No Home Office Deduction for Employee Working from Home for Her Own Convenience. (Parker's Federal Tax Bulletin: July 17, 2013)

While the taxpayer could deduct home office expenses for the portion of time she was an independent contractor, she could not deduct such expenses once she became an employee because working at home was at her request and for her convenience. Fontayne v. Comm'r, T.C. Summary 2013-54 (7/3/13).

Jean Marie Fontayne and Yves Fontayne were married and timely filed their 2008 federal income tax return. In 2008, Yves worked full time as an employee of a semiconductor sales company. From January to July 2008, Jean Marie worked part-time from her home as an independent contractor for the same company. In July 2008, Jean Marie became a full-time employee of the company. Per her request and for her convenience, the company allowed her to work from home up to three days a week.

In January 2008, Jean Marie and Yves moved into a new home. Jean Marie designated a room, which included a bathroom and a closet, as her home office. She did not see any clients or anyone from her company at her home office. In November 2008, the couple improved the home office area. They moved walls to increase the size of the office, replaced carpeting, retiled the bathroom, installed a central vacuum and under-the-floor heating system, and installed a fireproof safe in the closet. On their Schedule C, Profit or Loss From Business, the couple reported a tentative profit of $24,728 from Jean Marie's work for the company and expenses of $24,728 for the business use of their home. The couple's home was 3,100 square feet and they claimed that 554 square feet, or 17.87 percent, was used regularly and exclusively for business.

OBSERVATION: A taxpayer can deduct the business portion of general repairs that benefit the taxpayer's entire home and maintain it in good working condition over its useful life. Generally, the business portion of such general repairs is determined by applying the home's business use percentage to the full cost of the repairs.

After auditing the couple's 2008 return, the IRS issued a notice of deficiency disallowing some claimed business expenses as personal expenses, reducing the percentage of business use of the couple's home used to calculate business expenses, and prorating other claimed home office expenses reflecting Jean Marie's change of employment status from part-time independent contractor to full-time employee.

Code Sec. 262 precludes deductions for personal, living, or family expenses. Code Sec. 280A(a) denies deductions with respect to the use of a dwelling unit that the taxpayer uses as a residence during the tax year. However, Code Sec. 280A(c)(1)(A) allows the deduction of expenses allocable to a portion of a dwelling unit that the taxpayer uses exclusively and regularly as the principal place of business for a taxpayer's trade or business. In the case of an employee, the exception applies only if the use of the home office is for the convenience of the employer.

The IRS asserted that the home office expenses should be limited to the time period when Jean Marie was a part-time independent contractor. The IRS also adjusted the percentage of the couple's home used for business and disallowed business expenses deductions claimed for repairs and maintenance, utilities, and other expenses.

The Tax Court agreed with the IRS that only home office expenses incurred when Jean Marie was a part-time independent contractor were deductible. Because she was allowed to work from home part-time at her own request and for her own convenience once she became an employee, she was not entitled to any home office expense deduction for that time period. In determining the portion of the home used as a home office, the court rejected Jean Marie and Yves inclusion of the square footage of a hallway, bathroom, entryway and closet since those areas were not used exclusively as a home office. The court disallowed deductions for the costs of moving walls to increase the size of the home office, replacing carpeting, retiling the bathroom, installing a central vacuum and under-the-floor heating system since those expenses were capital expenditures and were not currently deductible. Deductions for telephone expenses at the home were also disallowed as personal expenses.

Finally, the court imposed the accuracy-related penalty. The court concluded that Jean Marie and Yves were negligent in preparing their return.

For a discussion of the home office deduction, see Parker Tax ¶85,500.

Staff Editor Parker Tax Publishing

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