Generally, a taxpayer may be able to claim deductions for the business use of a home if certain requirements are met. This might include “home office expenses” like repairs, insurance and depreciation. In a new case, Kho, TC Summary Opinion 2019-18, 8/5/19, the Tax Court approved depreciation deductions for the cost of major home renovations relating to a couple’s foster care business.
Usually, taxpayers can’t deduct expenses relating to their personal residence, including the cost of renovations. But there’s an exception when part of the home is used regularly and exclusively as the principal place of a business or a place used to meet or deal with patients, clients or customers in the normal course of business.
Key facts: The couple in the new case resided with their son in a single-family house in California. In 2008, they added three additional bedrooms and an extra bathroom (575 square feet) to a two-bedroom, 1,090-square-foot house. Two of the additional bedrooms and the bathroom were used exclusively by foster care clients. The third additional bedroom was used primarily, but not exclusively, by foster care clients.
Two clients lived with the couple in 2012 and 2013. One client moved into house in July 2012, and the other started living there in August 2012.
During the two tax years in question, one of the foster care clients routinely spent weekends at his parents’ home. With the exception of certain holidays, the other foster care client lived with couple year-round and accompanied them on family vacations and recreational outings. One of the foster care clients had special dietary requirements and restrictions.
A state agency paid the couple $24,000 in 2012 and $48,000 in 2013 for providing foster care services to clients. The services included purchasing their food, preparing their meals and transporting them to their numerous doctors’ appointments and other activities away from the house. For these two tax years, the husband was employed by various healthcare providers, while the wife wasn’t employed at all.
The couple deducted $7,465 and $7,788 for depreciation on Schedules C for 2012 and 2013, respectively. They claimed the deductions for depreciation were attributable entirely to the business use of their personal residence.
Tax outcome: The Tax Court determined that the couple passed the test for qualifying for deductions based on business use of a home. They showed the additional bedrooms and bathrooms were used regularly and exclusively for their foster care business. Thus, the couple is entitled to a depreciation deduction based on a reasonable allowance for the exhaustion and wear and tear of the property.
However, the Court differed with the couple on the applicable percentages for the two tax years. Ultimately, the Tax Court calculated that the additional bedrooms and bathroom represent 70 percent, or 402.5 square feet, of the total square footage added during the renovations. Accordingly, the Court said that 24.17 percent of the home was used exclusively for business, not the higher figures claimed by the couple on their returns.
Nevertheless, this represents a significant tax victory for the taxpayers. If you have clients in a similar situation, document the business use of their home.