Small Homes Can Give Big Tax Savings

A recent tax court decision means that many taxpayers who couldn't deduct their home offices in the past because they live in studio apartments without a separate office space may now be eligible for this valuable deduction. This is a blessing to many who have embraced the small home movement only to find their lack of walls can mean a shortage of business deductions.

If Home is Where Your Business is...

Can part of my studio apartment really be considered an office now?

Recently the tax court determined that taxpayers who live in studio apartments may still be able to deduct a portion of their living expenses for business purposes. This is a huge decision as in the past it has always ruled that office space must be separate- i.e. another room. Important to remember though that tax court cases cannot be used as precedents, so this is up to the discretion of the revenue officer to agree with upon review. However, there still is now at least one good case to base this on, making this a new possibility for many taxpayers.

Does this new ruling apply in my situation?

This is always the million dollar question. In Summary Opinion 2014-74 the court ruled in favor of a taxpayer who lived in a 600 sq ft condo in New York City and deducted one third of her living expenses. In her case she worked for a company in LA which listed her address on their website as their NYC office, which is a big plus to counting this expense as deductible!

How does this differ from the previous law?

The general rule for usage of an office in home has always been that the space is used ordinarily and exclusively for business, meaning it is a space set aside only for business use such as a separate office. There have always been a couple deductions for this, but generally it has held up. In this case the taxpayer had a sofa in the space she deducted, and admitted to the court she also used this sofa for recreational and personal uses, and the court allowed the full deduction.

Is this something that applies to past returns or just for the future?

This all depends on your comfort level. If you have a studio apartment that you run a business out of if you both meet clients in the space and have no other office to go to, then you probably would qualify and amending your return for the last three years could bring you a substantial tax refund- especially when you take self-employment tax into consideration.

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