Multiple and joint business uses of a home office.

• Author: Robinson, John

The proper tax treatment of expenses related to the business use of a home has long been an area of controversy. Most recently, the Supreme Court ruled that a taxpayer's home office must "achieve preeminence in a comparative analysis of the various locations of his trade or business in order for that office to become the taxpayer's |principal place of business'."(1) The proliferation of computers and fax machines in the home and the increasing popularity of home-based small businesses may also serve to intensify the controversy regarding home office deductions. In particular, given the prevalence of dual-career couples as well as individuals working second jobs or starting part-time businesses, it is increasingly likely that taxpayers will use a home office in connection with more than one business activity. For example, a taxpayer might use the same home office in connection with two or more businesses, or a husband and wife, each engaged in a different trade or business, might share the same home office.

Under Sec. 280A(c)(1), expenses allocable to a home office are not deductible unless that home office is "exclusively used on a regular basis" for the following qualifying business purposes: (1) a principal place of business, (2) a place used to meet or deal with patients, clients or customers, or (3) in the case of a separate structure not attached to the taxpayer's home, in connection with the taxpayer's business. If the taxpayer is an employee, the use must also be for the convenience of the employer. All other types of business uses, such as an employee's use of a home office for his own convenience, are nonqualifying.(2)

This article will analyze the "exclusive use" requirement as it is applied to multiple use and joint use home offices.

Multiple Use Home Offices

When a taxpayer uses the same home office in connection with multiple business activities, each use must be examined to determine if it qualifies under Sec. 280a(c)(1). If none of the business uses are qualifying, the taxpayer does not satisfy the exclusive use requirement. For example, in Wedemeyer,(3) the Tax Court disallowed a deduction because the taxpayer used the home office in connection with his employment as a grocery store manager (but not for the convenience of the employer) and his own retail sales business (but not as a principal place of business or a place to meet customers). On the other hand, if each business use is qualifying, it is now clear that the taxpayer satisfies the exclusive use requirement. As originally enacted, Sec. 280A(C)(1)(A) required that a home office be the "taxpayer's principal place of business." In order to specify that taxpayers can claim home office deductions with respect to more than one business activity, Congress amended this provision in 1981 to read "the principal place of business for any trade or business of the taxpayer."(4)

A more difficult issue is whether a taxpayer satisfies the exclusive use requirement when he uses a home office for both qualifying and nonqualifying business purposes. For example, suppose a taxpayer uses a home office as the principal place of business for a part-time business (a qualifying use), and to perform duties related to his full-time employment but not for the convenience of the employer (a nonqualifying use). Will the nonqualifying business use preclude a deduction with respect to the qualifying business use? Neither Sec. 280A nor the related Tax Reform Act of 1976 (TRA) committee reports specifically address this issue.

The explanation of "exclusive use" provided by Prop. Regs. Sec. 1.280A-2(g)(1) requires only that there be no use of the home office "other than for business purposes."(5) The use of the general term "business purposes" suggests it is possible to satisfy the exclusive use requirement when using a home office for both qualifying and nonqualifying business purposes. Prop. Regs. Sec. 1.280A-2(i)(2), which explains the gross income limitation on home office deductions, also intimates this possibility. This proposed regulation provides an example of a school teacher who is also engaged in a retail sales business. The example concludes that, if the teacher uses a home office as the principal place of business for the retail business (a qualifying use) and makes no "non-business use" of the office, the gross income limitation is based on the gross income from the retail business. However, the same limitation applies even if the teacher also corrects student papers and prepares class presentations in the home office (a nonqualifying use). Since the gross income limitation applies only if the home office satisfies the exclusive use requirement, this example implies that using a home office for nonqualifying business purposes does not preclude...