The Office-In-Home Deduction -- Examples
January 26, 2001
In the articles "The Office-In-Home Deduction -- An Overview" and "The Office-In-Home Deduction In Action," we discuss the concepts of regular and exclusive use of part of the home as an office. Many times, those concepts are difficult to comprehend, so here are a number of examples that might allow you to get your brain around the regular-and-exclusive-use issues. Enjoy!
Example #1: You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Your family also uses the den for recreation. Since the den is not used exclusively in your profession, you cannot claim a business deduction for its use. You've failed the exclusive use test.
Example #2: Your home is the sole fixed location for your business of selling mechanics' tools at retail. You regularly use half of your basement to store 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. How can you claim the deduction if the area is not used exclusively? Because you've met the "storage of inventory or products" exception to the general exclusive use rules.
Example #3: You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. You do not make investments as a broker or dealer. Since your activities are not part of a trade or business, you cannot take a deduction for the business use of your home. Investing might seem like a business to you, but it doesn't pass muster in the eyes of Uncle Sammy. One of the conditions for the home-office deduction is that the office is used for a trade or business.
Example #4: John is a self-employed plumber. Most of John's time is spent at customers' homes and offices installing and repairing plumbing. He has a small office in his home that he uses exclusively and regularly for the administrative or management details of his business -- such as phoning customers, ordering supplies, and keeping his books. John does not do his own billing. He uses a local bookkeeping service to bill his customers.
John's home office qualifies as his principal place of business for deducting expenses for its use. He uses the home office for the administrative or managerial activities of his plumbing business and he has no other fixed location where he conducts these administrative or managerial activities. His choice to have his billing done by another company does not disqualify his home office as his principal place of business. Because he meets all of the qualifications, including principal place of business, he can deduct expenses for the business use of his home.
Example #5: Pamela is a self-employed sales representative for several different product lines. She has an office in her home that she uses exclusively and regularly to set up appointments and write orders and other reports for the companies whose products she sells. She occasionally writes orders and sets up appointments from her hotel room when she is away on business overnight. Pamela's business is selling products to customers at various locations throughout her territory. To make these sales, she regularly visits customers to explain the available products and take orders.
Pamela's home office qualifies as her principal place of business for deducting expenses for its use. She conducts administrative or management activities there and she has no other fixed location where she conducts administrative or management activities. The fact that she conducts some administrative or management activities in her hotel room (not a fixed location) does not disqualify her home office as her principal place of business. Because she meets all of the qualifications, including principal place of business, she can deduct expenses (to the extent of the deduction limit) for the business use of her home.
Example #6: Kathleen is employed as a teacher. She is required to teach and meet with students at the school and to grade papers and tests. The school provides her with a small office where she can work on her lesson plans, grade papers and tests, and meet with parents and students. The school does not require her to work at home. Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. She uses this home office exclusively and regularly for the administrative duties of her teaching job.
Kathleen must meet the convenience-of-the-employer test for her home office to be able to deduct expenses for its use, even if her home qualifies as her principal place of business. Because her employer provides her with an office and does not require her to work at home, she does not meet the convenience-of-the-employer test and cannot claim a deduction for the business use of her home.
Example #7: Tracy White is employed as a teacher. Her principal place of work is the school. She also has a mail-order jewelry business. All her work in the jewelry business is done in her home office, and the office is used exclusively for the business. If she meets all the other tests, she can deduct expenses for business use of her home for the jewelry business.
If Tracy also uses the office for work related to her teaching, she would not meet the exclusive use test for the jewelry business. As an employee, Tracy must meet the convenience-of-the-employer test to qualify for the deduction. Because she does not meet this test for her work as a teacher, she cannot claim a deduction for the business use of her home for either activity (her jewelry business or her teaching).
Example #8: Rachel is a high school teacher. She is provided a classroom to perform her teaching and meet with parents and students after school, and is also provided access to a "faculty room" with a desk and tables where she can do her "paperwork" (such as grading papers, preparing lesson plans, etc.) -- it's not a fixed office, she shares it with other faculty. But Rachel doesn't really want to go through the hassle of moving from location to location at the school on a daily basis, so she decides to take her paperwork home and complete it all in her home office.
That's all well and good, but Rachel doesn't qualify for the office-in-home deduction. Why? Because Rachel's an employee, she must meet the "convenience-of-the-employer" test. Her employer provides her with "space" to complete her assigned duties. Rachel might not like the "space" provided, but it's still offered to her. So, when Rachel takes her paperwork home, she is doing so for her convenience... not for the convenience of her employer.
Example #9: June Quill, a self-employed attorney, works three days a week in her city office. She works two days a week in her home office used only for business. She regularly meets clients there. Her home office qualifies for a business deduction because she meets clients there in the normal course of her business.
We hope these examples will allow you to put the "regular and exclusive use" concepts into practical use.
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