More taxpayers are using their home as office space or to run their business. The number of taxpayers working from home has increased because of the pandemic. Many business owners have cancelled their business lease contract. It is very likely that you have taken some extra rooms, a corner, or other area of your home for your business use. Some taxpayers mistakenly believe they could deduct some expenses for using their home to perform their work. Unfortunately, employees are not eligible to claim the home office deduction because the Tax Cuts and Jobs Act (TCJA) suspended the business use of home deduction from 2018 through 2025. .
The home office deduction is available to both homeowners and renters and can be claimed on Form 8829 attached to the Schedule C when claiming the standard option that generates more deduction.
Taxpayers can deduct mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent. Taxpayers must also meet some specific requirements to claim home expenses as a deduction. The term “home” includes a house, apartment, condominium, mobile home, boat or similar property. It also includes structures on the property, like an unattached garage, studio, barn or greenhouse.
Taxpayers could instead claim the simplified option, introduced in 2013. Under this option, taxpayers can claim $5 per square feet (up to 300 feet), for a maximum deduction of $1,500.
The home office deduction gets more complicated when you have an S Corporation because you are also an employee of your corporation. The first option requires an “accountable plan” properly set up to account for expenses and to be reimbursed by your corporation. The corporation deducts the amount reimbursed. You do not report the amount on your tax return. The second option is to rent the space or room to your corporation. The corporation deducts the rent. The rent payment is income from rental activity and must be reported on your Schedule E.
The option that you use to claim the home office deduction could have an impact on your tax liability when you sell the home. You should discuss the consequences with your tax advisor.
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.
Further reading:
IRC Section 280 (c); IRC Section 280A(c)(6); Treas. Reg. section 1.62-2; Publication 587; Rev. Proc. 2013-13; Rev. Rul. 94-24; Prop. Reg. Sec. 1.280A-2(b).
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