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Keep any home matters out of the home office

My youngest daughter went to work for a not-for-profit organization in San Francisco.

She found a “cute” studio apartment in a house in Berkeley. What apartment managers call “cozy.”Jim Hamill

Her employer is fairly well known and does amazing work primarily in Africa and Southeast Asia. They have an office in the financial district.

Although her apartment is small, it seemed perfect for a new graduate who would take Bay Area Rapid Transit to and from work and be gone for most of her waking hours.

Last March the Bay Area was one of the first to shut down. Riding BART was out of the question and besides, the financial district was shuttered. A picture of a mountain lion walking among business buildings and empty San Francisco streets went viral.

Like many of us, she now works from home. But her home was one intended to be for short-term residency around a workday in a vibrant urban area with views of mountains and the bay. Now it’s a place of eating, bathing, working, sleeping and unwinding. All in 570 square feet.

But wait a minute – her dad is a tax guy. Maybe he can figure out some way to make that costly, cozy, cramped work-sleep-eat-bathe-unwind place a bit more affordable.

Isn’t there some tax rule for office in home use? Well, yes there is – although the tax law does not use the term “office in home.” It instead makes an allowance for “business use of a residence.” Three scenarios might allow tax benefits.

First, if the residence is the principal place of a business. Second, if the residence is used as a meeting place for customers, patients or clients in the normal conduct of a business. Third, if the space is separate from the dwelling unit and is used for business.

Now let’s tighten up this language. Any business use must be “regular and exclusive.” The latter term is the easier one to define and the more restrictive – it means used only for business. Using a space for business and personal dooms any tax benefit.

If the individual makes use of this property in connection with employment, the use must be for the convenience of the employer. And any deduction is allowed only as an unreimbursed employee business expense.

Without getting too tax-ey – which, as you can see is spelled different than taxi, explaining why spelling bees always use the word in a sentence – convenience of the employer is very difficult to support. But no matter, because the 2017 tax law changes eliminated all employee business deductions through 2025.

If we’re still using our COVID offices in 2026, I will return to this convenience issue, but otherwise there is no tax benefit available to an employee blessed to spend every single workday in the same place they also try to use for a personal life.

If you are self-employed, things are more favorable. You should meet the principal place of business test unless you have some outside office. But you will still need to use the space exclusively for the business.

A self-employed person who uses the home space for administrative and management functions only may qualify provided there is no other workspace that is used for that purpose. For example, a plumber who spends the day traveling to work locations and then does the administrative and management functions at home would qualify.

But, again, because it is important, make sure the space is used exclusively for business. No horseplay, high jinks or tomfoolery in the same space. IRS agents loathe shenanigans in the office and will ask if such things took place.

If you do qualify, the next step is how to determine allowed deductions. There are two ways. One is actual costs, which can include an allocated share (by square footage) of utilities, maintenance and even depreciation. The other is $5 per square foot, which is limited to 300 square feet of space.

The actual costs will almost certainly be greater, but you’ll need good records. And when you sell the home any depreciation claimed must be reported as income. The $5 per foot method requires no records and does not affect reporting on sale.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

 

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