Discussion:Definition of Exclusive Use

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Discussion Forum Index --> Tax Questions --> Definition of Exclusive Use


ArchCPA (talk|edits) said:

23 June 2006
A client of mine was audited yesterday. The auditor disallowed the home office deduction stating that the "exclusive" use of the home office space was questionable. My client - a plumber - has one bedroom for the exclusive use of his business where he meets his employees weekly, invoices his customers, etc. I had my client take a poloroid picture of his home office a couple of years ago. During the audit, the auditor noted from the poloroid picture that there were family pictures on the home office wall, and a few personal items (stuffed doll) on the desk. These two personal items made the auditor question the home office deduction. The auditor had an IRS manual (I hadn't seen this before) which stated that the home office can't have any personal effects. I asked the auditor for a copy, and was denied.

What is the true definition of "exclusive use"? Before I approach the auditor's supervisor, can anyone provide valuable insights? Thanks!

Taxref (talk|edits) said:

23 June 2006
I don't know how valuable this is, but a no person affects standard seems unreasonable. Its very common for people who work in offices to have family pictures on the desk and/or wall, and other items which can be considered personal. On my desk (not a home office)right now I have a hockey puck and a radio. I'm sure neither of those things would disallow a rent deduction, so I don't see why a home office would be different. Some years ago in CPE an instructor did recommend that no personal work be done on a computer in a home office, in order to meet the exclusive test. If your client has a computer in the home office used 100% for business and another in a different room used 100% for personal it may help your arguement.

Sandysea (talk|edits) said:

23 June 2006
HMMMMM....exclusive use means not to use it for any purposes other than business. I have art and pictures in my office, gifts from my kids adorn my desk and I also have other personal items which are not work related, but it is an outside office, so it qualifies as an office.

I think the auditor might be saying that as this is a bedroom and that it has personal effects in it, they are thinking it may also be used as a bedroom. Does it have a bed, dresser, clothes in the closet, etc? I highly doubt a stuffed animal and pictures on the wall were all that the auditor found...but if it is all he/she found, then that is just plain ignorant on the auditor's part...in mho that is :)

ArchCPA (talk|edits) said:

27 June 2006
Thanks Taxref and Sandysea. I had the supervisor intervene because the auditor seemed ignorant and just plain stupid (sorry to be harsh - but that's how I feel right now). The supervisor agreed with my argument, but wanted a statement from my client that the home office was being used exclusively. Some of the salient declarations in the statement include:

(a) that client doesn't use PC to check personal email on a regular basis (b) the client has no personal belongings (other than small items such as stuffed dolls, etc)in the home office. A wardrobe and/or a spare bed in the bed room will disqualify. (c) the filing cabinet doesn't contain ANY personal files (d) the home office is not used to entertain guests

Actionbsns (talk|edits) said:

5 July 2007
I have a question about exclusive use. My client has no real walls, but has carved out an office area in the home with the use of the desk, file cabinets, etc, and within those boundries all work is done for their painting business. No personal use of this area, computer is purely business, they use a cell phone so there's no phone line in this space and no deduction for a land line. Will the ratio of this space to the rest of the house meet the requirements for the home office?

Kevinh5 (talk|edits) said:

5 July 2007
yes

Solomon (talk|edits) said:

5 July 2007
Sec. 280A(c)(1)(a). Note: "...portion of the dwelling unit..." - not a room.

TxSrv (talk|edits) said:

5 July 2007
"The auditor had an IRS manual (I hadn't seen this before) which stated that the home office can't have any personal effects. I asked the auditor for a copy, and was denied."

