The 2020 tax season is nearly over, but people will continue to use their homes as their place of business in the months ahead thanks to COVID-19. In the second of a three-part series, tax guru Julian Block talks about what the IRS allows these individuals to deduct and what’s not permitted.

For those of you who’re just joining in, part one discussed my responses to a query from Abigail, a self-employed consultant who uses part of her home to conduct her business.

Part two will explain that Abigail qualifies for home office deductions only if she satisfies three requirements. First, she uses that portion exclusively for work in her business. Second, she does so on a regular basis. Third, it’s her principal place of business.

“Exclusively” means just that. IRS examiners are sticklers about what constitutes exclusive use.

They tell Abigail to use the entire area—whether a single desk in a corner of her bedroom, or a room—only for business and nothing else. They disallow all home-office deductions when she uses her office for any investment activities, as discussed in part one, or personal family activities.

They relax when Abigail’s deduction is for a room that’s closed off from all non-business activities; they remain relaxed even when the office is just a small part of a room, as long as Abigail clearly separates the business portion from the rest—by a partition, perhaps.

Personal activities. They might make Abigail establish that no personal activities take place within the business area—one of the reasons they suspect deductions for offices housed in cramped quarters, such as studio apartments.           

 A surefire way for Abigail to flunk the exclusive test: introduce a TV into her office—with a possible exception if she shows a business need to keep up with the news. An additional no-no: her office doubles as a place where she stashes her cat’s litter box, children play video games or do their homework on personal computers, or there’s a closet filled with clothes.

IRS auditors are mostly reasonable. They don’t forbid all personal activities. It’s not fatal if Abigail used office phones or computers for personal conversations or failed to rush outside whenever family members needed to ask questions or Fluffy craved some Meow Mix.

Abigail asks me to supply an appropriate standard for home offices: Permit personal activities only to the extent that they’re permitted someone who’s an employee in an office building.

How the IRS defines “regularly.” Internal Revenue Code Section 280A spells out the rules for deductions. Because gray areas abound, 280A sets no arbitrary standard for how much Abigail must use her office to pass the regular-use test.

Examiners recognize that they should base their decisions on the particular circumstances. Usually, they don’t challenge deductions when Abigail works in her office a couple of hours a day for several days a week. But they probably will when she spreads that couple of hours over a week.

IRS regulations allow some leeway. But Abigail ought to anticipate examiners will dispute her deductions for an otherwise empty room used infrequently for a purpose that’s incidental to her business.

The regs don’t require Abigail’s endeavor to be a full-time business. It can be part time, as when she moonlights from her home as a consultant and has a full-time job elsewhere. Examiners couldn’t care less that she devotes more time to moonlighting than to her job.

“Principal place of business” has its own meaning. Will the IRS be placated if Abigail satisfies the “regularly” and “exclusively” requirements? Two out of three is insufficient. Her home office also has to be her “principal place of business.”

It’s the place where she personally meets clients or customers (phone calls don’t count) or the only fixed location where she conducts her business’s key administrative or management activities. There can’t be another fixed location outside of her home where she conducts such activities for that business.

Some IRS-approved examples of administrative or management activities: arranging appointments; billing clients, customers or patients; ordering supplies; maintaining records; forwarding orders; and preparing reports.

The IRS makes an important exception, as long as Abigail passes the “regularly” and “exclusively” tests. The deduction remains available when she (1) carries out administrative or management activities while traveling (from, say, a hotel room or car) or (2) does occasional paperwork or administrative tasks at a fixed location other than her home.