Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

August 9, 2013

Two weeks ago, I discussed a new simplified option for calculating the home office deduction that is effective for 2013.  (You can find the article on my website at www.tlongcpa.com/blog if you missed it.)  The rules to qualify for a home office, however, have remained unchanged, and still complicated!  At the end of the last article I promised I would discuss the basic rules to qualify – so let’s get to it!

The purpose of the home office deduction is to offset the costs of maintaining a dedicated office space in a home related to a business owned by an individual, or in some cases for an employee’s job.

Let’s talk about employees first.  Many employees these days work from home, but more often than not, they are not entitled to the deduction because it is their personal choice to work from home.  The law requires that the office be for the employer’s convenience – not yours.  If your employer does not require you to work from home and provides space for you at the main office which you choose not to utilize, you are generally barred from taking the deduction.

An employer hiring for telecommuting position so it can save on corporate office rent or obtain/retain talent in distant places would certainly be for the employer’s convenience.  Or perhaps an employer would like to have a presence in a particular area, so it hires somebody to work out of his or her own home office, and meet clients there, instead of having to rent another space.  This would also be for the employer’s convenience.  Often, people work a couple days from home, and a couple days in the office.  They could be closer to a customer base from their home for appointments, for instance, but then also come to the main offices for staff meetings, etc.  Many times, it is certainly convenient for both parties.

The key thing employees would want to have is an expectation in writing from the employer about maintaining and using their own office.  Rationalizing in your own mind that the employer is benefiting will not help, even though it may be true.  If it does seem the employer is better off as a result of your home office, and your job description does not discuss maintaining your own office, you may want to talk to the employer about changing your job description to include this.

Now let’s discuss people running their own business.  In this circumstance, the IRS says the office must be one of three things: 1) the principal place of business, 2) a place of business that is used to meet customers, or 3) a separate structure from the home, but used for the business.  If you have a business, and your home is the only office, it is pretty clear you meet one of these three.  When someone has an office space outside the home, but also has a home office it gets a little trickier, especially if you don’t regularly meet with customers at your home (occasional use won’t qualify) and you don’t have a detached building at your home.

Digging further into item one you find that the IRS distinguishes your principal place of business from other offices as the place where your administrative and management activities such as billing, accounting, ordering supplies, making appointments, etc. takes place.  If you have no other fixed location where you conduct substantial administrative and management activities then your home office would qualify as your principal place of business.  For instance, if you were a personal trainer and rented space for you and your staff to meet with clients and use your exercise equipment, but you did all of your accounting, billing, appointment making, etc. from your home office, your home office would qualify as the principal place of business.

For any home office, whether it be for employees or business owners, the office must be used “exclusively and regularly” as an office for that business.  The rules are very rigid.  You can’t use a room a couple times a year and write it off, even if you did not use it for anything else.  It needs to be used with regular frequency, and be substantial and integral.  You also can’t double up your living room as an office during the day and a TV room at night.  You can’t have a family office where the kids use it for computer games on the weekends, dad uses it to work on the finances in the evening, and then mom uses it as her office during the day and tries to deduct it.  People often try to write off the whole guest bedroom which also houses there office, but courts have typically denied this if they have a bed in there and admit to having guests on occasion.   Technically, any nonbusiness purpose use disqualifies the space (special rules apply to childcare providers, however).

In practice there is at least de minimis personal use of virtually every office space, and at the end of the day, it is quite difficult to know if someone uses an office for some personal purposes.  However, if the auditor shows up and the kids are playing games on your computer and your in-laws’ suitcases are next to the bed in your “office,” I think you will have a problem!  Stick to the spirit of the law, carve out a dedicated space, and everyone will be happy.  Keep in mind that you don’t have to use an entire room, but you can define a portion of a room as the dedicated space, write off closet space for storage, etc.

If you have multiple businesses, you can use the same space for all of them, but if one business fails to qualify, then it is seen as personal use and thus none of the businesses qualify to claim the home office deduction.  (Note, in calculating the deduction, you would allocate the allowable deduction to the businesses – you would not get a double or triple deduction for the same space.)

In the final installment on home offices in two weeks, I will discuss the normal method of calculating the home office deduction and what expenses generally qualify.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.