Home Office Deduction - Exclusive Use

If you use your home for work or business, you may be entitled to the home office deduction. The home office deduction is one of those wonderful tax deductions that allows a taxpayer to turn an otherwise non-deductible personal expense into deductible business expense.

Over a series of posts, I'm going to review some of the rules and nuances of this deduction. You can find more information in IRS Publication 587 or the IRS YouTube video.

The first thing to note are the specific rules you must follow to get this special deduction. If you fail to follow the rules, you will generally lose the deduction.

To qualify to deduct expenses for business use of your home, you must use part of your home:

• Exclusively and regularly as your principal place of business,
• Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
• In the case of a separate structure which is not attached to your home, in connection with your trade or business,
• On a regular basis for certain storage use (Inventory storage or product samples)
• For rental use (See IRS Publication 527)
• As a daycare facility

If you are an employee, you may also qualify for a deduction if you meet the tests noted above plus:

• Your business use must be for the convenience of the employer, and
• You must not rent any part of your home to your employer and use the rented portion to perform service as an employee for the employer.

The IRS notes that if the use of the home office is merely appropriate and helpful for the employer, you cannot deduct expenses for the business use of your home.

The key words that often catch the unwitting taxpayer are exclusive and regular use. Many court cases hinge on the interpretation of these two words. In today's post, I'll review the exclusive use test.

The first thing to note is that you don't have to meet the exclusive use test if you are taking the home office deduction as a daycare facility, or for the storage of inventory or product samples. There are some specific rules you need to meet for these exceptions though I'll refer you to IRS Pub 587 to read those yourself.

Because exclusive use seems to be a very high bar, I'm often asked if there are exceptions to this rule beyond those noted above. In other words, does the IRS really mean "exclusive?"

The law [IRC Sec. 280A(c)(1)] is very clear on this matter - the use must be exclusive. Almost any personal use for the area destroys the deduction.

In Speers v. Commissioner (T.C. Memo 1994-157) the court ruled the exclusive use test is an "all-or-nothing standard." Combining business and personal use precludes the deduction - ANY personal use destroys the deduction.

Despite this clear standard, the courts have carved out de minimis exceptions to the exclusive use test.

In one case, a taxpayer claimed a home office deduction for a walk-in closet in his studio apartment. To get to the bathroom, the taxpayer had to walk through the closet allowing the IRS to challenge the exclusive use test. The court ruled in the taxpayer's favor saying this incidental use to walk to and from the bathroom did not violate the exclusive-use test.

In another case [Culp v Commissioner (TC Memo 1993-270)], a taxpayer stored a lawn mower in the garage he claimed as a home-office deduction. The court again ruled on behalf of the taxpayer claiming the space occupied by the lawn mower amounted to de minimis use and did not alter the deduction.

In an example of how even minor personal use can destroy the deduction, look at Langer v Commissioner [TC Memo 1992-46]. Mrs. Langer ran a piano lesson business from her home and had a special area set aside for this exclusive purpose. However, during the year she had an open house allowing guests to use the room. The court ruled that this use violated the exclusive use test and Mrs. Langer lost her deduction.

We'll continue with this subject in future blog posts.

Green Tax Incentives for Commercial Buildings

The Energy Efficient Commercial Building Deduction is allowed under IRC Sec. 179D. This code section was originally added by the Energy Policy Act of 2005 and was extended through 2008 legislation. Section 179D now applies to properties placed in service after December 31, 2008 and before January 1, 2014. Unlike most of the incentives I've covered in earlier blog posts, this incentive is based on a deduction and not a credit.

Section 179D allows an immediate deduction for the cost of energy efficient building property placed in service during the year. The maximum amount of the deduction is $1.80 per square foot on a lifetime basis and is available for energy efficient building property place in service after 2005 and before 2014. The maximum deduction in any taxable year would be equal to $1.80 x square footage of the building less the aggregate amount of Sec. 179D deductions for all prior tax years.

Note that this section applies to both new construction and renovations.

The maximum 179D deduction of $1.80 per square foot is actually comprised of three separate components:

1. Building envelope
2. Lighting
3. HVAC

Each component is worth a maximum $0.60 per square foot deduction.

To qualify for these deductions, commercial building performance must exceed baseline standards. Any deduction allowed under 179D reduces the depreciable basis of the property.

The standards for each of these three building components is far too detailed and specific to delve into here but let me point out a couple things to be aware of.

