Teacher Entitled to Deductions for Home Office Used for Administrative Assignments

(Parker Tax Publishing October 2016)

The Tax Court held that a physical education teacher, who taught at multiple schools each day, was entitled to deductions for the use of her home office. The court determined that the nature of the taxpayer's work required her to use portions of her home as her principle place of business in order to complete administrative and management activities, and found she did so for the convenience of her employer. The court disallowed the taxpayer's claimed deductions for unreimbursed vehicle and travel expenses, finding that she was not able to substantiate those expenses. Czekalski v Comm'r, T.C. Summary 2016-56.

Background

Diana Czekalski has been employed by the Hayward Unified School District (Hayward USD), part of the California public school system, for 31 years as an adapted physical education teacher. Her primary responsibilities include planning, developing, and implementing physical education programs for students with special needs.

On an average day, Czekalski drove her personal vehicle from her home to several schools where she used specialized physical education equipment, portable sound systems, and other devices (which she transported in her car) to engage students with special needs in appropriate physical education activities. At the end of the day, Czekalski returned home where she prepared various reports (e.g., progress and time and attendance reports) that she submitted to Hayward USD. In 2011 Czekalski was the sole adapted physical education teacher in school district, and she instructed as many as 96 students weekly.

Czekalski lives in a two-story residence with a two-car garage comprising a total of approximately 1,462 square feet of space. In 2011 Czekalski used an upstairs bedroom (80 square feet of space) as an office where she prepared routine reports and performed other administrative tasks related to her work for Hayward USD, and she devoted approximately one-half of her garage (144 square feet of space) to storing physical education equipment owned by Hayward USD.

In November 2011 Czekalski traveled to Long Beach, California, to attend a conference for educators working with children with disabilities. Before the trip, she had been informed by a Hayward USD representative that she would not be reimbursed for her travel expenses because of budget constraints.

On her 2011 income tax return, Czekalski claimed deductions for real estate taxes, home mortgage interest, depreciation, and the business use of her home. In addition, she claimed deductions for unreimbursed employee expenses, including vehicle and travel expenses. Following examination, the IRS disallowed the majority of Czekalski's deductions for lack of substantiation, determining a deficiency of $7,147 in her income tax for 2011 and an accuracy-related penalty of $1,429 pursuant to Code Sec. 6662(a).

Analysis

Under Code Sec. 280A(c)(1), taxpayers can deduct expenses attributable to a home office if the expenses are allocable to a portion of the dwelling unit which is exclusively used on a regular basis as the principal place of business for the taxpayer's trade or business. A taxpayer's home office may qualify as her principal place of business if she uses it exclusively and regularly for administrative or management activities of her business and if there is no other fixed location suitable for the taxpayer to conduct those activities. If the taxpayer is an employee, the deduction is allowed only if the exclusive use of the space is for the convenience of the taxpayer's employer.

Code Sec. 274(d) prescribes strict substantiation requirements for deductions for expenses related to travel, including meals and lodging. To satisfy these requirements, a taxpayer generally must maintain adequate records and documentary evidence which, in combination, are sufficient to establish the amount, date, and business purpose for the expenditure (Reg. Sec. 1.274-5T(b)(6)).

The Tax Court determined that Czekalski used the bedroom office and a portion of her garage (together, approximately 15 percent of her living space) on a regular and exclusive basis to conduct administrative and management activities for her work, and did so for the convenience of her employer. The court found that there was no fixed location other than those locations where Czekalski was able to conduct these activities, because the nature of her employment required her to consistently travel to multiple schools within the district during the work day and she was required to provide storage space for specialized equipment owned by Hayward USD.

Finding that Czekalski had established that she paid approximately $3,420, $876, and $888 annually for home owner's association dues, utility charges, and trash collection fees, respectively, the court held that she was entitled to a deduction of $778 for the business use of her home (i.e., 15 percent of the total of the expenses listed above). The court also disallowed her claimed depreciation deductions because she failed to identify the underlying property. The court did not include in its calculations the property taxes and mortgage interest Czekalski paid in 2011, noting that the IRS had already allowed deductions for those expenses.

With regard to Czekalski's claims for unreimbursed employee business expenses, the court observed that she did not produce any records of her vehicle expenses (including parking fees and tolls) that would satisfy the strict substantiation requirements of Code Sec. 274(d), concluding that she was not entitled to deductions for those expenses. In addition, the court noted that other than her hotel charges, Czekalski failed to substantiate any expenses, such as airfare and meal expenses, relating to her attendance of the educators conference in November 2011 for which she was not reimbursed by Hayward USD.

The court affirmed the accuracy related penalties, finding that Czekalski did not have reasonable cause with respect to the understatements.

For a discussion of home office deductions, see Parker Tax ¶85,505.

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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