Joint & Multiple Home Office use

[GTS1101]

A new client has gone to H&R Block since 2004. I am helping them carryback a huge NOL loss to 2004. After reviewing the return my head is spinning. There are so many errors. Depreciaton is wrong, home office is wrong, passive losses are wrong, carry forward of losses not done correctly. It is going to take many hours to do all the corrections just to get to the part for me to carryback. I have to recreate five years of returns.

The husband has three separate home based businesses. A pre-paid legal business, a teaching business, and a real estate business. The wife has also has her own real estate business. They had a home office built in their home in 2004. The husband and wife share the space. It is 140sf. Total of the house is 3,400. They don't use the space together. When the husband is not using the office the wife will use it for her business. The husband will use it for each of his businesses on different days. They both use 100% exclusive for all of their businesses. All files and records are kept in this office. No personal or non-qualifying use. They have printers, fax machine, and a computer in the office.

In one year the accountant showed 100 sf for one of the husband's business and 140sf for the wife. Then another year they changed it to 70 sf for each business and used only one of the husband's businesses. H&R Block moved around the home office deduction between the husband's three businesses to try and avoid an audit. I think that would bring up an audit and the IRS would question why the change every year but that is how they did it.

I think it would be best to do a form 3115 and fix the depreciation all the way back to 2004 showing each business using 140sf out of 3,400 sf as each business is used exclusively and only for business. And each business to deduct that same percentage of all other home office expenses. Do you think this would be a wise decision or would you recommend only fixing from 2009 and forward? I think going back to 2004 would be the best decision. I would be willing to stand up in an audit and defend them if necessary. It is very clear that each business uses the home office exclusively for business purposes. Neither one of them have any office space outside of the home.

Thank You!

GTS1101

[JohnH]

Whatever the risks of an audit may be under the circumstances, I think you greatly increase them by filing amended returns. Besides, just how many potential problems do you want to buy at this point? How many problems are lurking beneath the surface in those years that you aren't aware of, and will suddenly become your responsiblity to straighten out once you substitute your name for HRB on those returns.

Based on what you said, and assuming there aren't any blatant problems with the open years which demand correction, I'd be inclined to get it right with the return I'm filing and let those sleeping dogs lie.

[Kram BergGold]

My take

First, if the home office is 140 sq ft I would give each sposue 70 sq ft. If you give each 140 sq ft you will create a double deduction. Next I would do a 3115 to correct the depreciation on the 2009 return. If you carryback an NOL to 2004 you should correct all errors on that return at the same time. It would be unethical not to do so. As for other years you should make case by case calls depending on how severe the errors are.

[DonPriebe]

... They had a home office built in their home in 2004. The husband and wife share the space. It is 140sf. Total of the house is 3,400. ...
I think it would be best to do a form 3115 and fix the depreciation all the way back to 2004 showing each business using 140sf out of 3,400 sf as each business is used exclusively and only for business. And each business to deduct that same percentage of all other home office expenses. ...

The home office occupies 4.1% of the available space. No matter how you allocate the home office expense between the businesses, the total should equal 4.1%. You cannot give 4.1% to each business. Use of the business use area on the 8829 to do the allocation seems to be a reasonable procedure, as long as the total business usage does not exceed the 140 sq-ft.

[veritas]

This can be complicated

You said the husband had three businesses. At the same time? You will have to allocate the home office to each business. I'm guessing some have losses? This will create some carryovers.

[FEDUKE404]

And furthermore....

You said the husband had three businesses. At hre same time? You will have to allocate the home office to each business. I'm guessing some have losses? This will create some carryovers.

The relevant OIH phrase "regular and exclusive use" also rears its ugly head.

I don't understand how Block would have (apparently) an underachiever prepare a return that involves NOL, passive losses (rental property?), multiple OIHs, depreciation, and more. Even if the return had been prepared 100% correctly in the first place, there is still much involved.

I am quite intrigued by the "use on different days" approach. So if the phone/fax rings on Tuesday (business A day) they say "call back on Thursday" (business C day) or something similar??? Same issue would go with allocating depreciation/expenses for computer/printers/etc.

