If your clients qualify, they can deduct home office expenses when they work from home, as well as claiming a deduction for certain storage expenses. However, in a new case, Najafpirv, TC Memo 2018-103, 7/3/18, a taxpayer who operated a “smog check” business watched his deduction vanish into thin air.
Generally, to qualify for home office deductions you must use a part of your home regularly and exclusively as your principal place of business or a place where you meet clients or customers in the normal course of business. This entitles you to deduct direct expenses of the home office plus a proportionate share of regular household expenses (e.g., utilities and repairs) and depreciation. Alternatively, you may use a simplified method, equal to $5 per square foot, up to a $1,500 maximum. What’s more, if you use part of your home to store inventory or product samples, you can deduct expenses for that area without regard to the “exclusive use” requirement.
However, your clients must meet ALL of the following tests:
- You sell products at wholesale or retail as your trade or business
- You keep the inventory or product samples in your home for use in your trade or business
- Your home is the only fixed location of your trade or business
- You use the storage space on a regular basis
- The space you use is a separately identifiable space suitable for storage
Here’s what happened in the new case: The taxpayer, a resident of California, operated a smog check station for the state as a sole proprietorship. He lived in an apartment four doors down the street from where the business was located. The rental agreement entitled him to use a garage attached to the apartment building.
As an owner of a smog check business, the taxpayer was required by California to keep certain invoices and records regarding smog checks for at least three years. The invoices had to be housed on site so that they would be available for immediate inspection. Because of the close proximity of the garage, the taxpayer decided to use it for storage purposes instead of parking his car there.
In addition to the required invoices and business records, the taxpayer kept other business-related items in the garage, including backup air compressors, printers, monitors for the smog machine and various miscellaneous parts such as oil filters and wipers. But he did not store any personal items of value in the garage. When the IRS disallowed his deduction for home office, he took the case to the Tax Court.
Unfortunately, the Court ruled against the taxpayer. It gave two reasons:
- The taxpayer wasn’t involved the trade or business of selling products at retail or wholesale. Nor did the invoices and business records constitute inventory
- The garage wasn’t then used exclusively used as the taxpayer’s principal place of business
Note that the Tax Cuts and Jobs Act generally doesn’t affect home office deductions. But write-offs are no longer for employees who use a home office for the convenience of their employer. These deductions, which were claimed as miscellaneous expenses, are eliminated for 2018 through 2025.
Better idea: Have the company reimburse the expenses. As a result, the employee owes no tax and the business can deduct the reimbursements.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.