It’s not always easy to figure out which home office write-offs are acceptable and which are not approved by the IRS. Below is a summary of the key provisions to give you a better idea of what you are able to deduct from the IRS.
Internal Revenue Code Section 280A
The IRS and the courts take their cues from IRC Section 280A. Let’s consider a freelancer by the name of Abigail. The IRS will allow her to claim office deductions only if she’s able to pass a trio of tests:
- Test No. 1: Abigail uses a dedicated space in her home exclusively for business work.
- Test No. 2: She does so on a regular basis.
- Test No. 3: The portion of the home that Abigail uses is her principal place of business.
When Abigail arranges things to successfully pass the trio of tests, she transforms otherwise nondeductible personal expenditures — a portion of everything from home insurance premiums and repairs to utility bills to depreciation (should she own her house or a percentage of her rent) — into deductible business expenses.
‘Exclusively’ means just that
IRS examiners are sticklers about what constitutes exclusive use. They insist that Abigail must be using the area that she claims — whether that be a single desk in one corner of her bedroom or an entire room — for business reasons only and not for anything else. They disallow all home office deductions when she uses her office for family-related or personal activities.
Examiners will relax when Abigail’s deduction is for a room that’s closed off from all nonbusiness activities. They’ll remain relaxed if the office is just a small part of a room as well, as long as Abigail clearly separates the business portion from the rest — by some sort of partition, perhaps.
The IRS examiners might make Abigail establish that absolutely zero personal activities take place within the business area. This is one of the reasons they bristle when freelancers take deductions for offices housed in cramped quarters, such as studio apartments.
A surefire way for Abigail to flunk the exclusive test is to introduce a TV into her office, though there may be a possible exception if she shows she has a business-related need to keep up with the news. An additional no-no would be if her office doubles as a place where she stashes her cat’s litter box, in which children play video games or younger family members do their homework on personal computers. Even a closet filled with clothes could be bad.
IRS examiners are mostly reasonable
They don’t forbid all personal activities. It’s not fatal if Abigail used an office phone or computer for personal conversations in her home office. It’s fine if she doesn’t rush outside whenever a family member asks her a question or Fluffy persists that it’s time for some Meow Mix.
How the IRS defines ‘regularly’
Since gray areas abound, Section 280A sets no arbitrary standards for how often Abigail must use her home office in order to pass the regular-use test. Examiners recognize that they should base their decisions on particular circumstances.
In most cases, they won’t challenge deductions if Abigail works in her office for a couple of hours per day for several days every week. However, they probably will challenge her claims if she spreads those couple of hours over one week.
IRS regulations allow some leeway
Abigail should anticipate the possibility that examiners will dispute her deductions for an otherwise empty room that is infrequently used for a purpose that’s incidental to her business.
Abigail’s business doesn’t have to be full time
Her business can be a part-time endeavor, like in a situation where she might moonlight from her home as a freelance writer while having a full-time job elsewhere. Examiners couldn’t care less that she devotes more time to moonlighting than to her full-time job.
‘Principal place of business’ has its own meaning
Will the IRS be placated if Abigail satisfies the regularity and exclusivity requirements? Two out of three is insufficient. Her home office also has to be her principal place of business.
In other words, her home office needs to be the place in which she personally meets clients or customers, and phone calls don’t count. Another possibility is that her home office is the only fixed location where she conducts her business’s key administrative or management activities.
There can’t be another fixed location outside of her home where she conducts such activities for that business. Plus, the IRS makes an important exception — as long as Abigail passes the regularity and exclusivity tests.
The deduction remains available if she:
- Carries out administrative or management activities from, say, a hotel room or car while traveling or
- Does occasional paperwork or administrative tasks at a fixed location other than her home.
Need help deciphering the code? We’ve got you covered. Give Lang Allan & Company a call.