of a portion of a residence on a regular basis as a storage unit for the taxpayer's inventory or product samples will be allowed as a deduction if the taxpayer is engaged in the trade or business of selling products at retail or wholesale, but only if the residence is the sole fixed location of that business.

Code Section 280A limits the amount that a taxpayer may deduct for the business use of the home to the gross income derived from the use of the residence for that trade or business, reduced by the deductions that are allowed without regard to their connection with the taxpayer's trade or
business. If gross income is derived both from the use of the residence and from the use of other facilities, a reasonable allocation (based on the facts and circumstances of each case) is to be made to determine that portion of the gross income derived from the use of the residence.

The deductions allowable without regard to whether the activity is a trade or business are deducted first. Any remaining gross income may then be reduced (but not below zero) by the remaining allowable deductions. Any
disallowed deduction may be carried forward indefinitely.

COMPLIANCE TIP: Form 8829, Expenses for Business Use of Your Home, is used to determine the deductible expenses for the business use of the taxpayer's home and is carried to the self-employed's Schedule C.