Do you claim a tax deduction for a home office?
Should you include or exclude your garage space in your calculations of business-use percentage?
The Culp’s Case
Ronald Culp earned an office deduction for 78 percent of his home. That’s a nice percentage, but what’s really interesting is how the court looked at Mr. Culp’s home in deciding that 78 percent business use.
Here’s how the court made the computation that produced the 78 percent business use of Mr. Culp’s home:
• The court counted the garage as office space because it could find no basis in law or fact for excluding it. (The garage held two printing presses and a large paper cutter that were integral to Mr. Culp’s business.)
• Regarding the utility room in the basement where the water heater and furnace were located, the court said that this space failed the exclusive business-use standard for the home-office deduction and that such space counted as personal space.
• The attic, which measured 1,128 square feet, contained only 100 square feet of usable space. The court ruled that the other 1,028 square feet were not functional, because that footage was not accessible due to the slope of the roofline and/or the lack of flooring.
Observation. The printing took place in the garage, but the IRS said that such space was not usable space, and the IRS did not want it counted in the calculations. The taxpayer and the court agreed that the space should be counted in the calculations. Will this be true for other garages?
The Moretti’s Case
According to the court’s description in a different case, Gene Moretti rented a 5.5-room house consisting of two bedrooms, a den, a living room, a dining room, and a half-kitchen. The court noted that “the house also had a garage” and that Mr. Moretti claimed business use of the den, living room, dining room, and garage.
The court concluded that only the den met the regular and exclusive use requirements for qualification as an office in the home.
To calculate the business percentage, the court used the number-of-rooms method and calculated that one room (the den) of the 5.5 rooms represented the business-use percentage of this home. The court ignored the garage even though Mr. Moretti tried to claim it as office space.
The two-garage case. In an effort to save time, the court tried two separate day-care cases together. Each case involved the use of a garage.
In both of these court cases, the IRS excluded the garages from its computations.
The court took the opposite view. First, it included both garages in the business-use-of-home calculations. Although it found that one garage met the requirements for the home-office deduction and one garage did not, the key point is that both garages were included in the calculations.
In conclusion, we see in these court cases that the IRS often excluded the garages, whereas the courts were eager to include them. Since you start any disagreement over your tax return with the IRS, this should work to your advantage.
You might think that the rules are a little unclear in this area. That’s true.
The science involved in tax law is finding cases, rulings, procedures, and publications that support your position. The art form is putting your spin on the deduction. That’s all you can do when neither the law nor the regulations give clear advice.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.