IRS Tax Tip 2009-53
Taxpayers who use a portion of their home for business purposes may be able to take a home office deduction if they meet certain requirements.
In order to claim a business deduction, you must use part of your home for one of the following two reasons:
- Exclusively and regularly as either: your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business. Where there is a separate structure not attached to your home, the regular and exclusive use does not need to be your principal place of business as long as the use is in connection with your trade or business.
- On a regular basis for certain storage use -- such as storing inventory or product samples -- as rental property, or as a home daycare facility.
Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.
There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
If you are self-employed, use Form 8829 to figure your home office deduction and report those deductions on line 30 of Schedule C, Form 1040.
Excerpt from Tax Site
If your client qualifies for the deduction, you may then calculate the amount of the
allowable deduction. First, determine the qualifying business proportion of the home—this is generally computed using the square footage of the home. Second, determine which expenses qualify for the deduction. Include 100% of the expenses made solely for the business part of your client’s home (e.g., repairs to the home office), but only include the business percentage of expenses made for the entire home. The business percentage of expenses is computed by multiplying the qualifying business proportion of the home by the amount of expenses such as insurance, rent, utilities, general repairs, and even depreciation. Third, using the figures determined above, compute the allowable deduction. The author recommends using IRS Form
8829 to make this computation. Note that if your client’s gross income from the business use of the home equals or exceeds total business expenses, then all of your client’s qualifying business expenses are deductible.
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, DC 20224 UILC No.:
Number: XXXXXXXXX CC:ITA:2:MEBrookens
Release Date: 5/25/2001 COR-117177-00
March 19, 2001
MEMORANDUM FOR MR. MICHAEL PERLMUTTER
LEAD CUSTOMER SERVICE REPRESENTATIVE
ACCOUNTS MANAGEMENT DIVISION III, GROUP 6140
FROM: Heather C. Maloy
Associate Chief Counsel
(Income Tax & Accounting)
SUBJECT: Section 280A(c)(6)
This technical assistance memorandum responds to your inquiry concerning the effect
of § 280A(c)(6) of the Internal Revenue Code on the deductibility by an individual
taxpayer of expenses attributable to the rental of a portion of a dwelling unit to his
employer. The employer is an S corporation of which the employee is the sole
shareholder and sole employee. During the period of the rental the individual used the
rented portion in performing services as an employee. The individual also used the
dwelling unit as a principal residence. Our discussion supplements previous oral advice
we have given you on this subject.
Your inquiry was prompted by an individual described above who was concerned
because he could not find a place on the applicable forms to claim certain business
expenses and depreciation attributable to the rental income. You asked for guidance
concerning the appropriate form(s) to use in reporting the rental income and
Please note that technical assistance does not relate to a specific case and is not
binding on audit or appeals offices. This document may not be cited as precedent.
How should an individual who rents a portion of his dwelling unit to his employer and
who uses the dwelling unit in performing services as an employee of that employer treat
the expenses attributable to the rental of the dwelling unit?
However, although the aggregate amount of deductible home mortgage
interest, real property taxes, and personal casualty losses is not affected by partial
business use of the home, those deductions must be allocated between business and
personal use of the home to prevent circumvention of the gross income limitation (or
deduction limit) of § 280A(c)(5).
The individual described above may deduct home mortgage interest, real property
taxes, and personal casualty losses to the extent permitted by §§ 163, 164, and
165(c)(3) and (h). However, the individual may not deduct otherwise allowable trade or business expenses under § 162, business casualty losses under § 165(c)(1), or
depreciation under § 167, to the extent those expenses and losses are attributable to
the use by the employee of the dwelling unit in performing services for the employer.
In general, § 280A applies to individuals who use their homes both for personal
purposes and for the production of trade or business income. The section is designed
both to insure that the business use of the home does not result in an inappropriate
conversion of nondeductible personal, living, and family expenses into deductible
expenses and to permit the deduction of legitimate business expenses incurred in using
the home to earn income.
Section 280A(a) generally disallows otherwise allowable deductions with respect to the business use of an individual’s residence. However, § 280A(b) provides an exception to that disallowance rule by providing that § 280A(a) “shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity).” In other words, § 280A(b) provides that if an individual who uses his home entirely for personal purposes could take a deduction related to that personal use, he may also take the deduction if he uses the home both for personal purposes and to carry on trade or business activities. Thus, § 280A(a) and (b), taken together, permit an individual who pays home mortgage interest expense and state and local real property taxes to deduct those payments -- if the rules found in §§ 163(h) and 164(a)(1) are met -- regardless of whether that individual uses his residence solely for personal purposes or for both personal and business purposes.
