IRS Lets Taxpayer Deduct Rent for a Personal Residence

Due to the pandemic, millions of taxpayers are now working from home. Although the IRS has not yet issued any guidance on whether they would receive special deductions, some cases have gone through Tax Court that could be relevant to this subject.

Apr 9th 2020
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A taxpayer in a new case, Benton TC Summary Opinion 2020-12, 3/11/20, tried a relatively novel approach. He  worked out of a house in the suburbs and deducted the rent his business paid to use the place as an ordinary and necessary business expense.  

This case is especially timely in light of the unique circumstances these days where millions of taxpayers have started working from their homes. 

Generally, you can deduct rent paid by your business for use of a building, such as office building or warehouse, where you conduct business activities. But it’s not as clear-cut if you operate the business in a house normally intended to be used as a personal residence.

The taxpayer, a resident of California, operated a picture framing business. He sold framed photos, prints and artwork and enlarged photos and arranged framing services for his customers. Usually, the taxpayer enlarged the photos himself at Costco and paid a third party to provide framing services for his customers.

In 2013, the taxpayer conducted his business from a house in a residential community near Los Angeles. The house included a living room, a dining room, a kitchen, three bedrooms and two bathrooms. Neither he nor his family resided there.

The taxpayer rented the house and claimed a deduction of $42,000 for rental expenses, based on bank records he provided. The IRS denied the rent deduction in addition to certain other expenses claimed on Schedule C.

In disallowing the rental expense deduction, the IRS relied on tax code Section 280A, which states the general rule that a taxpayer can’t claim a deduction “with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.” However, the Tax Court said that the IRS’s reliance on this section is misplaced.

The parties stipulated that the taxpayer did not reside in the house where he conducted his business. He testified that he used the house exclusively for business purposes and offered photos to show that he displayed framed pictures and various types of artwork in some rooms. In addition, one of the taxpayer’s customers who appeared at trial testified that she visited the house two or three times during the year in issue to pick up photos that taxpayer had framed for her. It was her impression that he used the house to conduct the framing business.

The Tax Court concluded that the taxpayer did not use the house in question as a residence. Therefore, the deduction is allowed.

As a result of the COVID-19 outbreak, many taxpayers are working from home, at least temporarily. The IRS has not yet addressed the issue of where these taxpayers would be entitled to any deductions relating to home office expenses. Stay tuned for new developments.

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By juliabliss
Apr 13th 2020 21:17

One of the changes made with Trump's tax overhaul was eliminating all employee deductions. So making this change would involve another overhaul of our current system.

If we're going to make that change, perhaps fix it so it's not on the Schedule A.
Lots of renters are working from home, and they've never been able to take this deduction.

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