Rentals to an employer.

• Author: Moore, Philip E.
• Position: Home office expense deductions

Employees need to be careful when arranging compensation from employers for home offices to qualify for all of the deductions that they expect. Letter Ruling (TAM) 200121070 provides insight into the Service's position on Sec. 280A(c)(6). Under this provision, a taxpayer cannot take deductions for business expenses connected to rental income for a home office used exclusively for business as an employee at an employer's convenience. The unwary taxpayer can still take mortgage interest, property tax and casualty loss deductions related to the home office, but cannot deduct additional expenses connected to the rental income, including business expenses, depreciation and business casualty losses.

Normally, Sec. 280A(c)(1) allows a taxpayer to deduct expenses allocable to the portion of a home used exclusively for business on a regular basis. Also, Sec. 280A(c)(3) allows the taxpayer to deduct expenses attributable to the portion of a home rented out. However, to curb potential abuses inherent in transactions that are not at arm's length, Congress disallowed business deductions for employees with home offices rented to employers. Sec. 280A(c)(6) states:

Treatment of Rental to Employer. Paragraphs [c](1) and [c](3) shall not apply to any item which is attributable to the rental of the dwelling unit (or any portion thereof) by the taxpayer to his employer during any period in which the taxpayer uses the dwelling unit (or portion) in performing services as an employee of the employer.

Clearly, Sec. 280A can undermine taxpayers involved in legitimate business transactions. The IRS issued the TAM in response to an inquiry from a taxpayer who could not find a place...