I have a lot of clients in the San Francisco Bay Area, where housing costs are sky high. Many of these clients also work from home, and would like to take advantage of the home office deduction if possible. But a problem they frequently run into is that one of the rules for deducting home office expenses is the law says an area must be used “exclusively” for business purposes.
So if you’ve got a small studio or 1-bedroom apartment, it’s pretty hard to set aside an area that’s “exclusively” used for anything, even though you might have a space where you do all your work from and it very rarely is used for any other purpose. That’s why when I mention the “exclusive use” test, I often get eye-rolls or incredulous questions along the lines of, “Are you kidding?? How on earth could I afford an apartment big enough for that?!” (Sometimes followed by, “You know how little I make!”)
For years I have advised clients that the letter of the law requires “exclusive” use…but…sometimes the letter of law doesn’t always make sense in every situation, and you have to consider the intent. So I’ve had a number of clients through the years who seem to clearly meet the intent of the law…they do all their work from a dedicated space, they meet clients there, etc. But since they don’t have a separate room — just a clearly delineated space as required by the IRS — there are occasionally times when the office area might be used for a non-business purpose. And I’ve told clients that it’s very aggressive to take a home office deduction in that case — essentially hoping the IRS or the tax court will go with the intent of the law rather than the letter — but it’s not an unreasonable position.
Well now the tax court has provided some vindication for that advice. In Summary Opinion 2014-74, the tax court allowed a home office deduction for a taxpayer with occasional personal use of a home office.
Now it’s very important to note that this doesn’t suddenly throw open the door for taking the home office deduction any time you do some occasional work from home. There were unique circumstances to this case. I won’t go into a lot of detail (you can just google Tax Court summary opinion 2014-74 for lots of details), but this was a taxpayer with a New York studio apartment, and no other work place available to her. She had a clearly delineated space and often met with clients in this space. Her home was for all practical purposes the New York office for her employer. So every requirement except the “exclusive use” requirement was clearly met with zero question. And as a result, the tax court went with the intent of the law, and determined that some occasional, incidental personal use of the home office space was not enough to negate the otherwise valid deductions for home office expenses.
So while this case does nothing to change the advice I’ve always given, it does provide reassuring validation. For taxpayers in very high cost areas, where it’s simply not practical to have enough space to maintain a completely, exclusively separate office space, the home office deduction is not out of the question due to some very occasional personal use, provided all other tests are clearly met. From experience, I can tell you this taxpayer’s situation is uncommon…but far from completely unique, especially in places like where my practice is located in the SF Bay Area.