Can a separate building qualify for a home office deduction?

June 5, 2002

Subject:  A home office outside the house
Date:  Wed, 22 May 2002
From:  MD

The quality of your tax articles is excellent; I'm hoping you can answer a question that stumped my local tax preparer.

SITUATION: We live on a 1.1 acre property with a 1500 square foot house and a 1000 square foot detached shop. I'm planning to start a business that will involve my fabricating and shipping automotive accessorites and stocking and mail order reselling auto parts from other sources. We won't be using any of the house for this, but about 1/2 of the shop (500 square feet) will be used solely for the business.

QUESTION: Can the square footage of the house and shop be combined and considered our "home" for home office percentage calculations? In our case, we'd be using 500 square feet of the total 2500 square feet (1500 square feet for the house and 1000 square feet for the shop) that I would call our "home." By this method, our "home office" would then be 20% of our "home."

Thanks in advance for your opinion as well as any help you can give me in locating the regulation/case that supports (or contradicts) my position.

MD

Answer

Date:  Mon, 3 Jun 2002

Hello MD,

It depends.

First, the separate structure status is important to qualify for deductions that you otherwise might not receive for the residence itself. (Internal Revenue Code Section 280A(c)(1)(C).)

Under Proposed Regulations Section 1.280A-2(i)(3), a taxpayer may determine the expenses allocable to the portion of the unit used for business purposes by any method that is reasonable under the circumstances. Expenses which are attributable only to certain portions of the unit shall be allocated in full to those portions of the unit. Expenses which are not related to the use of the unit for business purposes, such as for lawn care, are not taken in account.

It seems to me the separate structure should be separately depreciated. If there aren't separate utilities for the structure, you might allocate based on a combined square footage basis. You could also use a combined square footage approach to allocate combined expenses, like property taxes. Personally, I would prefer separate utilities and separate accounting. You will probably find you have a bigger deduction due to energy used for business equipment. Also, your documentation is cleaner.

See IRS Publication 587, Business Use of Your Home.

Good luck!
Mike Gray

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