ACCT 612 Week 6 Tax Research Memo 3 Example

The Spare Bedroom as Principal Place of Business: A Tax Research Memo on Section 280A for a Self-Employed Consultant

Memo Header

To: Engagement partner. From: Tax associate. Date: Module/Week 6. Re: Marcus Reed, home office deduction under Section 280A for tax year 2025.

Facts

Marcus Reed is a self-employed operations consultant who reports his business on Schedule C, with gross receipts of $168,000 and other business expenses of $31,000 in 2025. Most days he works on site at clients' facilities, where he has no office of his own. He uses a 180-square-foot spare bedroom in his 1,800-square-foot owned home only for his business: it contains a desk, a file cabinet and a computer used for billing, scheduling, proposals and bookkeeping, and no one else uses the room. He works there most evenings and every Friday. His home costs for the year were $14,400 of mortgage interest, $6,200 of property taxes, $3,600 of utilities and $1,900 of insurance, and the home's depreciable basis, excluding land, is $320,000.

Issue

May Mr. Reed deduct the costs of his spare bedroom as a home office under Section 280A, and if so, which computation method should he use?

Conclusion

Yes, more likely than not. The room meets the exclusive and regular use tests, and because Mr. Reed conducts his administrative and management activities there and has no other fixed location for them, it qualifies as his principal place of business. The regular method yields a larger deduction than the simplified method, but the client should weigh the later depreciation recapture.

Analysis

The general rule and its exception

Section 280A generally disallows deductions for a dwelling unit the taxpayer uses as a residence, then allows deductions for the portion used exclusively and on a regular basis as the principal place of business for any trade or business (I.R.C. § 280A, 2025). Both conditions must be met. Exclusive use means the room is used for no personal purpose, and regular use means continuing use rather than occasional use. Mr. Reed's room meets both: no family member uses it, it holds no personal items, and he works there several evenings a week and every Friday. Sawyers and Gill (2018) stress that a researcher should confirm such facts with the client rather than assume them, since a guest bed or a child's homework at the desk would defeat exclusive use entirely.

Soliman and the 1997 amendment

In Commissioner v. Soliman (1993), the Supreme Court denied a home office deduction to an anesthesiologist who treated patients at hospitals and used his home office only for administrative work, holding that the office was not his principal place of business because the essential services were performed elsewhere. Congress responded by amending Section 280A, effective for tax years after 1998, to provide that a principal place of business includes a place used for administrative or management activities if there is no other fixed location where the taxpayer conducts substantial administrative or management activities. The amendment turned Soliman's facts from a loss into a qualifying case. Mr. Reed's facts fall within the amendment: his billing, scheduling and bookkeeping are done in the bedroom, and he has no other fixed location for them. The amendment also makes clear that the office does not lose its status because the taxpayer performs some administrative work elsewhere, such as answering email in a client's lobby, so long as there is no other fixed location where substantial administrative work is done. A researcher should still read Soliman itself, because its reasoning continues to govern the comparative test for taxpayers whose home office is not used for administrative work.

Computing the deduction

Under the regular method, the business percentage is 10% (180 of 1,800 square feet), applied to mortgage interest, taxes, utilities and insurance, which gives $2,610, plus depreciation on 10% of the $320,000 basis over 39 years, about $820, for a total of roughly $3,430. Under the simplified method in Revenue Procedure 2013-13, the deduction is $5 per square foot, or $900, with no depreciation (Rev. Proc. 2013-13, 2013). The regular method is larger, although the mortgage interest and taxes allocated to the office would otherwise be partly deductible as itemized deductions. The deduction cannot exceed the business's gross income less its other expenses, a limit that Mr. Reed easily meets (I.R.C. § 280A, 2025). If he were an employee rather than self-employed, the analysis would end differently: unreimbursed employee expenses, including a home office, are miscellaneous itemized deductions, which the 2017 law suspended and the 2025 law eliminated permanently, so an employee in his position would get no federal deduction.

Later consequences

Depreciation claimed on the office reduces the home's basis, and on a later sale, gain attributable to post-1997 depreciation is not excluded under Section 121 and is taxed at up to 25%. Under the simplified method, no depreciation is claimed, so no recapture arises.

Recommendations

Mr. Reed should keep a floor plan and photographs showing the room's exclusive business use, a log of hours worked there, and records showing he has no office at any client's site. He should use the regular method unless he expects to sell the home soon and prefers to avoid recapture. These steps cost little and address the substantiation issues the IRS most often raises. He should also confirm each year that the room's use has not changed, since a single year of mixed use would end the deduction for that year.

References

Commissioner v. Soliman, 506 U.S. 168 (1993).

I.R.C. § 280A (2025).

Rev. Proc. 2013-13, 2013-6 I.R.B. 478 (2013).

Sawyers, R. B., & Gill, S. L. (2018). Federal tax research (11th ed.). Cengage Learning.