Tax Court Rules on Home Office

By August 4, 2014 Individuals

Kiplinger is reporting that the Tax Court has made a new ruling on the personal use of a home office.  Don’t get too excited, this ruling says more about how restrictive the IRS is on home office rules than it does about any new leniency.

For the case in question, the tax filer had a small studio apartment in New York City.  She used a portion of the studio apartment as her home office.  Because of the size of her living space, the taxpayer had to walk through her home office to get to her bedroom.  The tax court ruled that walking through her home office to get to her bedroom did not violate the exclusive use thresholds and she could take the deduction (Miller, TC Summ. Op. 2014-74).

What this ruling shows is how restrictive the IRS can be when evaluating whether or not a home office is truly a home office.  A home office should be a space that is regularly and exclusively used for business.  If you use a home office for business most of the time, but spend the weekend surfing the web or relaxing in that room, this will jeopardize your deduction.  In this tax court case, the IRS took issue with the taxpayer simply walking through her home office to get from one side of the apartment to another.

Some things to consider to protect your home office deduction:

  • Are you using the space exclusively for business?  Or is it a family room that doubles as a home office?
  • If it is not your primary business location, are you using the space to conduct regular business including meeting with clients?  Having space to take extra office work home on the weekends is not enough to meet the “Principle Place of Business” requirement.
  • Is your home office in a high traffic area of your home?  The IRS is looking for reasons to disqualify the deduction.  Can you see a tv from your desk?
  • What sort of recreational capabilities does your computer have?  If your home office is also your gaming headquarters, that is not exclusive business use.

If you do have a space that meets the exclusive and regular use requirement and the principle place of business requirement, then there is good news.  This year the IRS has introduced a simplified standard method for calculating your deduction.  IRS Publication 587 has some good information on what records to keep and what qualifies.  If you have any questions, please don’t hesitate to contact us.