That is suspect. IRS does not issue guidance at a formal level, such as anything like a "manual," which contains anything a Court would not support. IRS people with at least a desk have personal effects. If there's something wrong with that, file a dang Qui Tam suit, an actual AUSA your free lawyer, against all fed agencies, alleging waste in using taxpayer funds to provide space for some personal stuff. Get rich quick, with a cash award of % of the savings if a District Court so upholds. Like not one personal effect in the Judge's chamber.  ;-)

Death&Taxes (talk|edits) said:

5 July 2007
In one Tax Court proceeding concerning home office, our client and District Counsel argued heatedly whether the item on a table was a radio (client) or a 'boom box' (DC). Finally the judge stepped in, asked its purpose ('music while I work') and the case went on.

TxSrv (talk|edits) said:

5 July 2007
"...and the case went on."

To where? The landmark, decisional boom box taint of section 280A? Light classical, the only thing conducive to productivity, ain't played on a boom box. Except Wagner. Most Vivaldi OK by default. Schubert works. Bach marginal; too often technical and distracting. :-)

Dennis (talk|edits) said:

6 July 2007
What? No manuals? In my only ever once in a lifetime 1041 audit the poor guy had some kind of pamphlet sized reference he continually referred to. (Most of what seemed to be in it was either inapplicable or in a couple of cases just plain wrong.) I actually have the Valuation manual (published in pamphlet form by CCH). I don't think they use it anymore.

TxSrv (talk|edits) said:

6 July 2007
100% of audit guidance is on www.irs.gov, except for what's in the Law Enforcement Manual -- exempt from FOIA disclosure. Garden-variety home office stuff is assuredly not in there. There's always memos coming from people in management, specialties, or pursuant to training matters. Pure opinion. Whether disclosure-exempt, who cares. An examiner better redact the author and his/her function, lest the author have a voodoo doll of the examiner what actually works. Remaining doc official? Well, got the IRS eagle wing and justice scales, and whatever those leaves are supposed to be. Likely from an a nondesiduous shrub. IRS always around? :-)

Seriously folks, as IRS examiners are hammered from day one. Title 26, then administrative Regs, then Rev Rulings, then court cases (current and on-point; know your Appellate Circuit if variant). Bores 'em to tears, until they suffer a 100% concession in Appeals in analysis of law against undisputed facts.

Death&Taxes (talk|edits) said:

6 July 2007
Revenue Agents seemed to tell the same story about prior home office audits: the agent had visited the home office, was satisfied, packed his papers and left only to remember he had left something behind, so he returned only to find a furniture rental truck outside and the office furniture being taken out. Three to four agents told me that story, as if they had been the person. I began to think it had been imparted as part of their training. (to be fair, we are speaking about 10+ years ago). So when they would ask to see a client's home office, I would tell them to check the carpet to see if there were marks showing that the furniture had been moved.

TxSrv (talk|edits) said:

6 July 2007
"So when they would ask to see a client's home office...."

Local IRS offices can do as they wish, but that's really inappropriate tax enforcement policy, since the deficiency potential is typically too small to waste that kind of time. It's also a "consensual search" under our Constitution, where the gov't usually is looking for a crime, not a mere tax deficiency. It's offensive and casts the IRS in a bad light. There's many other deductions where IRS must accept good-faith representations as to what the facts are.

IRS has tried, but Congress won't let 'em, to tighten this deduction. Unless you got a retail store bldg and live on the 2nd floor, this deduction is very bad tax policy. The marginal cost of the typical home office is zero. Buy more house to better have an office, you own more house to sell at a gain.

Riley2 (talk|edits) said:

6 July 2007
Blame it on the judicial system. The Tax Court and the Ninth Circuit held that keeping books on law and poetry in the home library of a publisher indicated that the office was not used exclusively for the business of publishing.

Death&Taxes (talk|edits) said:

7 July 2007
In the case I spoke about, District Counsel seemed to base his whole argument on exclusive use. After he finished, the judge asked the taxpayer why he needed an office in the home when his employer gave him a tiny office five miles away. Employer was based in London, so was not present. Client then shot himself in the foot by saying something like "working at home was more pleasant." Judge cited that answer as the reason for holding for the government. District Counsel might as well have not been there for all his effectiveness. The judge won the case for him by knowing the proper question to ask.

