Home Office Deduction Not for Hobby Activity

A home office deduction can be claimed only if space is used regularly and exclusively for business. But can a taxpayer who has two businesses claim a home office deduction for the same space?

In a recent case, a taxpayer claimed to run a horse business, although she didn’t own a horse for the year in question and didn’t have any income from this activity. She did, however, run a profitable IT business. She had seven computers which adorned the wall of her 800 sq. ft. one-bedroom apartment’s living room. She used one computer for the horse activity, another for the IT business, one to administer her website, one to watch horse DVDs, two as backups, and one as a file server. She claimed that she used the living room solely for work and took a home office deduction on the Schedule C for the IT business.

The Tax Court disallowed her home office deduction (Denise Celeste McMillan, TC Memo 2019-108). For space to be a home office, it must be used regularly and exclusively for business. In this case, the horse breeding activity was only a hobby because she didn’t demonstrate a profit motive and didn’t even own a horse, so the use of the space wasn’t exclusively for business. Even though use of the space by the IT business on its own would qualify, the fact that she used the space for her hobby disqualified the home office deduction. It’s all-or-nothing for the home office deduction. If the horse activity had been a business, it would have been permissible to combine them to meet the exclusive use test.

Note: Even if the horse activity were a business, the taxpayer would not have been eligible for the home office deduction because she also used the space for working on various lawsuits and other personal purposes.