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Exclusive use test for a home office.

It is well recognized that a taxpayer who uses a portion of his home on a regular and exclusive basis may deduct a portion of his home operating expenses as home office expenses. When one generally thinks of an office in a home for tax purposes, it is usually implied that the taxpayer is conducting only one trade or business out of his home. However, it is not always clear as to whether a taxpayer who operates more than one trade or business out of the same home office meets all of the requirements, especially the "exclusive use test," for deducting a portion of his home operating expenses as home office expenses.

Therefore, the purpose of this article, is to address this issue to determine if a taxpayer conducting more than one trade or business activity out of the same home office can satisfy the "exclusive use test" for an office in that home therefore, becoming eligible to deduct a portion of his home operating expenses as home office expenses.

Analysis

Section 280A of the Internal Revenue Code provides for a deduction for home office expenses for a taxpayer who uses a portion of their personal residence "exclusively" and on a regular basis: (a) [as] the principal place of business for any trade or business of the taxpayer, (b) as a place of business which is used by patients, clients or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or (c) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business. In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. (1) What is crucial here is the meaning of the condition of "exclusively." It is without dispute that the condition of exclusively prohibits any personal use, no matter how small or insignificant, by the taxpayer or anyone else of the designated area of the home that is being used as a home office. However, we must examine further to determine if it likewise prohibits the use of the home office to conduct more than one separate trade or business activity.

In the case of Alfred W. and Mary M. Hamacher (2), the taxpayer conducted two business activities out of a home office. One activity was related to the taxpayer's independent contracting acting services and the other activity was duties performed by the taxpayer in his capacity as an employed administrator of an acting school. The Tax Court agreed with the Internal Revenue Service and denied the taxpayer a deduction for home office expenses. The Tax Court reached its decision not because the taxpayer conducted more than one activity out of the home office but because the taxpayer failed to meet the "for the convenience of his employer" condition for the duties performed in his capacity as administrator of the acting school. In fact, the Tax Court made very clear that in 1981 the United States Congress amended section 280A(c)(1)(A) of the Internal Revenue Code to read "for any trade or business of the taxpayer" in order to permit a business expense deduction for more than one trade or business conducted by the taxpayer out of a home office.

However, the court carefully pointed out that each and every business activity conducted out of the home office must be of the type described in Section 280A(c)(1). If any of the business activities does not meet the requirements of Section 280A(c)(1), the exclusivity test is not met with respect to any of the activities and, therefore, no deduction is allowed for the home office expenses. No allocation of home office expenses between activities that meet the requirements of Section 280A(c)(1) and activities that do not meet the requirements is permitted.

The Tax Court in the Hamacher case held that, in light of the fact that the employer (acting school) had provided an office for the taxpayer and did not require or expect for him to do any work at home, the administrative duties performed by the taxpayer in his home office was for his own convenience, comfort or economy, and not for the convenience of his employer. Accordingly, the taxpayer did not meet the requirements of Section 280A(c)(1) in regards to his employment duties performed at home and, therefore, was disallowed all deductions for home office expenses.

Based on the ruling of the Hamacher case, it is important for a taxpayer to not conduct activities that do not meet the requirements of Section 280A(c)(1) in the same home office with activities that do meet the requirements of Section 280A(c)(1). Conducting qualifying and nonqualifying activities out of the same home office will result in none of the home office expenses being deductible. The better practice is to conduct the nonqualifying activities in a separate area of the home and not in the home office of the qualifying activities.

Conclusion

A taxpayer may satisfy the "exclusive use test" when more than one trade or business activity is conducted out of the same home office and, therefore, may deduct home office expenses for those activities provided that all of the activities conducted out of the home office meet all of the requirements of Section 280A(c)(1) of the Internal Revenue Code. Failure of any of the trade or business activities to meet all of the requirements of Section 280A(c)(1) will result in the denial of deducting home office expenses for all of the trade or business activities conducted out of the home office.

Footnotes

(1) See Section 280A(c)(1)(A)(B)(C) of the Internal Revenue Code of 1986.

(2) Alfred W. and Mary M. Hamacher, 94 T.C. 21 (1990)

Marvin J. Williams is an assistant professor of accounting at the University of Houston teaching primarily courses in federal taxation including taxation of individuals and estate and gift taxes. A certified public accountant since 1983, he received his MBA in 1982 and his JD in 1986, both from the University of Houston.
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Title Annotation:Debits & Credits
Author:Williams, Marvin
Publication:The National Public Accountant
Article Type:Column
Date:Nov 1, 1991
Words:1039
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