The law allows freelancers and other individuals who work at home to claim home-office deductions only if they pass a series of tests. You must use a portion of your home exclusively and on a regular basis for work in your business. It has to be your principal place of business.
Arranging things to pass the tests lets you transform otherwise nondeductible personal expenditures (a portion of everything from home-insurance premiums to repairs to utility bills to depreciation if you own your house or a percentage of your rent) into deductible business expenses.
What's "exclusive" use? You must use the entire area -- whether a single desk, a room or an entire floor -- only for business and nothing else. Use the home office for any personal, family or investment activities, and you forfeit all rights to home-office deductions.
IRS auditors are at ease when scrutinizing a deduction for an office in a room that's closed off from all non-business activities. They remain at ease when the office is just a small part of a room as long as you clearly separate the business portion from the rest -- by a partition, perhaps.
Because gray areas abound, IRS examiners set no arbitrary standard for how much you must use the office to pass the regular-use test. They base their decisions on the particular circumstances. Usually, working in the office a couple of hours a day, several days a week proves sufficient; a couple of hours a week probably doesn't pass muster. While auditors allow some leeway, look forward to a disputed deduction if you use an otherwise empty room infrequently for a purpose incidental to your business.
Your endeavor doesn't have to be a full-time business. It can be part time, as when you moonlight from your home as a writer and have a full-time job elsewhere. Examiners don't care that you devote more time to moonlighting than to your job.
Your "principal place of business" means the place where you personally meet clients or customers (phone calls don't count) or the only fixed location where you conduct your business' key administrative or management activities. There can't be another fixed location outside of your home where you conduct such activities for that business. Some IRS-approved examples of administrative or management activities: arranging appointments; billing clients, customers or patients; ordering supplies; maintaining records; forwarding orders; and preparing reports.
There's an additional, even tougher requirement for employees who do office work at their homes. Most employees are unable to satisfy the requirement that they maintain the at-home office for the convenience of their employer -- "convenience" meaning that otherwise their jobs disappear. Employees can't maintain the office for their own convenience -- for instance, to complete reports at night or on weekends. Dubious IRS examiners will want to see a confirming letter that says, essentially, "No home office, no job."
Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as: "a leading tax professional" (New York Times); "an accomplished writer on taxes" (Wall Street Journal); and "an authority on tax planning" (Financial Planning Magazine). This article is excerpted from "Julian Block's Easy Tax Guide for Writers, Photographers, and Other Freelancers " available as a Kindle at Amazon and as a print copy at julianblocktaxexpert.com.