TxSrv (talk|edits) said:

7 July 2007
D&T, don't get me started. All local (now called) IRS Field Attorneys I ever dealt with had their absolute wits about them and rather dogmatic sorts to even concede tax, if called for. They would say it was the Judges who was unpredictable. All in all -- whatever (!), the hazards of litigation for Appeals to deal with. No precise definition for that at all, as in all of civil law from time immemoriam. Or the later of March, 1913. :-)

Michaelstar (talk|edits) said:

7 July 2007
Even after Soliman - it seems that the IRS hammers this issue to a point that causes me to believe that the case of Soliman never ever happened.

"Exclusive" use by definition is just so exclusive.......

Having an office in a home and walking in to "just think" about sailing or whatever turns your fancy - even having a book titled "Understanding the Racing Rules of Sailing" would most likely imply that the "office" space was not exclusive. Having a personal weather system siting on the desk pointing out current wind direction, wind speed, humity, and even the wind chill factor (that is really only revelant in the winter - Yes - we have a winter in San Diego for those of you who really have a winter.... it gets cold around 50 degrees here - we need sweatshirts about then but no mittens  :-} )

The only definition of exclusive use before appeals or a reasonable manager (hopefully) is initially defined and "enforced" by junior auditors who are looking for a change and drawing for straws.

Be fair and talk your clients out of this "home" office gig. Otherwise it will only come back to haunt you and are you really going to send the client an invoice for $1,000 just so that they saved pennies on their taxes.

YES - I have lost a few clients over this but then again I am not interested in pinching pennies - unless of couse it is a 1909 S-VDB or even possible a 1914-d.........

Anyone who is really making $$ in their business and works out of their home does not need to deal with the exclusive use issue and most likely already can deduct the interest and r/e taxes on schedule A - like utilities and insurance means anything to someone who is successful.

Natalie (talk|edits) said:

July 7, 2007
Michael, how would you handle an S-corp client with a 100% shareholder that has its only office in the home of the shareholder? And let's assume that the house is rented, not owned, by the shareholder.

Death&Taxes (talk|edits) said:

7 July 2007
I always tell clients, especially the self-employed, that the best home offices are rentals, not owned. They are getting something that was not deductible. For homeowners, the saving in SE tax can amount to something over the years and balance out the recapture of depreciation on sale, but Michael hits a very good point.

Often I describe home offices as devices that tax professionals use to beat other tax professionals over the head with. Some pros look at other's returns and leer, "He didn't give you a home office." It is such a dealmaker for some. It's so easy to say, but like anything, consider the entire picture.

I never mention possibility of audit, not because of the statistics compiled here, but because home offices are not the cause of audits, but only part of an audit, and I have rarely seen one thrown out, that case from pre-1987 excepted. btw, three days later I saw my boss successfully argue a home office case for an insurance adjuster.

Since 1999 I have worked from home, but when I measure the dimensions I never come close to the 2% as an employee, and I am an officer of a C Corp. No matter that I don't deduct the home office; it is my place of business and that is the important point when it comes to reimbursing for mileage. It is not required that a home office be deducted to take the auto deduction.

As for Natalie's question, JR and others have mentioned the accountable plan. I am not sure this really works, but many do it for their S Corps.

Michaelstar (talk|edits) said:

7 July 2007
Natalie - I agree with D&T that when a renter has a home office, this can tend to be a stronger reason to claim a home office for the taxpayer as they are not receiving any deductions on Schedule A for mortgage interest or r/e taxes that a home owner would receive. When I had a home office in a rented house - I did take the home office deduction - took pictures of the office from every angle - and held my breath but the audit notice never came. Probably because my Schedule C expenses average around 7% of my gross revenue at the time. Last year they were at 9% of gross revenue.

