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You may know which expenses qualify for home office deductions, but are you savvy about the requirements for your office qualifying to take these deductions in the first place? In order to make home office deductions, your office must pass the “regular use” test. It’s just what it sounds like—a determination of whether you regularly do business from the office in your home.
What the IRS Says
The IRS states in its audit manual, “Regular use means that you use the exclusive business area on a continuing basis. The occasional or incidental business use of an area in your home does not meet the regular use test even if that part of your home is used for no other purpose.”[1] Obviously, setting up an area exclusive to your business, filling it with files, and never going in there will not cut it, but this definition does little to pinpoint exactly what does count.
According to the IRS, they consider your individual facts and circumstances when determining regular use.[2] Great, but that leaves things pretty vague when you’re trying to plan for your tax return. So, instead, we’ll take a look at court precedents to get a better idea of what exactly you need to do to get your deduction.
- The Frankel Case—Max Frankel was the editor of The New York Times. In his case, he claimed that he used his home office to communicate by phone with prominent politicians at all levels of government, as well as community leaders and labor leaders. Records indicated that Frankel averaged a call per night, and Frankel stated that it may have taken several calls to complete a single discussion. The U.S. Tax Court decided in his favor, stating that the frequency was enough to qualify Frankel’s home office for regular use.[3]
- The Green Case—Because of the circumstances of his work, and because many of his clients were unable to make calls during daytime hours, John Green took a large number of client phone calls at home after his regular work hours. This was a required condition of his employment. The calls averaged 2 ¼ hours per night, five nights per week. Again, the Tax Court decided the frequency met regular use requirements for a home office.[4]
Like any tax strategy, passing the regular use test requires one important item—sufficient evidence. Another court case, involving Anthony Cristo, illustrates this need. The court stated:[5]
“We do not suggest that the frequency or regularity of meetings or dealings must match the level we faced in Green in order to meet the requirements for regular use. However, in this case we have so little information that we cannot tell whether the facts, if we knew them, would satisfy any reasonable interpretation of regular use.”
What does this mean for you? It means that no matter how good a claim you have to regular use of the office in your home, you will lose out on those deductions if you can’t prove it with substantial evidence. The truth is you only need two pieces of evidence in order to prove regular use:
- A log recording how you spent your time, and
- Documents that support your log of time spent.
Your log can be as simple as keeping an appointment notebook or printed sheets from a calendar application. Note your schedule, including phone calls, meetings, opening mail/responding to business email, and any other business activities you complete at your home office. Next, you need something to corroborate with the log.
- You say you responded to emails on this day at a certain time? Keep your sent emails. They’re time and date-stamped and prove that you were indeed responding to email.
- You claim to have met a client at your home? You could keep a guest log and have the client sign in. Or, you could provide email correspondence of your client’s agreement to meet at that time.
- You devoted 2 hours each evening to making and taking phone calls? This one is easy to prove. You simply need to provide your phone bill as documentation. Make sure you get a detailed copy.
Sure, keeping records is a pain in the butt. Just set up a routine now and stick with it. You can make it even easier by creating a checklist for yourself. Every day, go through the checklist and make sure you took care of logging and documenting your hours, that way you won’t forget anything. Once it becomes part of your routine, you’ll see that keeping emails or having people sign a guest log really isn’t all that hard—and your deductions may hinge upon it.
A Checklist to Get You Started
What do you need to do to comply with the IRS regular use rules?
- Use your home office more than 10 hours per week on average (this is a subjective number because the IRS has never given a specific amount of time required, but 10 hours seems to be a safe bet based on past cases).
- Build proof indicating that you actually did work for those 10 hours or more.
That’s it. It shouldn’t be too hard to find business activities you can do from your home office for just a couple of hours per day/night. This article already gives you a few easy ideas, as well as simple ways to document them. Start keeping good records now, and taking care of any tax issues that arise will be no problem.
- Internal Revenue Manual Exhibit 4.10.10-3 — Standard Explanation Paragraph 4814 Test for Home Office (Last Revised: 01-11-2011). ↑
- Prop. Reg. Section 1.280A-2(h). ↑
- Max Frankel v Commr., 82 TC 318. ↑
- John W. Green v Commr., 78 TC 428; Rev on another issue, 52 AFTR 2d 83-5130, 707 F2d 404 (CA9, 5/31/1983). ↑
- Anthony B. Cristo v Commr., TC Memo 1982-514. ↑