Home Office Deductions and Substantiation Requirements

William Delaney, EA
Westwood, MA

Taxpayer (Miller) was the only New York state based employee of BIW (employer), a company located in California.  Since the employer did not have office or other work space in NY, BIW asked Miller to work out of her home.  On its website, Miller’s address was listed, along with Miller’s phone number.  The taxpayer lived in a studio apartment which was one large room divided into three equal sections, one of which was used almost exclusively (more on this later) for BIM’s business operations.

At issue were various business expenses deducted on Miller’s 2009 return (Schedule A)
which totaled $34,933 against wages income of $48,680.  Matters were complicated by Miller’s testimony that she lost most of her business records when she moved to another apartment in 2011.  As a result, all of her 2009 expenses were disallowed by the IRS due to lack of substantiation.  [See Reg. 1.274-5T(c)(2)]

At trial, Miller admitted that she used portions of the office space for non-business purposes.  The Court found, however, that this personal use was de minimis and due to the practicalities of living in a small studio apartment.  She was, therefore, allowed a deduction for one-third of her rent and cleaning service charges.

Miller paid TimeWarner Corporation for a package consisting of cable television, telephone, and internet access.  Since the cable television was exclusively personal use, its cost was excluded.  Applying the Cohan rule, the Court found that one-half of the telephone cost was for local service (no deduction under Sec. 262(b) for the basic cost of the first phone) and could not be deducted.  The Court allowed a deduction for the remainder as business use.

The Court accepted as credible Miller’s testimony that she used wireless internet 70% for business, and found that the strict substantiation requirements of Sec. 274(d) were not applicable (see Noz v. Comm., TC Memo 2012-272).

Miller was unable to substantiate her utility expense with invoices and/or receipts, so no deduction was allowed.  Cohan could not be applied.  Likewise, she was unable to substantiate her cellular phone charges [which are subject to the substantiation requirements of Sec. 274(d)] because a cell phone (at that time) was listed property
and she could not produce invoices and/or receipts.

Lastly, and this is outside of the office in home issue, Miller was required to dress appropriately for BIW sponsored events which she attended.  She purchased three evening dresses at a total cost of $2,093 which she wore exclusively at employer sponsored events.  Since the cocktail dresses did not resemble a uniform, nor was she required by her employer to wear a uniform, the dresses were found to be suitable for personal use.  No deduction allowed.

Lauren Elizabeth Miller v. Comm., TC Summary Opinion 2014-74 (7/28/14)