Office in the Home IRC
§280A
I. Trade or Business Requirement
A. Office must be used in the Taxpayer’s trade or business.
1. Not for investment expenses.
B. Principal Place of Business
1. A place of business that is used by the taxpayer for the administrative or management activities of the business if there is no other fixed location of the business where administrative or management activities are conducted.
2. Taxpayers are not prevented from taking home office deductions if:
a. They do not conduct administrative or management activities at a location other than the home office, even if these activities are conducted at another location, ex. Billing.
b. Administrative or management activities are conducted at sites that are not fixed locations, ex. Hotel Rooms.
c. An insubstantial amount of administrative or management activities are conducted in a fixed location.
d. Non administrative or non managerial activities are conducted at a fixed location other than home, ex. Meeting with or providing services to customers, clients or patients at locations other than the home office.
II. Qualifying Uses that must be Regular & Exclusive.
A. The deductions will be allowed for a home office only if the office is exclusively used on a regular basis as a place of business by the taxpayer, & in the case of an employee, only if the exclusive use is for the convenience of the employer.
1. If a taxpayer conducts some administrative or management activities at a fixed location of the business outside the home, the taxpayer still is eligible to claim a deduction so long as the administrative or management activities conducted at any fixed location of the business outside the home are not substantial.
a. The $250,000 ($500,000) exclusion from the sale of a principal residence does not apply to so much of the gain from the sale of the principal residence as is attributable to any depreciation allowed with respect to the rental or business use of the residence. IRC §121(d)6).
b. If the taxpayer can treat the home office as the principal place of business, any transportation expense between the residence & other work locations are deductible, as long as they are related to the business. Rev. Rul. 99-7.
1. Reimbursements provided to employees who incur commuting expenses in going between their home offices and other work locations can be excluded from income.
B. Separate Structures
1. A home office that is not the taxpayer’s principal place of business, or used by patients, clients, or customers in meeting or dealing with the taxpayer may qualify for a deduction if it is a separate structure used in connection with the taxpayer’s trade or business. IRC §280A(c)(1). The structure must be in proximity to, but not attached to, the house, ex. Artist’s studio, florist’s greenhouse, or carpenter’s workshop.
III. Exclusive Use Requirement IRC §280A(c)(1)
A. Exclusive use means that the taxpayer must use a “portion of the dwelling unit” solely for purposes of carrying on a trade or business. If the portion of the dwelling unit is used both for business and personal purposes, the exclusive use test is not met.
IV. Regular Use Requirements
A. A home office must be used on a regular basis for business purposes in order to qualify. IRC §280A(c)(1)
1. The purpose of this requirement is to prevent a taxpayer from claiming a home office deduction for a room that is used only occasionally for business purposes.
a. Keep careful records of client visits & outline business uses.
V. Storage of Inventory & Product Samples IRC§280A(c)(2)
A. A taxpayer may be entitled to deduct as a business expense the expenses attributable to the portion of the residence used to store inventory & product samples. §280A(c)(2)
1. Applicable conditions:
a. The space must be used on a regular basis to store the taxpayer’s inventory or product samples.
b. The taxpayer must be in the business of selling products at the retail or wholesale.
c. The dwelling must be the sole fixed location for this trade or business.
VI. Allocation of Expenses to the Home Office
A. Proposed Reg. §1.280A-2(i)(3) provides that a taxpayer may determine the expenses allocable to the portion of the dwelling unit used for business purposes by any method that is reasonable under the circumstances.
1. If the rooms of the residence are of approximately equal size, the taxpayer may allocate expenses according to the number of rooms used for business purposes.
2. Expenses may also be allocated according to the percentage of total floor space in the unit that is used for business purposes and the space used exclusively for business.
VII. Limitation on the Amount Deductible
A. The amount of Gross Income derived from the business use of the home for the tax year, minus deductions that are allowable regardless of business use. IRC §280A(c)(5)
B. Reduce the taxpayer’s Gross Income from the activity by all other deductible expenses attributable to the activity, but not allocable to the use of the unit itself. IRC §280A(c)(5) (B)(ii)
1. Home Office deductions are disallowed to the extent that they create or increase a net operating loss (NOL).
a. The amount disallowed may be subject to carry forward provisions.
C. Deductions must be taken in the following order:
1. The allocable portion of expenses allowable as a deduction with respect to the dwelling unit regardless of the business use, i.e. mortgage interest & taxes
2. amounts otherwise allowable as deductions for the tax year by reason of the business use of the dwelling unit (other than those that result in adjustments to the basis of the property, ex. depreciation).
3. amounts otherwise allowable as deductions for the tax year by reason of the business use of the dwelling use that would result in an adjustment to the basis of the property.