An office that is 10' x 14' is hardly more than a closet. And I would think, especially if associated business losses are involved, that any calculated OIH depreciation would likely not be used in the first place and would thus be carried to later years.

All in all, this return sounds about as treacherous as plowing through a dense mine field while driving a very large tractor, especially when you factor in the "well, for this year we're gonna do things this way...." approach.

If amended returns are prepared, I can imagine an IRS auditor immediately reduced to salivating and heavy panting..... One approach might be to prepare a detailed list (time charge) of the prior years problems, and have the client take that back to Block for them to fix. (Peace of Mind or Gold Guarantee or whatever they call it, especially if prepared at a "premium" office.) And you did not mention why these folks left Block....hmmmmm. Tip of the iceberg issues??

Challenges I welcome - basket cases I avoid!

FE

[GTS1101]

Thank You!

A couple of things to clarify. First of all this is not a basket case return. It is very challenging and very involved with a lot of complex situations and unusual office use. I welcome these challenges with open arms. My mission is to make sure that each taxpayer gets all of the deductions they are entitled to within the law. And I will defend them in an audit. I don't fear an audit nor do I fear the IRS. I have learned a lot from my year in being an EA and I more than ever do not want to let the IRS intimidate people by scaring them with audit. I will stand up and defend why I did what I did and quote the code or regulation to support it.

Here is the issue. The room is only 10x14. The husband said that he and his wife never use the office at the same time. They have one computer in the office that is shared between them. They have printers and fax machines and a copier shared by both of them. They have file cabinets shared by both of them. It is not like each one has their own desk and each is using 70 sf. Each person when using the office is using the whole 140 sf. The husband has a pre-paid legal business so sometimes he uses the offices for that, sometimes he uses the same space for his medical teaching business, and other times he uses it for his real estate business. The wife also has her own real estate business and with real estate being slow the wife is using the office less than him right now. So with the office being used for multiple businesses how can you limit the entire space to 70 sf each. Each business is using it 140 sf. With the theory in the answers above I would have to use 35 sf for each business. But that does not make sense because each business uses more than 35 sf of the office. The whole office is being used by each business. I am sure sometimes the husband works on two different businesses at the same time. Yes I am going to be doing a NOL carryback to 2004 as there is only about 20 days left to take advantage of the new five year carryback rules. They paid a lot of tax back then so they will qualify for a nice refund. The customer did not decide to leave H & R Block. One of my clients told them how I helped them get money back with rental properties lost in foreclosure so they recommend I take a look at the return. The customer has decided in the future to use me because of all the errors that Block made. They were quite shocked because they had a senior person at Block preparing their returns.

Thank you all again for your comments. I will take it into consideration when I decide what to do. I appreciate all of you on this board for your insights.

GTS1101

[JohnH]

One key element of your post was the words "the husband said" at the beginning of paragraph 2. I'd feel better if you wrote, "the husband gave me a written statement which said"... I assume you're going to get that before you proceed with all this amending.

Call me a cynic, but I also wonder how you'll respond to the clients if the amended returns do get audited, and in spite of your best efforts IRS disagrees with you and hands them a bill. Especially one that's big enough to hurt but not quite big enough to pay the cost of fighting their decision.

[GTS1101]

Good point John. I am not sure if I want to do all this amending either. What I usually do is place the decision in the hands of the client. I will let them know that there is a possibility that the IRS may disagree with our decision and that it may cost them and let them make the decision if they want to proceed going forward. And I never thought about getting a written statement from the client but I am almost 100% positive this client would give me one. If I had a home office I would not do it the way this client is. I would have a separate desk for my wife and I and split 70sf each.

Here is the dilemma. H&R Block for 2008 & 2009 claimed 70 sf on one of the husband's business and 70 sf on the wife's business. Then in prior years she claimed the home office on another of the husband's business to move it around. I know going forward that all four of theses businesses are using the home office. If I just continue what Block did it seems to me that would be incorrect and I would be robbing my clients of some deductions because it is not calculated correctly. But as you said since this situation is unique maybe the IRS won't agree. And is it really worth it for all the expense of say a $200 deduction. not really.

