Section 280A: Rules for Deducting Home and Business Expenses

Section 280A of the Internal Revenue Code provides rules for taxpayers seeking to deduct expenses related to the use of their home for business purposes. As remote work and home-based businesses become more common, understanding these deductions is essential for managing tax liabilities.

Residential vs. Business Use

Section 280A distinguishes between residential and business uses of a home for tax purposes. To qualify for deductions, a portion of the home must be used exclusively and regularly for business activities. For example, a home office cannot also serve as a guest room. The exclusive use test is strict, and failing to meet it disqualifies the taxpayer from claiming deductions.

The regular use test requires consistent use of the space for business purposes. A consultant who occasionally works from home but primarily operates from a rented office may not meet this criterion. These factors are evaluated on a case-by-case basis, highlighting the importance of detailed records to support claims.

Allocation for Mixed Purposes

When a home is used for both personal and business purposes, only the portion of expenses tied to the business use is deductible. This is determined by calculating the percentage of the home used for business, often by dividing the square footage of the business space by the total square footage of the home. For instance, if a 300-square-foot office occupies a 3,000-square-foot home, 10% of the home’s expenses may be deductible.

Direct expenses, such as repairs specific to the office, are fully deductible, while indirect expenses like utilities, insurance, and maintenance must be apportioned using the business-use percentage. Personal expenses unrelated to the business are not deductible. Maintaining accurate records is crucial to substantiate these calculations, especially in case of an IRS audit.

Deductible Expense Categories

Mortgage Interest

Mortgage interest is deductible based on the business-use percentage of the home. For example, if a taxpayer pays $10,000 in annual mortgage interest and uses 10% of their home for business, $1,000 can be deducted. The Tax Cuts and Jobs Act of 2017 limits deductions on home equity loans unless the funds are used to buy, build, or improve the home. Taxpayers should retain records, such as Form 1098 from their lender, to verify interest payments.

Real Estate Taxes

Real estate taxes are deductible according to the business-use percentage of the home. The Tax Cuts and Jobs Act capped the total deduction for state and local taxes, including real estate taxes, at $10,000. For example, if annual real estate taxes total $5,000 and 10% of the home is used for business, $500 is deductible. Taxpayers should keep accurate records of tax payments, as these figures may be reviewed during audits.

Insurance

Homeowners’ insurance premiums can also be partially deducted based on the business-use percentage. For instance, if annual premiums total $1,200 and 10% of the home is used for business, $120 is deductible. Additional business-specific insurance, such as liability coverage, is fully deductible. Reviewing insurance policies to ensure adequate coverage for both personal and business purposes and keeping documentation of premium payments is essential for accurate deductions.

Reporting Considerations

To report deductions under Section 280A, taxpayers use Form 8829, “Expenses for Business Use of Your Home,” which calculates allowable expenses. This form integrates with Schedule C, “Profit or Loss from Business,” to reflect the impact of these deductions on taxable income.

Maintaining detailed records, including utility bills, mortgage statements, and insurance invoices, is critical to substantiate claims. These records not only ensure accurate reporting but also provide a defense in case of an audit. Consistency in reporting year over year is also important, as discrepancies can attract scrutiny.