|The COVID-19 pandemic is still impacting our lives. You may be spending more time working from home. It is likely that you may have taken some extra rooms or a corner of your home for your business use.|
IRC Section 280A(c) states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business.
The law dictates no specific number of rooms or particulars regarding the size of the office. The courts clarify this rule in the Hefti case (Charles R. Hefti and Marion Hefti; T.C. Memo. 1993-128), lots of rooms and Mills case (Albert Victor Mills; T.C. Memo. 1991-592), less than one room.
The Hefti Case
Charles R. Hefti lived in a big house, totaling 9,142 square feet. He claimed that more than 90 percent of his home was used regularly and exclusively for business. The court concluded that 13 rooms, totaling 19 percent of the home based on its review of the rooms, were used exclusively and regularly for business.
The Mills Case
Albert Victor Mills maintained an office in his apartment to conduct his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills desk is located, he also kept tools, equipment, paint supplies, and a filing cabinet. The court agreed with Mr. Mills’s allocations and awarded the home-office deduction based on his claimed 23 percent business use of the 422-square-foot apartment.
Mr. Mills had only an area of the apartment where he grouped his office furnishings, equipment, and supplies. You might need to ensure that your business assets are located in a group if you have a similar situation.
“Exclusive use means that the taxpayer must use a specific part of a dwelling unit solely for the purpose of carrying on his trade or business. The use of a portion of a dwelling unit for both personal purposes and for the carrying on of a trade or business does not meet the exclusive use test.”
IRS Treasury Regulation specifies that: “For purposes of section 280A(c)(1) and this section, the phrase “a portion of the dwelling unit” refers to a room or other separately identifiable space; it is not necessary that the portion be marked off by a permanent partition.”
However, one exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.
Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.
Example 2. In Pearson case (T. C. Memo. 1982-295), Dr. Pearson practiced orthodontics in a downtown medical building but retained the dental records of more than 3,000 patients in 36 file drawers- each measuring 26 inches by 14 inches by 12 inches- and had 1,461 boxes containing orthodontic models – each box measuring 10 inches by 6 inches by 2 1/2 inches. He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.
The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.
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