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Home Office Deduction

Home Office Deduction

Deductions for working from home center around the concept of a home office deduction.  That is, §280A(a) disallows all deductions “with respect to the use of” a taxpayer’s residence.  However, §280A(c) removes that barrier if the taxpayer uses a portion of the home “exclusively and on a regular basis” for anyone of three purposes: (1) as the taxpayer’s principal place of business; (2) as “a” place of business where the taxpayer meets with patients, clients, or customers to whom the taxpayer provides services; or (3) in any way reasonably connected with the taxpayer’s trade or business if and only if the physical area so used is an outbuilding, “a separate structure which is not attached to the dwelling unit.”

In Commissioner v. Soliman, 506 U.S. 168 (1993), the Supreme Court created a pretty narrow two-part test for whether a taxpayer’s home was a “principal place of business”: (1) the work done at home had to be more important than work done elsewhere and (2) time spent in working at home had to be more than working outside the home.  There, an anesthesiologist did all his administrative worked from home because none of the hospitals where he performed services gave him office space.  While he won in Tax Court and the Court of Appeals, the Supreme Court decided that his services in the hospitals were more important and he spent more time in those places.

In the Tax Reform Act of 1997, 111 Stat. 788, 881, Congress reversed Soliman’s specific result by amended §280A(c) so that a “principal place of business” can include “administrative or management activities” if there is no other office available.  Otherwise, Soliman remains the test.

The tax year at issue is 2015.  That year Ms. Armstrong was employed by Ace Relocation Systems (“Ace”), a global moving and storage company, at its office in Long Beach, California, a city part of the Los Angeles metropolitan statistical area.

In another case, Ms. Armstrong appears to have been employed to sell her company’s services to prospective clients.  During the days in 2015, Ms. Armstrong worked in the Ace office or else traveled to offsite client meetings or trade shows or conferences to represent the company.  During evenings and on weekends, Ms. Armstrong worked at home, using a “nook” in her kitchen.  There she worked on client contracts and “other sales-related activities.”

Ms. Armstrong traveled a lot for her employer.  She used her car.  Ace paid her a flat monthly car allowance of $500 and she was not eligible for further reimbursement on the car.  However, Ace also allowed employees to be reimbursed for other employee expenses as long as the reimbursements were claimed within 90 days of the expense.

On her 2015 return, Ms. Armstrong claimed a deduction for just over $20,000 in unreimbursed employee expenses.  She got there by adding up: (1) $8,000 for use of her car for travel; (2) $1,700 for parking, tolls, and non-car transportation; and (3) $16,800 for undifferentiated “business expenses.”  Then she subtracted the $6,000 worth of monthly car allowances.

The IRS disallowed all three of these categories.  The Tax Court sustained.  Each category teaches a lesson.

In conclusion, in order to use the Home Office Deduction, The following has to be met:

Certain business use

(A) As the principal place of business for any trade or business of the taxpayer.

(B) As a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or

(C) In the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. For purposes of subparagraph (A), the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.

Certain storage use

Subsection (a) shall not apply to any item to the extent such item is allocable to space within the dwelling unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer’s trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business.

Use in providing daycare services

(A)In general

Subsection (a) shall not apply to any item to the extent that such item is allocable to the use of any portion of the dwelling unit on a regular basis in the taxpayer’s trade or business of providing daycare for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves.

(B)Licensing, etc., requirement Subparagraph (A) shall apply to items accruing for a period only if the owner or operator of the trade or business referred to in subparagraph (A)—

(i)has applied for (and such application has not been rejected),

(ii)has been granted (and such granting has not been revoked), or

(iii)is exempt from having,

a license, certification, registration, or approval as a daycare center or as a family or group daycare home under the provisions of any applicable State law. This subparagraph shall apply only to items accruing in periods beginning on or after the first day of the first month which begins more than 90 days after the date of the enactment of the Tax Reduction and Simplification Act of 1977.

(C)Allocation formula

If a portion of the taxpayer’s dwelling unit used for the purposes described in subparagraph (A) is not used exclusively for those purposes, the amount of the expenses attributable to that portion shall not exceed an amount which bears the same ratio to the total amount of the items allocable to such portion as the number of hours the portion is used for such purposes bears to the number of hours the portion is available for use.

Limitation on deductions

In the case of use described in paragraph (1), (2), or (4), and in the case of use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of—

(A)the gross income derived from such use for the taxable year, over

(B)the sum of—

(i)the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used, and

(ii)the deductions allocable to the trade or business (or rental activity) in which such use occurs (but which are not allocable to such use) for such taxable year.

Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year. Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year.

Calculating the Deduction

  1. Electing to use the simplified method

The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. In most cases, you will figure your deduction by multiplying $5, the prescribed rate, by the area of your home used for qualified business use. The area you use to figure your deduction is limited to 300 square feet

  1. Business Percentage

To find the business percentage, compare the size of the part of your home that you use for business to your whole house. Use the resulting percentage to figure the business part of the expenses for operating your entire home. You can use any reasonable method to determine the business percentage. The following are two commonly used methods for figuring the percentage.

  1. Divide the area (length multiplied by the width) used for business by the total area of your home.
  2. If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.

Example 1.

  • Your office is 240 square feet (12 feet × 20 feet).
  • Your home is 1,200 square feet.
  • Your office is 20% (240 ÷ 1,200) of the total area of your home.
  • Your business percentage is 20%.

 

Example 2.

  • You use one room in your home for business.
  • Your home has 10 rooms, all about equal size.
  • Your office is 10% (1 ÷ 10) of the total area of your home.
  • Your business percentage is 10%

 

  1. Using Actual Expenses

If you do not or cannot elect to use the simplified method for a home, you will figure your deduction for that home using your actual expenses. You also will need to figure the percentage of your home used for business and the limit on the deduction.

 

Certain expenses are deductible to the extent they would have been deductible as an itemized deduction on your Schedule A or if claiming the standard deduction, would have increased your standard deduction had you not used your home for business. If the expense is indirect, use the business percentage of these expenses to figure how much to include in your total business-use-of-the-home deduction. If you are itemizing your deductions on Schedule A (Form 1040 or 1040-SR),

these expenses include the following.

  • Real estate taxes.
  • Home mortgage interest.
  • Mortgage insurance premiums.
  • Casualty losses are attributable to a federally declared disaster.

 

If you are claiming the standard deduction, these expenses only include net qualified disaster losses that increase your standard deduction.

 

The IRS publishes a very detailed publication and worksheet to help you calculate your deduction. Getting expert advice from an Accountant is always a good idea. There are many Miami Accountants who are qualified to answer your questions.

Home Office Deduction
You can deduct Home Office Expenses if you meet the criteria
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