Home Office Deduction - Exclusive Use

If you use your home for work or business, you may be entitled to the home office deduction. The home office deduction is one of those wonderful tax deductions that allows a taxpayer to turn an otherwise non-deductible personal expense into deductible business expense.

Over a series of posts, I'm going to review some of the rules and nuances of this deduction. You can find more information in IRS Publication 587 or the IRS YouTube video.

The first thing to note are the specific rules you must follow to get this special deduction. If you fail to follow the rules, you will generally lose the deduction.

To qualify to deduct expenses for business use of your home, you must use part of your home:

• Exclusively and regularly as your principal place of business,
• Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
• In the case of a separate structure which is not attached to your home, in connection with your trade or business,
• On a regular basis for certain storage use (Inventory storage or product samples)
• For rental use (See IRS Publication 527)
• As a daycare facility

If you are an employee, you may also qualify for a deduction if you meet the tests noted above plus:

• Your business use must be for the convenience of the employer, and
• You must not rent any part of your home to your employer and use the rented portion to perform service as an employee for the employer.

The IRS notes that if the use of the home office is merely appropriate and helpful for the employer, you cannot deduct expenses for the business use of your home.

The key words that often catch the unwitting taxpayer are exclusive and regular use. Many court cases hinge on the interpretation of these two words. In today's post, I'll review the exclusive use test.

The first thing to note is that you don't have to meet the exclusive use test if you are taking the home office deduction as a daycare facility, or for the storage of inventory or product samples. There are some specific rules you need to meet for these exceptions though I'll refer you to IRS Pub 587 to read those yourself.

Because exclusive use seems to be a very high bar, I'm often asked if there are exceptions to this rule beyond those noted above. In other words, does the IRS really mean "exclusive?"

The law [IRC Sec. 280A(c)(1)] is very clear on this matter - the use must be exclusive. Almost any personal use for the area destroys the deduction.

In Speers v. Commissioner (T.C. Memo 1994-157) the court ruled the exclusive use test is an "all-or-nothing standard." Combining business and personal use precludes the deduction - ANY personal use destroys the deduction.

Despite this clear standard, the courts have carved out de minimis exceptions to the exclusive use test.

In one case, a taxpayer claimed a home office deduction for a walk-in closet in his studio apartment. To get to the bathroom, the taxpayer had to walk through the closet allowing the IRS to challenge the exclusive use test. The court ruled in the taxpayer's favor saying this incidental use to walk to and from the bathroom did not violate the exclusive-use test.

In another case [Culp v Commissioner (TC Memo 1993-270)], a taxpayer stored a lawn mower in the garage he claimed as a home-office deduction. The court again ruled on behalf of the taxpayer claiming the space occupied by the lawn mower amounted to de minimis use and did not alter the deduction.

In an example of how even minor personal use can destroy the deduction, look at Langer v Commissioner [TC Memo 1992-46]. Mrs. Langer ran a piano lesson business from her home and had a special area set aside for this exclusive purpose. However, during the year she had an open house allowing guests to use the room. The court ruled that this use violated the exclusive use test and Mrs. Langer lost her deduction.

We'll continue with this subject in future blog posts.