I am going to have to really think this one over. It gets more complex by the minute. I will be sure to make sure I get paid for all the hours and work I put into this one.

GTS1101

[oceanlovin'ea]

My opinion

This is just my opinion...just how my mind thinks. (which doesn't mean it is right).

The couple have an office in their home that is used exclusively for business purposes. No matter how many businesses they run from the office, it is only used for business purposes.
So they should have a deduction that is 4.1% of the expenses allowed on Form 8829. I don't think it would be an issue with an auditor (although I have never been in an audit) where in the return the deduction was taken, as long as it didn't add up to more than the 4.1%.

Since there is no other way on the form to break up the time used issue, the only other way is to divide the space. If you give husband 70 sq ft and wife 70 sq ft, you will still come out with the same bottom line. If you don't feel she should not get as much of a deduction, split it differently. I know it isn't that she only uses part of the space, but that is the only way to divide it up. You will still end up with the same deduction amount, if you use it on only one 8829 or break it up with several businesses.

Although I don't think I would change it each year. The client may have said I used the office more in one year for real estate and the next year said he used it more for the teaching. That may have accounted for the switching the HRB person did.

Again just my opinion.

Linda

[Kram BergGold]

Reality Check

Let me try it this way. If the real estate taxes are $1,000 and 4.1 are allocable to the office, this is $41. No one is going to get to bent out of shape if you split this 50-50 or 70 -30 between the spouses. You seem to want to give them an amount which exceeds $41. This you can't do.

[GTS1101]

After thinking about this some more I thought about a different way to do this. Yes I finally realized that no matter what it can't be more than the 140sf total. So one business he uses 60% of the time, the other 20%, and the wife 20%. His third business is not using the office and is just about closed. So I will show the 140sf on the 8829 but when I complete the home office expenses whatever that total amount is I multiply by 60% to put on one business, 20% on the other, and 20% on the wife. This seems to make most sense to me.

GTS1101

[FEDUKE404]

Assignment of size

Obviously "the office" cannot exceed 140 sq ft.

From reading your continuing posts, it almost sounds as if in reality there is simply ONE office, used by two people, for five businesses. The shared equipment strengthens that viewpoint.

The problem I foresee is that, so far as I recall, you must prepare a separate Form 8829 for each Schedule C. Such concern is related to the fact the the allowable OIH deduction for each business is always limited to the "tentative profit" (Sch C, line 29) of that business.

I have no doubt your skills, and hopefully that of your software, can handle things, but I can foresee the distinct possibility of having to prepare, in addition to the five Sch Cs, five Forms 8829, five forms 4562 (good luck on those allocations!), and then perform such mundane tasks as making five Sch A corresponding adjustments to both the mortgage interest and real property tax amounts.

Allocating the "size" of the home office to husband/wife or the five businesses still seems to be the major hurdle here. Without doing further research, there may be merit to pursuing how to split up the office deduction by something other that square footage. This might include some income allocations of the total allowable OIH deduction for the five businesses.

I'll spare you the "what ifs" related to line 36 of Form 8829 if the five businesses did not all "start" at the same time.

Good luck on this. I have no idea where you might find guidance. There are some real tax gurus who regularly post here, so maybe they have some useful suggestions!

FE

[Kram BergGold]

No!!!!

Do not put 140 SQ feet on each Schedule C. It will look like the office is 420 SQ Ft.
One office will be 84 SQ ft and the other two 28. I had a client who kept adding office areas to his home. Every time an office got added I entered the sq footage of that office to the new 8829 and adjusted the deductions to get the correct amount. By the time he was audited it appeared my clients were claiming over 100% for home office. The audit was dificult but the home office was a snap to expalin and they only owed $200. My clients were understanding but I felt terrible that I caused the audit.

[veritas]

You can use one 8829

and allocate the expense using any reasonable method. See instructions for form 8829.

I have used gross revenue for each business and computed a percentage of the total to allocate expenses.

However in my case one business had a loss and one had a profit. So I will have to track the unused expenses on the one business to be carried forward.