First, because Sec. 179D deductions are based on square footage - the bigger the building, the larger the deduction. These deductions can be huge for distribution centers, parking garages and other facilities with large footprints. As a rule of thumb, I've heard a building needs to be greater than 50,000 sf before these provisions are cost effective due to the documentation and increased costs necessary to qualify for the deduction.

I've also heard that the construction cost needs to be north of $1 million before deciding whether to pursue these deductions because the cost of proving performance will exceed the deduction on smaller projects.

This deduction is available to either the building owner or the tenant, depending on who incurred the costs.

In the case of a government-owned building, the Sec. 179D deduction is awarded to the primary designer should the building qualify based on performance. An architect, engineer, contractor or energy consultant who creates the technical specifications for a new building or an addition to an existing building which incorporates the necessary performance standards may qualify for this deduction.

A government-owned building is any publicly owned building such as a prison, school, water treatment facility, court house, military facility, etc., etc. Designers working on such projects can qualify for some huge deductions under this code section.

Tax breaks for the green community

The latest tax bill has some nice benefits for the sustainability community to help us green our economy. For instance, starting in 2009, employers can give bicycle commuters a tax free fringe benefit of up to $20 per month to cover the cost of pedaling to work including repairs, storage, accessories and even the cost of a bike. Employers and employees should act now to put this in place starting January 1st.

Also, the credit for residential energy saving improvements will return in 2009. The 10% tax credit has been expanded to include biomass fuel stoves as well. You may want to delay the installation of skylights, windows, outside doors and high-efficiency furnaces, water heaters and central a/c units until next year in order to claim the credit. This credit will be on the books through 2017 so you can use it in 2010 and beyond if you don’t get your project done next year.

One of the challenges for the alternative energy market is financing, and tax policies can make or break projects. Trying to determine long-term cash flows with unpredictable tax policies makes the challenge even harder so it is good news that many existing energy tax breaks have been extended:

• Coal and wind energy credits as well as the biodiesel credit have been extended through 2009.
• Energy credits for biomass and landfills lapse after 2010, as will a new credit for energy from waves and tides.
• The 30% solar energy and fuel cell credits however get a long-term extension through 2016. 
• The residential solar credit also lasts through 2016, and the $2,000 cap is repealed. 
• The law that allows commercial realty to expense energy saving improvements will run through 2013.

Business deductions

I was meeting with a prospective client yesterday and they were talking about deductions. This person owned an upscale retail clothing store and a friend of theirs had told them they could write off almost everything as a small business owner.


Drive to work - write it off.
Laptop computer - write it off.
Cell phone - write it off.
Daily lunch with his business partner - write it off.
Fancy clothes - write it off.
Haircut - write if off.


The list was actually longer but I think you get the picture.


While all of these have some connection to the business activity, that doesn't necessarily make them deductible. While there are many specific rules regarding business deductions, the items noted above generally have a high degree of personal benefit, i.e. non-business, to them. Everyone has to eat, wear clothes, get their haircut and drive to work. These are generally personal expenses and therefore not deductible as business expenses.


Haircuts and clothing are almost never deductible. As a general rule, clothing is deductible only if it is a requirement of the job AND, cannot be worn as street clothes. My friend and his employees who dress nicely in their upscale clothing store cannot deduct their clothing as a business expense. It may be a requirement of the job but the clothes can also be worn outside of work and therefore can't be deducted. If it is any consolation, I can't deduct my suits, shoes and ties either.


Cell phones and laptops are considered listed property and an allocation between business and personal use is required. The business use portion is deductible while the personal portion isn't.


There are a number of ways to handle cell phone accounting and I recommend you do it right with professional help to review the tax implications of your plan. I see too many companies who don't handle this correctly and expose themselves to potential liabilities. The biggest mistake I see is where a company simply provides cell phones to employees and pays the monthly bill without any accounting by the cell phone user. This type of arrangement is allowed but the payment is considered W-2 compensation and should be handled accordingly.


Business meals have a their own set of specific rules but generally, the meal must be ordinary and necessary for your business and directly related to or associated with it as well. Having lunch with a co-worker will not pass the necessary test and is therefore not deductible. Most meals are considered personal unless, you are meeting with a client or perspective client AND discussing business.


The IRS has strict rules for substantiating meal and entertainment expenses. For each expense, you must show the date, place, amount, business purpose of the expense, and the business relationship of the person you entertained. Receipts are required for expenses of $75 or more.