IRS provides guidance on employee rental of home to employer.

• Author: Fiore, Nicholas J.

The employer is an S corporation of which T is the sole shareholder and sole employee. T rents a portion of his home to his employer. During the period of the rental, T used a rented portion in performing services as an employee. He also used the dwelling unit as a principal residence. T was concerned because he could not find a place on the applicable forms to claim certain business expenses and depreciation attributable to the rental income.

Issue

How should an individual who rents a portion of his dwelling unit to his employer and who uses the dwelling unit in performing services as an employee of that employer treat the expenses attributable to the rental of the dwelling unit?

Analysis

In general, Sec. 280A applies to individuals who use their homes both for personal purposes and for the production of trade or business income. The section is designed both to ensure that the business use of the home does not result in an inappropriate conversion of nondeductible personal, living and family expenses into deductible expenses, and to permit the deduction of legitimate business expenses incurred in using the home to earn income.

Sec. 280A(a) and (b), taken together, permit an individual who pays home mortgage interest expense and state and local real property taxes to deduct those payments--if he meets the rules found in Secs. 163(h) and 164(a)(1)--regardless of whether that individual uses his residence solely for personal purposes or for both personal and business purposes.

Deductions for the business use of a home are potentially available only if the use falls into one of the four categories listed in Sec. 280A(c)(1)-(4). Those categories are specified home office uses (Sec. 280A(c)(1)(A),(B) and (C)); storage of inventory or product samples in the home (Sec. 280A(c)(2)); rental of the property (Sec. 280A(c)(3)); and use of the home in providing day-care services (Sec. 280A(c)(4)). In general, the business expenses associated with those uses are deductible only if the individual's business use of the home is regular (rather than occasional or incidental), and only to the extent the income earned from the business use of the home equals or exceeds the business expenses. Sec. 280A further requires both that expenses be reasonably allocated between business and personal use and that expenses be taken in a specified order. In addition to these general rules, particular rules apply to some of the business uses listed above. Pub. 587, Business...