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Make room for home office deductions

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in Small Business Tax,Small Business Tax Deduction Strategies

A new Tax Court decision may give business people more room to maneuver on home office deductions.

Strategy: Use your home office exclusively for business to preserve deductions. But know that you may be able to cross the line when some personal use is unavoidable.

The taxpayer in a recent case was allowed to deduct home office expenses even though she used the office space in her small apartment for nonbusiness purposes some of the time. (Miller, TC Summary Opinion 2014-74)

Here’s the whole story: To qualify for home office deductions, you must use the office regularly and exclusively as your principal place of business or a place to meet or deal with customers, clients or patients during normal business. If you’re an employee, the home office must also be used for your employer’s convenience (e.g., it’s a condition of employment).

If you qualify, the direct office expenses are deductible, plus a percentage of other expenses. For example, if you use 10% of the home for business, you can deduct 10% of your mortgage interest, property taxes, utilities, repairs, insurance, etc., as home office expenses. You may be entitled to a depreciation or rent deduction.

However, it is often difficult to establish that a home office is used “exclusively” for business.

Facts of a recent case: A public relations firm based in Los Angeles hired Ms. Miller, a New York City resident, to be an accountant director. It promised Miller that it would find commercial space in New York but failed to do so. So Miller used a space in her studio apartment for the firm’s business. The firm listed Miller’s home address as its New York location on its correspondence and website.

According to Miller’s testimony, the apartment was a single room divided into three equal sections:

  (1) an entryway, a bathroom, and a kitchen area;

  (2) office space, including a desk, two shelving units, a bookcase, and a sofa; and

  (3) a bedroom area, including a bed and dressers. She frequently met with clients in the office and used the computer on her desk for work.

But Miller also admitted to using the office space for nonbusiness use. For instance, the apartment was so small she had to walk through the office space to get to her bedroom area.

Based on these seemingly unfavorable facts, the Court concluded that Miller still qualified for home office deductions. The home office was her principal place of business and she worked there for her employer’s convenience. Although she also used the office space for personal purposes, such use was minimal and attributable to living in a small studio apartment.

Tip: This case indicates when the Tax Court might budge an inch.

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