If you run a business from home, you may use more than one room for work. So how many rooms can you count for the home office deduction? The short answer: there is no set number.
The rule for the home office deduction
Under Section 280A(c), you can claim a home office based on the part of your home you use regularly and exclusively for business. In other words, the law sets no specific number of rooms. It also doesn’t set a size for the office.
Note: This deduction is for self-employed people and business owners. Employees who work from home generally can’t claim it on their federal return.
Court cases make the rule clear. For example, the Mills case involved less than one room. By contrast, the Hefti case involved many rooms.
The Mills case: less than one room
Albert Victor Mills ran a rental property management business from his apartment. The apartment was small, only 422 square feet. In his office area, he kept his desk, tools, equipment, paint supplies and a filing cabinet.
The court agreed with his allocation. As a result, it allowed a home office deduction for 23% of the apartment.
Planning note: Mr. Mills didn’t have a separate room for his office. Instead, he grouped his office furniture, equipment and supplies in one area. If you’re in a similar situation, keep your business items together in one space.
The Hefti case: many rooms
Charles R. Hefti lived in a large house of 9,142 square feet. He claimed he used more than 90% of it regularly and exclusively for business.
The court reviewed each room. In the end, it found that 13 rooms, or 19% of the home, qualified.
What these cases mean for your home office deduction
The deductible part of your home includes every area you use regularly and exclusively for business. For example, say you have an office in one room and your files in another. You never use either room for personal purposes. Also, you use the office daily and the file room for that same daily work.
In that case, both rooms meet the regular and exclusive use tests. That is just how Mr. Mills’s and Mr. Hefti’s offices qualified.
The exclusive use test
“Exclusive use” means you use a specific part of your home only for business. You can’t use the space for anything else.
However, there is one exception. You can deduct space used to store inventory or product samples if your home is the only fixed location of a retail or wholesale business.
Example 1: Your home is the only fixed location of your business, which sells mechanics’ tools at retail. You regularly store inventory and samples in half of your basement. Sometimes you use that area for personal purposes too. Even so, you can deduct the storage space.
Example 2: In the Pearson case, Dr. Pearson ran an orthodontics practice in a downtown medical building. However, he kept records for over 3,000 patients at home. He stored 36 file drawers and 1,461 boxes of dental models in his attic and basement.
These storage areas weren’t separate rooms. Also, his family used the rest of the attic and basement for personal purposes. So the court denied the deduction. The records weren’t inventory or samples, and he didn’t run a retail or wholesale business from home.
For more on the rules, see IRS Publication 587, Business Use of Your Home.
Get help with your home office deduction
Allocating space correctly can raise your deduction and hold up in an audit. To review your home office, call us at (415) 842-2940 or book a free 15-minute call.