Taxpayer Entitled to Home Office Tax Deduction for Portion of Studio Apartment.
(Parker Tax Publishing August 28, 2014)

Where a taxpayer's studio apartment was her principal place of business and she was required to use the space as an office for the convenience and benefit of her employer, and her employer was not able or willing to reimburse her for any of her apartment-related expenses, she was entitled to a home office deduction for a portion of the apartment. Miller v. Comm'r, T.C. Summary 2014-74 (7/28/14).

Lauren Miller lives in New York City. In 2008, she was hired to work for Branding Iron Worldwide, Inc. (BIW), a company headquartered in Los Angeles. Lauren was responsible for managing existing client accounts, hosting press events, producing style guides, and assisting clients with product line development and communications. She was also expected to attempt to recruit new clients. At the time she was hired, Lauren was BIW's only employee in New York, and BIW did not have an office in New York. Instead, BIW listed Lauren's apartment address on its Web site as the address for its New York office. Lauren regularly used one-third of her efficiency apartment space as an office to conduct BIW business. She met with clients there, and she was expected to be available to work well into the evening. Although she used the office space primarily for business purposes, she occasionally used the space for personal purposes.

Lauren's studio apartment was a single room with a total living area of 700 square feet. For purposes of allocating business expenses to the apartment, she divided it into three equal sections: (1) an entryway, a bathroom, and a kitchen area; (2) office space, including a desk, two shelving units, a bookcase, and a sofa; and (3) a bedroom area including a platform bed and dressers. Lauren had to pass through the office space to get to the bedroom area.

BIW did not maintain a formal employee expense reimbursement policy. Lauren understood that BIW was struggling financially, that the company's business was not growing, particularly in New York, and that she would be reimbursed only for expenses that BIW could itemize and bill directly to its clients.

Lauren paid rent of $26,200 and cleaning service charges of $1,680 during 2009. She also paid $1,896 for a package of services that included cable television, a telephone line, and wireless Internet access. Lauren used the cable television exclusively for personal use, the telephone line exclusively for business purposes, and the wireless Internet access for both personal and business purposes. She estimated that approximately 70 percent of her wireless Internet use was business related.

On her 2009 Form 1040, Lauren reported wage income of $48,680, and she claimed a deduction of $34,933 on Schedule A for unreimbursed employee business expenses (before applying the 2-percent of adjusted gross income floor in Code Sec. 67(a)). She attached Form 2106, Employee Business Expenses, to her return listing the following: parking fees, tolls, and transportation expenses of $553, meals and entertainment expenses of $299 (before applying the 50 percent limitation of Code Sec. 274(n)), and unspecified expenses of $34,230.

The IRS disallowed Lauren's Schedule A deductions for unreimbursed employee business expenses on the ground that the expenses were not ordinary and necessary business expenses.

The Tax Court held that, while Lauren used portions of her office space for nonbusiness purposes, her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of modest dimensions. Thus, the court said she was entitled to deduct one-third of her rent and cleaning services. The court also concluded that Lauren used her apartment telephone exclusively for business purposes. Thus, maintaining the telephone line was an ordinary and necessary business expense. The court noted that, under Code Sec. 262(b), any charge for basic local telephone service with respect to the first telephone line provided to a taxpayer's residence is treated as a nondeductible personal expense. Although Lauren provided some information related to the breakdown of the charges for the telephone line, the record was silent regarding the exact charge, if any, for local telephone service. Under the circumstances, the court estimated the amount allowable as a deduction. Allocating one-half of the telephone charge to local telephone service, the court held that Lauren was entitled to a deduction of $316 for the telephone line.

For a discussion of the home office deduction and the deduction for unreimbursed employee expenses, see Parker Tax ¶85,500. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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