CSI in the News October 2011 - CSI Today

Real estate. John M. Rodriguez v. Comm'r (T.C. Memo 2009-22) involved tax returns for tax years 1998-2001. Rodriguez had some success in claiming an office in his home on these tax returns. He was a realestate manager for several real estate developers. In addition, he handled a personal real estate businessthat he conducted entirely from his home. He had allocated 40% of his home as his home office becausehe stated that he used two of the five rooms for business.While the IRS agreed that the space was used regularly and exclusively for business, they disagreed withhis percentage because the rooms were not the same size. Rodriguez was only allowed to allocate 28.5%as his home office. Although the two-prong test of Soliman was not appropriate in this case becauseRodriguez conducted his personal real estate business from only one location, his home, he still needed tobattle the issue of proper measurement. The Rodriguez case is from 2009, and is just one indication thatthe office in home deduction has been in the past, is now, and will continue to be an issue of debatebetween taxpayers and the IRS.Rodriguez's battle did not involve principal place of business, which is usually the major battle; rather, hisfight was regarding size. This point illustrates that the ability to properly claim a home office deduction,while not impossible, is difficult. Another issue to keep in mind is that while the principal place ofbusiness is one of the stickiest points to deal with in connection with the home office deduction, by nomeans is it the only one.Looking to the FutureBoth the House and the Senate have submitted bills on the matter of home office deduction. In June2009, Congressman Charles Gonzalez (D-Tex.) introduced the Home Office Tax Deduction Simplificationand Improvement Act; simultaneously, Senator Olympia Snowe (R-Maine) introduced the bill in theSenate. The objective of the bill is to basically provide a standard deduction for a home office. Inaddition, the bill provides for a de minimis amount of personal use when dealing with employees ratherthan self-employed taxpayers. While the home office would still need to be for the employer'sconvenience, it would liberalize the criteria exclusively used for business by stating:A portion of a dwelling unit shall not fail to be deemed as exclusively used for business for purposes ofthis paragraph solely because a de minimis amount of non-business activity may be carried out in suchportion.Rather than calculate the deduction as it is done presently, which involves a great deal of recordkeepingand computation, a standard rate would be used if the taxpayer chose to do so. This rate would bedetermined by the Secretary of the Treasury and would be multiplied by the square footage used for thehome office. A maximum amount of square footage would also be determined by the Secretary.In 2009, there had been a desire to bring about change. Unfortunately, some legislation that getsintroduced is allowed to die, and change never comes; perhaps change will come with a newer billintroduced in 2010. Congressman John J. Hall (DN.Y.) sponsored this bill, the Help Small Businesses Startand Grow Act. One provision of this bill related to a standard office deduction. It was suggested thisdeduction be the lesser of $2,500 or the gross income derived from the individual's trade or business forwhich such use occurs. Once again, an attempt is being made to change the status quo, but this bill wasreferred to the Committee on Ways and Means and the Committee on Small Business, and it has not seenmovement since.The concern here is whether there will be a return to the abuse Congress originally tried to avoid when itinitially adopted IRC section 280A. This section was adopted to prevent taxpayers from treating whatotherwise would be nondeductible living and family expenses as business expenses.It should be noted that most of the discussion here is related to self-employed individuals. The criteria fora qualifying home office deduction are a little different for those taxpayers who are employees. Theirhome office must be for the convenience of the employer; this complicates matters further. Manytelecommuters today do so for the employee's own convenience. It is not uncommon, however, to findthat some taxpayers who work strictly from home are doing so at the employer's request. While this maystill be appealing to the employee, it provides a number of benefits to the employer, including thereduction of office space and the associated high cost of commercial space.Planning ConsiderationsPage 45 of 154