Opinions on...

[rfk]

Got a question from a client; need second opinion. Client lives with parents; parents pay rent; parents bought car for use; client pays for gas etc. for use of car to perform 1099 SE employment work.

Question:

Wondering if he qualifies for Home office use deduction because of parents paying his portion; he goes to visit clients so he leaves his office and goes to the client - non commuting. Just wondering of the ramifications of parents having paid for the son's living (paid by parents), home office use and car. Does this affect his ability to take deductions? As stated, gas etc. is out of his pocket.

Any thoughts would be appreciated; I hope I gave enough info for comments.

Thanks for your help in advance.

rfk

[Nashville]

Yes, but maybe worthless

Other elements need to be considered.

Don't mix use of the car with a home office deduction. Two different deductions, treated differently, and with different usage qualifications.

Nothing from your post would stop the home office deduction if all other qualifiers were met (exclusive usage, meeting customers, working for business use, etc.) However, the expenses incurred for the office-in-home may be non-existent.

Expenses are Rent (or alternatively depreciation), Interest, Taxes, Insurance, Repairs, etc.
Betcha the client's parents are paying ALL of these, and client is paying NONE of them, other than to reimburse them rent for living expenses. But then the square footage factor is applied against the totality of the listed expenses (which are most likely paid, and required to be paid, by the parents).

Some benefit might be salvaged from the rent he is paying them, but I'll betcha this includes not only room, but meals, laundry, etc. Hard to see any value coming out of this unless there are factors that I have wrongly assumed.

Kinda like suing in court for the cost of a popsicle stick...you might even win, but is it worth it?

[rfk]

Nashville

I am seeing this as no expense for home on his part no expenses occurring. He can, like you said, have the home office deduction, but if he is not paying anything then there is nothing to deduct. What's left is the actual costs for gas, etc. because of the expenses to go see clients.

rfk

[Gary2]

It's often the case that the real value of the home office deduction isn't in the deduction itself, but the ability to claim transportation expenses that would otherwise be classified as commuting. A small home office might bring in a $2K home office deduction, but add in 10K mileage, there's another roughly $5K in auto expense.

[appelman]

You can work out of your home...

...without claiming, or even being able to claim, the business-use-of-home deductions.

[Gary2]

...without claiming, or even being able to claim, the business-use-of-home deductions.

Of course you can, other than any local zoning laws that may prohibit it.

However, you are not allowed to claim transportation expenses from your home to other work locations (other than travel that qualifies as being away from home) unless your home qualifies as a home office specifically under the principal place of business test. See "Office in the home" in the Transportation chapter of Pub. 463. This includes meeting the exclusive and regular use requirements. (The way I read this, the other ways of qualifying for the office in home deduction don't qualify for taking transportation expenses, though conceivably daycare might be an exception.)

[JohnH]

It certainly helps if he has inventory or product samples which need to be stored in the home office.

[appelman]

I disagree.

However, you are not allowed to claim transportation expenses from your home to other work locations (other than travel that qualifies as being away from home) unless your home qualifies as a home office specifically under the principal place of business test. See "Office in the home" in the Transportation chapter of Pub. 463. This includes meeting the exclusive and regular use requirements. (The way I read this, the other ways of qualifying for the office in home deduction don't qualify for taking transportation expenses, though conceivably daycare might be an exception.)

Looking at p. 15, Column 2, of Pub. 463:

"Office in the home. If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business."

and:

"Example 2. Your principal place of business is in your home. You can deduct the cost of round-trip transportation between your qualifying home office and your client’s or customer’s place of business."

I.e. the home office is sufficient to establish that your principal place of business is in your home, but it certainly isn't a NECESSARY condition.

Exempli gratia: I am a tax practitioner who works out of my home. However, I can't define an area that meets the exclusive use rule, so I cannot claim any OIH deduction. Nevertheless, there is no question that my home is my principal place of business, and transportation costs to visit clients are fully deductible.

[Gary2]

"Office in the home. If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business."

and:

"Example 2. Your principal place of business is in your home. You can deduct the cost of round-trip transportation between your qualifying home office and your client’s or customer’s place of business."

I.e. the home office is sufficient to establish that your principal place of business is in your home, but it certainly isn't a NECESSARY condition.

I disagree, I believe it's the other way around. The first quote says that it must be the type of office in home that qualifies as a principal place of business. In other words, if you have an office in your home that doesn't qualify as a principal place of business (e.g. it relies on the "meeting clients" tests), then you cannot deduct the transportation costs. Likewise, example 2 starts by assuming that your principal place of business is in the home.

The missing piece is the sentence after the one you quoted, which reads "See Publication 587 ... determining if your home office qualifies as your principal place of business." Turning to Pub. 587, it says "Your home office will qualify as your principal place of business if ... use it exclusively and regularly ..."

In other words, even though a home office may be a principal place of business by any sane, lay definition of the term, it doesn't satisfy the IRS requirements unless it meets the exclusive and regular tests.

[appelman]

I think not.

I think we are confusing "hone as one's principal place of business" and "home office as one's principal place of business." The latter obviously has more restrictive requirements. From Pub. 587:

"You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. To determine whether your home is your principal place of business, you must consider:
• The relative importance of the activities performed at each place where you conduct business, and
• The amount of time spent at each place where you conduct business.

Your home office will qualify as your principal place of business if you meet the following requirements.
• You use it exclusively and regularly for administrative or management activities of your trade or business.
• You have no other fixed location where you conduct substantial administrative or management activities of your trade or business."

I.e. having your home as your principal place of business is a necessary, but not sufficient, requirement for claiming OIH deductions.

I believe it reduces to a basic question of logic. If A is a necessary condition for B, B cannot also be a necessary condition for A. That would create a circular reference, which has been frowned on by logicians since the time of Aristotle.

I wouldn't mind having someone else weigh in here.

[Gary2]

I suggest looking at this recent Tax Court decision. The commuting expense discussion begins on page 13, and the home office aspect of the commuting discussion starts on page 15.

[appelman]

I see where you're coming from on this.

It's an interesting ruling that does appear to support your interpretation. But I feel there is still the "what's a requirement for what" issue. The petitioner's case for having his home be his principal place of business is pretty weak -- his only chance would have been if he could have shown office-in-home qualification, and this is what the ruling rejects. In particular, note this language:

"For purposes of subparagraph (A), the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.

Where a taxpayer’s business is conducted in part at the taxpayer’s residence and in part at another location, the Supreme Court has held that there are two primary considerations in deciding whether the home office qualifies as the taxpayer’s principal place of business: (1) The relative importance of the functions or activities performed at each location; and (2) the time spent at each location."

No mention of exclusivity there!

We might ask what the ruling would have been had the petitioner been able to show convincingly that he spent most of his work time, and executed the most important functions or activities of his business, working at home, but that no space could be defined as "exclusive," precluding the OIH deduction. I suppose, as a practical matter, in such a case the taxpayer ought to be able to define some minimal space, if only a file drawer, that would meet the exclusivity test.