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If a work area in a residential dwelling meets certain requirements, it qualifies for an "office in home" deduction. This tax tip discusses three eligibility requirements necessary to take this deduction. Consider whether the area in question has exclusive and regular business use, is the principal location of business, and is a meeting location for professional contacts. This tax tip also clarifies deductibility requirements for unattached structures.

Are you one of the growing number of taxpayers who is working more and more at home? If you meet certain requirements, you can take a limited deduction for using your home for business. This is commonly called the "office in home" deduction. The deduction is available to self-employed persons as well as employees.

This tax tip discusses three requirements necessary to qualify for this deduction. Eligibility relies on whether the area in question has exclusive and regular business use, is the principal location of business, and is a meeting location for professional contacts. This tax tip also clarifies the deductibility requirements for unattached structures.

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Exclusive and regular business use is a requirement

The first requirement is that the area used for business must be used exclusively and regularly for at least one of the following purposes:

• As the principal place of business for any trade or business

• As a place to meet or deal with clients in the normal course of the business

• In connection with the business, if it is a separate structure unattached to the taxpayer's personal residence

Note: The definitions of "exclusively" and "regularly" are critical:

• Exclusively means for business purposes only. Using part of a home as a business office and also for personal purposes doesn't qualify as exclusive. Two exceptions to this rule are storage of inventory and day-care facilities.

• Regularly means on a continuing basis. A part of a home used only occasionally or incidentally doesn't qualify, even if that part of the home isn't used for any personal or other purpose.

For an employee, meeting these regular and exclusive tests isn't the final hurdle. This exclusive and regular business use must be for the convenience of his employer.

Principal place of business another consideration

The two main factors in determining a principal place of business are:

• Relative importance of the activities performed at each business location

• Amount of time spent at each location

The relative importance test always is considered first. Under this test, if the business activities outside the home are more important than the business activities performed in the home, the home doesn't qualify as a principal place of business.

The nature of the business determines which activities are most important. For example, if the business is a retail company selling goods to the general public, the most important activity occurs at the place where the owner meets his customers. The other required activities (accounting, billing, etc.) aren't the most important for this business.

If the relative importance test doesn't clearly establish the principal place of business, then the time test is considered. If the time spent on the business outside of the home exceeds the time spent on the business in the home, the home doesn't qualify as a principal place of business.

Is it a place to meet patients, clients, or customers?

If you meet or deal with patients, clients, or customers in your home in the normal course of business, you can deduct your expenses for the part of your home used exclusively and regularly for business. This applies even if you also carry on the business at another location and the home isn't the principal place of business.

An example of this would be an attorney who works four days a week in a downtown office and one day a week in a home office used exclusively for meeting with clients. Since the use of the home is regular and integral to the conduct of the business, the home office qualifies for a business deduction.

Separate structure is deductible

If you use a freestanding structure separate from your home, such as a studio, garage, or barn, you can deduct the expenses for this structure if it is used exclusively and regularly for business. Again, this structure doesn't need to be the principal place of business. You aren't required to use it to meet patients, clients, or customers.

An example of this would be a florist who grows plants for his shop in a greenhouse behind his personal residence. The floral shop is the principal place of business and is at a different location from the greenhouse. However, the florist can still deduct expenses for the greenhouse since he uses it exclusively and regularly in his business.