IRS wants exclusivity in Home Office Deductions

A recent Tax Court Case dealt with Home Office deductions of a small business tax payer.

The ruling is based on §280A(a); Disallowance of certain expenses in connection with business use of home, rental of vacations homes, etc.   “Except as otherwise provided in this section, in the case of a taxpayer who is an individual or a[n] S corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the year as a residence.”

The taxpayer before the court operated a business in close proximity to the apartment he rented.  The apartment rent included the use of a garage.  The taxpayer stored business documents required by state law to be available for inspection at or near the business in the garage with business equipment and inventory. He did not store personal items of “note or value in the garage” with the inventory and business documents.  Further the business did not have a formal office or storage space in the business premises nor did he have space set aside in the apartment for an office.

The court stated the taxpayer did not fit within the exception of §280A(c)(2). The taxpayer did not sell products at retail or wholesale and the records where not inventory. This exception allows inventory or samples to be stored in a dwelling and the space used to be deductible. I call this the salesman’s exception as many salesmen carry samples and inventory to show and leave with customers and need storage for inventory or samples in their home as many do not have daily access to the storage of the companies they sell for.

And the taxpayer did not meet the exception granted by §280A(c)(1) as the garage was not used exclusively as the place of business.

The moral of this story is to be aware of when you meet the requirements to claim the home office deduction. If you use your home office as the:

  1. principle place of business for your business,
  2. a place of business where you meet clients, patients, or customers in meeting or dealing in the normal course of business or,

You may claim the home office deduction.

If your principle place of business is elsewhere you may only deduct the space allocated to storage of inventory or samples if you are involved in retail or wholesale. The taxpayer above made reasonable assumptions of what he could deduct as a business expense. It is business related, I can deduct it.  Tax law is not reasonable, It is a bag of compromises, manipulations, and feel good measures that often had no rhyme to it. If you are not sure, ask a tax preparer and save the time, money, and frustrations.

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