When you operate a business in part of your home, you may be entitled to deduct certain expenses, like utilities, based on the percentage of business use. However, as shown in a new case, Mendelson, TC Summary Opinion 2019-25, 9/4/19, the cost of utilities like telephone lines may be fully deductible if they are used strictly for business purposes.
For starters, you may deduct home office expenses if you use a portion of your home “regularly and exclusively” as your principal place of business or a place to meet or deal with customers, clients or patients in the normal course of business.
In addition, you may be entitled to deductions for a business storage area or a separate structure (e.g., a detached garage or barn) used for business matters.
If you qualify under these rules, you can deduct expenses directly related to your home office, as well as a proportionate share of certain expenses of the entire home.
The taxpayer in the new case is an attorney licensed to practice law in California. He had a solo law practice for many years. From 2005 through 2009, however, he sustained significant business losses, and was subsequently unable to maintain a full-time practice. So, he closed his law office in 2009, but continued working on cases throughout 2013 and into 2014.
After the law office closed, the taxpayer worked out of a designated office space in his home. He converted an unused 168-square-foot bedroom in his 2,400-square-foot home into an office. The room was connected to a large closet consisting of approximately 20 additional square feet.
In total, the home office comprised approximately 7.83 percent of the total living space within the home. It included two desks, six two-drawer file cabinets and a bookshelf used for books and supplies.
While working from home, the taxpayer continued to maintain five business telephone lines in addition to his cell phone. He also paid independent contractors to provide paralegal and bookkeeping services for his practice. One paralegal worked from her own home and the taxpayer reimbursed her business expenses. He also contracted with a private investigator on some cases, as needed.
Based on these facts, the taxpayer claimed deductions of $6,609 for utilities on Schedule C. At trial, he testified that the reported expenses were primarily related to the five telephone lines he had dedicated exclusively for business use. The parties stipulated that the general ledger recorded a total of $6,499 in payments to AT&T, MCI and Verizon for communications services.
During his testimony, the taxpayer also contended that he was entitled to deduct one-third of his Comcast cable bill as a business expense because it included a secondary phone line used for faxes. But, he didn’t submit any evidence to substantiate either the amount of the Comcast bill or the alleged business use.
The Tax Court was convinced that the taxpayer substantiated the reported utilities expenses to the extent that they were recorded in the general ledger. Accordingly, it ruled that he s entitled to deduct $6,499 for utilities expenses in 2013 for the five telephone lines. However, it disconnected the unsubstantiated expense attributable to the cable bill. That expense is nondeductible.
Make sure your clients claim the full amount of home office expenses they are allowed by law. Have them substantiate business use in case the IRS ever challenges the deductions.
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...