Taxing Times ... The Home Office Deduction
Part 2

=> Exceptions to the Exclusive Use Test

The only exceptions to the exclusive use test are if you use part of your home for the storage of inventory or product samples or as a day-care facility.

If you use part of your home for storage of inventory or product samples, although you don't have to satisfy the exclusive use test, you must meet all of the following tests instead:

* you keep the inventory or product samples for use in trade or business; 
* your trade or business is the wholesale or retail selling of products; 
* your home is the only fixed location of your trade or business; * you use the storage space on a regular basis; and 
* the space you use is an "identifiably separate space" suitable for storage.

Therefore, if you store your inventory of knitting wool for your internet business of selling wool, knitting patterns and knitting needles in your basement, then you will still be able to deduct your basement expenses (or part of your basement expenses) even though your basement is also used as a recreation or workshop area.

=> The Regular Use Test

In addition to satisfying the exclusive use test, you must also satisfy the regular use test.

This means that you must use the specific area of your home you use exclusively for business purposes on a continuing basis. This means more than occasional or incidental use.

IS IT YOUR PRINCIPAL PLACE OF BUSINESS?

Your home will be your principal place of business if you use it exclusively and regularly for the administrative or management activities of your trade or business and you have no other fixed location where those activities are conducted.

"Administrative or management activities" include activities such as billing customers, keeping books and records, ordering supplies, setting up appointments, forwarding orders or writing reports.

Furthermore, and this is a recent change in the law from 1999 onwards, even if certain administrative or management activities are performed outside your home, you will not necessarily be disqualified from satisfying the principal place of business test. You may, for example, engage third parties to conduct your  administrative or management activities at other locations. An outside bookkeeping service is one example. You may also conduct some of your management or administrative activities from your car on your cell phone without disqualifying your home as your principal place of business.

Alternatively, if you conduct your business at more than one location, whether your home can be considered your principal place of business depends on a consideration of the relative importance of the activities performed at each location. If this is not determinative, you can then take into account the time 
spent at each respective location.

If, after conducting this analysis, you home can be identified as your principal place of business then, provided you also satisfy the trade or business and exclusive and regular use tests, you can deduct home office expenses.

IF NOT PRINCIPAL PLACE OF BUSINESS, DO YOU MEET PATIENTS, CLIENTS OR CUSTOMERS IN YOUR HOME?

Even if you can't meet the principal place of business test, if you use your home to meet with patients, clients or customers in the normal course of your business, you may still be able to claim the deduction. 

You can deduct expenses for the part of your home used exclusively and regularly for business if you physically meet with patients, clients or customers in your home and their use of your home is "substantial and integral" to the conduct of your business.

This means that the use of your home for occasional meetings and telephone calls is not sufficient as the use of your home is not substantial and integral to your business.

IS IT A SEPARATE STRUCTURE?

You may deduct expenses for a separate free-standing structure such as a garage if you use it exclusively and regularly for your business. It does not have to be your principal place of business or a place where you meet patients, clients or customers.

For example, if you're an internet consultant whose principal place of business is at an office downtown, but you also use your garage exclusively and regularly as your home office for reviewing client websites and writing reports in relation thereto, you can claim the home office deduction for expenses associated with your garage.

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