I now own a home - my ONLY office is in my home, the IRS has even been in my office for an audit of a client I only represented for this single audit - and the agents could not understand why I did not claim a home office because I brought it up just to see what they thought about the issue.

Most people that I have come across who want to claim a home office fail the exclusive use test by the third or fourth question - dresser and bed in the room, wife uses the sewing machine that is set up in the corner of the room etc... The tax professional who steals a client with the "He did not give you a home office" line can both have the client and deal with the issues when they come up.

Natalie - I think in your case, you need to discuss with the client that if they do get audited, the issue of home office will come up. If they agree to accept the liability, you have pictures of their office in your files that in your mind passes the test, put notes in the permanent file for the client and claim the home office. Just cover your bet.

Actionbsns (talk|edits) said:

7 July 2007
Michaelstar, you are assuming that the entire room is part of the deductible percentage. In my client's case, they have carved out a section of a larger room that admittedly has personal items in it. The section they use, is defined by file cabinets, desk, etc and we take the percentage based on that space only. It is used exclusively for business and I made sure with the client that she doesn't bring down the computer and put up the sewing machine, or iron, or anything else unrelated to business in that space. She said, no it's only for the business. The deduction on the sched C, reduces the FICA/MC expenses for them and that's where they are looking and it changes the taxes enough to make it an attractive deduction. Are you saying that in this case, because there are personal items outside the boundaries of the "office" that are personal, the entire deduction is at risk? even though we don't use the entire room for calculations, only the part that is actually the office?

Michaelstar (talk|edits) said:

7 July 2007
I have a client who has put up a partition around the office in his only large living room (nothing fancy)about 5 feet high to break the room into two. He also wants to be able to sit in the living room and not see the "office". He is a computer programmer with 3-4 computers running all the time. We do have pictures. There are clear boundaries.

From a reasonableness stand point - it will also depend on the % (based on sq footage) being claimed as well. You need to be able to represent, on the clients behalf that this area "outside the boundaries" actually does not encroach "inside the boundaries". I have never had to be involved when a t/p is audited on this issue like D&T. I certainly would not want to give a client the impression that this is an easy issue without risk and not cross my "T's" and dot my "I's. I have no intentions of paying for the clients penalties and not bill for my time to represent a client on this issue unless the client has his side fully covered and fully understands the risk.

TxSrv (talk|edits) said:

7 July 2007
On the facts as described re the living room partition, I believe IRS would not have any basis for applying the 6662 penalty.

Death&Taxes (talk|edits) said:

7 July 2007
"To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space." Publication 587 Seems to me you meet the identifiable test by separating the area with file cabinets.

Aspiring concert pianist had a Steinway in her living room; she lived in a three room apartment plus bath. She measured 32% of total space taken by piano, bench, bookcase which held scores and music stands for her quartet. To settle audit, we agreed to 27%, eliminating the space taken by the music stands, which could be moved. By the way, photos of the apartment showed art reproductions on the walls above the piano, and framed photos on top of the bookcase.

Kevinh5 (talk|edits) said:

8 July 2007
DT, don't most offices have artwork on the walls? I even have a personal picture or two in my office. (although my artwork is all originals and not reproductions). That doesn't make it "not an office".

Death&Taxes (talk|edits) said:

8 July 2007
I agree Kevin: I was trying to reassure Actionbsns that the personal items must be material and in the same place to cause problems.....e.g., a television set in the middle of the area when television is not involved with the business usage.

Goodness, I look around this small room and note a trophy won in Basic Training in 1967, an extension phone for the house phone so that I do not have to walk to the other end of the house if it rings, two fly swatters, a number of cartoons taped to the wall (but all tax related) and my dear Farfel's diploma from dog obedience school. Before she died, she stayed in here with me, and I had a glass jar of dog treats next to the fax, and her water bowl under it. So any IRS agent could propertly label this space 'a dog house' and not an office. Then Farfel would have qualifed to use the 8829.