Deductions for the business use of a home are potentially available only if the use falls
into one of the four categories listed in § 280A(c)(1) - (4). Those categories are,
respectively, specified home office uses (§ 280A(c)(1)(A), (B), and (C)), storage of
inventory or product samples in the home (§ 280A(c)(2)), rental of the property
(§ 280A(c)(3)), and use of the home in providing day-care services (§ 280A(c)(4)). In
general, the business expenses associated with those uses are deductible only if the
individual’s business use of the home is regular (rather than occasional or incidental),
and only to the extent the income earned from the business use of the home equals or
exceeds the business expenses. Section 280A further requires both that expenses be
reasonably allocated between business and personal use and that expenses be taken
in a specified order. In addition to these general rules, particular rules apply to some of
the business uses listed above. Publication 587, Business Use of Your Home (2000)
contains a detailed description of the various § 280A rules.
Your questions involve a corporate employee whose receipt of business income and
whose incurring of business expenses relate to three of the § 280A(c) business uses
listed above: the (c)(1)(A) and (B) home office use and the (c)(3) rental use. For ease
of discussion, we will refer to two hypothetical employees – E-1 and E-2 – both of whom use part of their homes (but not a separate structure detached from the dwelling unit)
Why does this matter? What implications does it have? They wouldn’t mention it if it didn’t change something, Right?
in performing services for their employers and both of whom are the sole shareholders of their S corporations. Assume the following additional facts concerning these
(1) E-1 receives a reasonable salary from her employer (includible in her gross
income under § 61(a)(1)) and seeks to claim a home office deduction.
(2) E-2 receives a reasonable rent from his employer (includible in his gross
income under § 61(a)(4)) and seeks to deduct business expenses related to that rental.
To claim a home office deduction, E-1 must satisfy both the general requirements of
§ 280A and the particular requirements of § 280A(c)(1)(A) or (c)(1)(B). Specifically,
under § 280A(c)(1), E-1 must show that she used her home office exclusively and
regularly either as (A) her principal place of business in her trade or business of being
an employee, or as (B) a place of business in which she meets or deals with patients,
clients, or customers in the normal course of her business. In addition, E-1 must show
that her exclusive use of the home office is for the convenience of her employer.
Assuming E-1 can meet the general and specific rules of § 280A, she should calculate
her home office expense deduction by using the worksheet contained in Pub. 587.
Such expenses are generally claimed on various lines of Schedule A, Form 1040
Note: E-1 in this example did not receive reimbursement or rent and is simply trying to deduct the expenses.
Pages 16 - 17 of Pub. 587 (2000) contain an example of how the expenses are
calculated and reported and provide information about additional forms which E-1 may
be required in some circumstances to prepare and file.
However, because E-2 is receiving rental rather than salary income from his employer, E-2 will not be allowed to deduct business expenses attributable to the rental income.
This result comes about not because it is more difficult to satisfy the rental use tests.
The § 280A(c)(3) rental use rules are usually easier for an individual to satisfy
than are the (c)(1) home office use rules, because the (c)(3) rules do not contain the
requirement of exclusive use found in the (c)(1) rules.
than the home office use tests -- indeed, ordinarily the opposite is true2 -- but because
of the particular disallowance rule of § 280A(c)(6).
Section 280A(c)(6) was added to the Code in 1986 by § 143(b) of P.L. 99-514, 100
Stat. 2120, 1986-3 C.B. (Vol. 1) 37. Section 280A(c)(6) provides that:
Treatment of rental to employer. Paragraphs [c](1) and [c](3) shall not
apply to any item which is attributable to the rental of the dwelling unit (or
any portion thereof) by the taxpayer to his employer during any period in
which the taxpayer uses the dwelling unit (or portion) in performing
services as an employee of the employer.
So this doesn't apply is services are not performed?
E-2 falls squarely within § 280A(c)(6), because E-2 is both renting to his employer (Y
Co.) and using the rented portion of his dwelling unit to perform services as an Y Co.
employee. Accordingly, § 280A(c)(6) will bar E-2 from deducting otherwise allowable
§ 162 trade or business expenses, § 165(c)(1) business casualty losses, and § 167
depreciation. That statutory bar, in turn, explains why there is no place on the forms to
deduct those expenses.
