With the COVID-19 pandemic, more Americans are working from home than ever.
And we’re adapting our living spaces into workspaces accordingly, even taking some extra room for our business use.
That’s ok, right?
Actually, Section 280A(c) of the IRS code states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business. Therefore, the law defines no specific number of rooms or particulars regarding the size of your home office.
The courts make this rule clear in the seminal cases, Mills (less than one room) and Hefti (lots of rooms) cases described below.
The Mills Case
Albert Victor Mills maintained an office in his apartment from which he conducted his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills had his desk, he also kept tools, equipment, paint supplies, and a filing cabinet.
He claimed 23 percent business use for his 422-square-foot apartment and the court agreed with his allocations.
Key takeaway: Mr. Mills didn’t have a single room dedicated to a home office, but just an area of the apartment where he grouped his office furnishings, equipment, and supplies. If you have a similar situation, make sure your business assets are located in a group.
The Hefti Case
Charles R. Hefti lived in a huge house, totaling 9,142 square feet. However, he claimed that more than 90 percent of his home was used regularly and exclusively for business.
But based on a careful review of his rooms, the court decided that 13 rooms, totaling only 19 percent of the home, were used exclusively and regularly for business.
The deductible portion of your home for an office includes the area used exclusively and regularly for business.
So, let’s say you have an office in one room and your files in a second room, and you never use these rooms for personal purposes. Further, let’s say you use the office area on a daily basis and the file area in connection with that daily work.
Both rooms would meet the exclusive and regular use requirements, just as Mr. Mills’s and Mr. Hefti’s offices met these rules.
But Not This
“Exclusive use” means that you must use a specific portion of the home only for business purposes. You must make no other use of the space.
Exception. One exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.
Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.
Example 2. In Pearson, another notable case, Dr. Pearson practiced orthodontics in a downtown medical building. But he retained the dental records of more than 3,000 patients in 36 file drawers (each measuring 26 inches by 14 inches by 12 inches) and had 1,461 boxes containing orthodontic models (each box measuring 10 inches by 6 inches by 2 1/2 inches).
He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.
The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.
Those subtle distinctions can make all the difference when claiming home office deductions!
If you would like to discuss your home-office deduction to make sure we get it right, schedule an appointment with my office using this link.