Recent advances in technology, as well as the economic recession, have made working from home a captivating option for many. Workers using a home office often look to deduct the associated expenses, but the U.S. tax code includes stringent requirements for the allowance of such deductions.
If taxpayers are not careful, the IRS can easily disallow home office deductions.
Burden of Proof on Taxpayers
Ordinary and necessary expenses incurred in conducting a trade or business is deductible; deductions for personal, living, or family expenses are prohibited. If a space in a taxpayer's home also functions as an office; however, deductions can be taken for the office if it meets certain requirements. The home office must be used exclusively and regularly as the taxpayer's principal place of business under Internal Revenue Code (IRC) section 280A(c)(l)(A). The burden rests upon taxpayers to prove that they qualify for the claimed deduction.
Exclusive use. A recent court case discussed the exclusive use requirement, highlighting that a mixed use space will not qualify for a deduction (Shiekh v. Comm'r, TC Memo 2010-126, June 10, 2010). Here, a taxpayer who owned several rental units claimed a portion of his personal residence as a home office used to collect rents and store equipment; however, he offered no evidence that any one area was used exclusively for business purposes. On this basis, the U.S. Tax Court upheld the IRS's disallowance of the deduction. This holding affirms that, for procuring a deduction for a home office. It is insufficient to show merely that work was performed in a given space; instead, taxpayers must prove that the space was used exclusively for conducting business. A small home renders the burden of demonstrating exclusive use even more difficult to prove.
Principal place of business. Another recent case addressed the requirement that a home office act as a taxpayer's principal place of business (Xiong v. Comm'r, TC Summary Op. 2007-96, 2007). In this case, the taxpayer worked as a university professor and was also actively engaged in writing a book. The Tax Court held that the taxpayer's "book writing project [was] so interconnected with his university teaching and research as not constitute an activity separate from that of his occupation." Once the court determined his occupation as a professor, it then looked to establish the principal place of business. Courts apply several factors when determining a taxpayer's principal place of business. If work is conducted in both a residence and another location, courts weigh the relative importance of functions performed, and the time spent at each location.
In this case, the taxpayer offered no evidence to show that he spent more time working at home than at his university office, and thus the court disallowed all home office deductions.
Convenience. Employees must also meet another test before claiming home office deductions. The home office may not be established for the personal convenience, comfort, or economy of the employee (Sharon v. Comm'r, 66TC515, 523 ). Drucker v. Comm'r (52 AFTR 2d 83-508, 2d Cir. 1983) provides an example of a taxpayer who established a home office for the convenience of his employer. In Drucker, a musician used a portion of his apartment as practice space because his employer, the New York Metropolitan Opera, did not provide him with private practice space. The taxpayer claimed a home office deduction and, because of the necessity of practice for professional musicians, succeeded in securing the deduction. The ruling was tailored to this set of facts, and it applied the stringent statutory standards, accordingly. Conclusion, taxpayers retain the burden of proving both exclusive use and principal place of business for claimed home office deductions. Albeit, such deductions seem attractive to workers who rely on a home office.