Congress added § 280A(c)(6) expressly to overturn the Tax Court’s decision in
Feldman v. Commissioner, 84 T.C. 1 (1985), aff’d, 791 F.2d 781 (9th Cir. 1986). The
taxpayer in Feldman, an employee, shareholder, and managing director of an
accounting firm, not only had an office at the firm, but received an above-market rental
payment from the firm to maintain an office (and related garage space) in his home.
Because his home office did not meet the requirements of § 280A(c)(1), the taxpayer
could not have claimed business expenses relating to its use. Despite the
government’s argument that the “lease” agreement in fact represented disguised
compensation, however, the courts permitted the taxpayer to claim offsetting rental
expenses under § 280A(c)(3). In enacting § 280A(c)(6), Congress observed that the Tax Court’s interpretation of § 280A in Feldman could lead to the circumvention of statutory restrictions on the deduction of home office expenses. In particular, Congress was concerned that:
(1) employers and employees could arrange sham transactions (whereby a portion of
salary was paid in the form of rent), and (2) the employer-employee transactions would
not be negotiated at arm’s length but would provide added tax deductions for the
employee at no additional cost to the employer. Accordingly, Congress provided that
no home office deductions were allowable (other than expenses such as home
mortgage interest and real estate taxes that are deductible absent business use) if the
employee rents a portion of his or her home to the employer. H.R. No. 99-426, 1986-3
C.B. (Vol. 2) 133. It should be noted, however, that although § 280A applies to S corporations as well as to individuals, the only taxpayer to whom § 280A(c)(6) refers is the employee. Thus, for example, an S corporation’s deduction under § 162 for rent is not affected by § 280A(c)(6).
We hope this memorandum is helpful. If you have further questions, please contact
Ms. Marilyn E. Brookens at (XXX) XXX-XXXX.
Excerpt from Tax Almanac
As a self-employed sole proprietor you can deduct as an ordinary and necessary business expense the costs of a qualifying home office on Schedule C. If you are an employee of your own one-man corporation, whether a regular “C” corporation or a “sub-chapter S” corporation, you have three choices for handling the costs of a qualifying home office:
• You can deduct the costs as an unreimbursed “employee business expense” under “Job Expenses and Most Other Miscellaneous Deductions” on Schedule A. Expenses in this category of itemized deduction are only deductible to the extent that the total exceeds 2% of your Adjusted Gross Income.
• The corporation can pay you rent for the home office.
• The corporation can pay you for the “out-of-pocket” costs of a home office under an “accountable” plan for employee business expense reimbursement.
The third option, being reimbursed under an accountable plan, provides the greatest tax savings.
What's your opinion?
It is an excellent way to get money out of your closely-held corporation tax-free. The corporation can deduct the amount of the reimbursement and you do not have to report the payment as income.
This option is “more better” than having the corporation pay you rent for the home office. While your corporation can deduct the rent paid to you, you must report the rent as income on Schedule E. You can only deduct the pro-rated share of real estate taxes, mortgage interest and casualty losses against the rental income on Schedule E, expenses that are otherwise deductible in full on Schedule A. You cannot deduct the proportionate share of insurance, utilities, repair and maintenance, depreciation or any other indirect expenses.
So, if I'm paid rent I can only deduct part of RE taxes, mortgage insurance, and casualty losses, but not portion of utilities, maintance, ect...? I would pay income tax on the rent received, minus my above mentioned deductions, but since it is, correct me if I'm wrong, considered passive income and not SE wages, I would not have to pay SE tax on the rental income. I know I probably used way to many commas.
Last Excerpt, I Swear
Office in Personal Residence - There is a two-fold test as to whether an area in a home may be deducted as an office in home. First, the area must be used regularly for business purposes. Regularly means of course, on a regular basis and whether that be 8 hours or more daily or once a week the concept is that it be on a regular basis. Second, the area must be used exclusively for business purposes. Nightmare stories
are told about a business owner using the Home office deduction and it being completely disallowed because of a simple thing like his allowing the children to use the internet, watch TV, etc in the same room, or having a guest sleep over in the office during a weekend stay. If there is ANY activity occurring in that
room other than strictly business related work, the entire deduction is in jeopardy
One word of caution on this deduction for the S-Corp is that the deduction goes on the Form 2106, not as an expense on the 1120S. Remember that this income flows through to your personal return and you are personally taking this deduction for the home office.