Special Business Uses of a Home

There are 2 exceptions to the exclusive use requirement: day-care facilities and storage space. If either of these exceptions apply, you can deduct your home office expenses even though the space is also used for personal purposes.

Day-Care Facilities

If you use all or part of your home on a regular basis as a facility to provide day-care services, you may claim home office deductions if you meet certain tests.

  • You must provide day care for children, elderly persons (age 65 and older), or persons who are physically or mentally unable to care for themselves.
  • You must have a license, certificate, registration, or other approval as a day-care center or family or group day-care home under your state law. You can claim home office expenses if you have applied for approval and are awaiting it. You cannot claim home office expenses if your application has been rejected or your approval revoked.

Note: Special rules for meal costs of day-care providers are covered in Chapter 22.

CALCULATING YOUR HOME OFFICE DEDUCTION

If you use a portion of your home exclusively for day-care services (e.g., a basement playroom), you can deduct your expenses for any other type of business use of a home. If, however, you use a portion of your home for day-care services but also use it for personal purposes (e.g., your living room), you must follow special allocation rules to determine your home office deduction. You must compare the business use of the space with the total use of the space. There are 2 methods for making this comparison:

1. Compare the number of hours of business use in a week with the number of hours in a week (168 hours).
2. Compare the number of hours of business use in the tax year with the number of hours in a tax year (8,760 in a 365-day year).

Then this percentage is applied to the business percentage of total space.

Example
An individual uses her basement to provide day-care services. The basement represents 50% of her house’s total square footage. She uses her basement for 12 hours per day, 5 days per week, 50 weeks per year, for day-care services. Her family uses the basement during the times it is not being used for day-care services. She uses her home for a total of 3,000 hours per year for business, or 34.25% of the total hours in the year (3,000 ÷ 8,760). In calculating the amount of indirect expenses allocable to her business use, she can deduct 17.13% (34.25% × 50%).

If meals are provided as part of the day-care services, the cost of the meals is not included in a home office deduction. It is a separate expense. In calculating the deductible portion of the meal costs, 100% of the costs to day-care recipients is deductible. If you also provide meals to employees, only 50% of the cost of meals for them is deductible. No percentage of the cost of meals consumed by you or your family is deductible. If you receive reimbursements under the Child and Adult Food Care Program under the U.S. Department of Agriculture, you must include in income any reimbursements in excess of your expenses for eligible children.

Storage

If space is used on a regular basis for the storage of your inventory or sample products, you can deduct home office expenses even though you also use the space for personal purposes and thus fail the exclusive use test. The storage space that is deductible is only the actual space used. For example, if a portion of a basement is used for storage, only the expenses related to that portion are deductible even if the rest of the basement is not used for other purposes.

Expenses of storage space are deductible even though the exclusive use test is not satisfied if:

  • The home is the fixed location of the business activity (you run the business from home).
  • The business activity is selling goods wholesale or retail.
  • The space is used as a separately identifiable space suitable for storage.
Example
An individual runs from home a gift basket business and uses her family room to store samples. She may deduct the portion of the family room used to store her samples even though the family room is also used for personal purposes.

Bed and Breakfasts

Typically, owners of a bed and breakfast live at their inn, using a portion of the premises as their personal residence. There is no exception to the exclusive use rule for bed and breakfasts as there is for day care and storage. The Tax Court has determined that no deduction can be taken for the portion of the inn used for both personal and business purposes (e.g., lobby, kitchen, and laundry room). A deduction is limited only to areas used exclusively for business (e.g., guest rooms).

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