Of course, the door to my right is the main entrance to our house and behind me is the doorway to the kitchen and the rest of the house. Anyone wishing to watch TV also passes thru to the doorway and steps on the left that lead to the family room.

I am being facetitious in some of my comments, but often tax law and tax agents approach the level of Mr. Bumble. At least Sec. 121 eliminated the 'miraculous conversion' of the old Section 134. Anyone remember those days: a TV critic for a national magazine was selling his home and buying a new one. The old contained his den/writing office with 2-3 televisions in it. I told him to permit his children to watch the programs with him, thereby destroying exclusive use and eliminating the home office.

Natalie (talk|edits) said:

July 10, 2007
Some of this stuff really sounds nit-picky. Don't the revenue agents take into consideration that when employees work in a "non-home office," (I guess you could say a "real" office), that they have all kinds of personal stuff there? And in fact, they have personal emails in the computer, and personal phone messages on the company phone, etc. etc.? If a home office looks like a business office, it should pass the test, right?

Death&Taxes (talk|edits) said:

10 July 2007
Natalie, the attitude of some revenue agents is a perfect Dickens 'the law is an ass.' Many are the cream of the Service, but these people often move on to private practice, leaving the rank idiots in charge.

btw, something they don't teach you in Kevin's representation classes: in 1997 I took Farfel to a field audit at my client's house in Pound Ridge NY. My client was the one who suggested it, and since my wife was recovering from surgery and would have needed a dog sitter, it was logical. The auditor fell in love with 85 lbs of shaggy dog and all went swimmingly.

Natalie (talk|edits) said:

July 17, 2007
This discussion has centered on the tax implications of having a home office. Michael suggests having pictures of the client's office on file. Some tax preparers go to their client's home and measure the office and home and keep that documentation in their files. The preparer typically would also have escrow/closing documents for the closing of the home when it was purchased. Obtaining all of this documentation could be interpreted as audit procedures. The more documentation, the more likely the taxpayer will think audit work is being performed. So, I am curious whether anyone has come across a situation where a taxpayer put the blame on the preparer because she/he thought an "audit" was being done and that everything was okay.

PVVCPA (talk|edits) said:

July 17, 2007
NO WAY!! There are tax preparers that actually go out and measure their client's home office?

TheTinCook (talk|edits) said:

18 July 2007
Going to clients home office to measure :D Thats a new one on me. At HR Block, I put little premeasured pencil marks on the walls so when the client told me that his office was "about as big as from the desk to the far cubicle" I has something close to accurate to work with.

I think I'll tell my clients next year to buy a roll of masking tape and make a like an episode of "I Love Lucy."

TheTinCook (talk|edits) said:

18 July 2007
Natalie- I'm not sure why a taxpayer would take this as a bad thing. I think that giving proactive advice in regards to audits is good thing and my clients responded well. I didn't go as far as keeping photos of clients home office or anything like that(At HRB we only kept the efile sigs and HRB forms in the file). Most of it was trying to get the clients to keep better records (mileage, basis, and sch c expenses were the biggest issues).

As for making clients think that they are being audited, they usually know before we do.

Natalie (talk|edits) said:

July 18, 2007
Let me clarify. When I say audit, I am referring to the audit service that CPAs perform, not the kind that comes from the IRS. In some CPE courses I've taken, the instructor drills home the fact that you don't want the client to think that a higher service is being performed than actually is the case because then you'll be held to a higher standard if something blows up.

And yes, I actually have a client whose prior CPA measured the home to determine the home office deduction.

Death&Taxes (talk|edits) said:

18 July 2007
"At HR Block, I put little premeasured pencil marks on the walls so when the client told me that his office was "about as big as from the desk to the far cubicle" I has something close to accurate to work with."

I loved when they would bring in a stack of receipts; I would hold them in my hand and say 'I think they weigh $438.44.'

I do think there is a gem of an idea here, Natalie.....a service to help your clients have their returns audit ready. With digital cameras etc, a file could be built.

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