Many taxpayers question whether they can deduct a room or portion of their personal residence if they use that portion for business reasons. Frequently, the questions will be: “Can I take a deduction for our guest bedroom where I keep a computer to retrieve emails from work?” or “I do all my research for my school teaching job in my family room; can I take a deduction for this room?” or “I have to work evenings and weekends for my employer; I do this work in my study den at home. Can I take a deduction for this room?”
For musicians, the two questions most commonly asked are: “I teach private lessons in my home; can I take a deduction for this room?” and “I am a professional musician and must practice to maintain my skills; can I take a deduction for the room in my house that I use for practicing?” There are certainly other reasons for which musicians use parts of their homes for business purposes. However, for the purposes of this article, I will only address the private teaching studio and practice room situations.
Home office tests
The answer to whether a home office is deductible is not always simple, but the current rules for claiming a home office are fairly straight-forward. In order to claim a home office deduction, the home office area must be used regularly and exclusively:
As the principal place of business (including administrative use), As a place to meet with clients in the normal course of business, or In connection with the business, if it is a separate structure not attached to the taxpayer’s personal residence.
An additional requirement for an employee is that the area must also be used for the employer’s convenience.
Regular use means that the area used for business must be used on a continuing basis; occasional or incidental use does not meet the regular use test even if the area is used for no other purpose. Exclusive use means that the area is used for business purposes only. Exceptions to the exclusive use test are made for storage of inventory or product samples, and day care facilities.
Private music teaching studios
A musician who is self-employed teaching private music lessons in his/her home will be able to claim a home office deduction as long as the room (or portion of a room) satisfies the regular and exclusive use tests. If the room is also used to entertain guests, watch the television, or for any purpose that is not related to teaching the private lessons, the home office deduction will be disallowed. This is an example of a fairly straight-forward home office deduction.
Practice rooms for performing musicians: a brief history
For performing musicians the home office deduction can be more complex; over the past two decades the rules for claiming a home office deduction have also changed. Home office deductions for practice rooms have been disallowed by the IRS. The IRS reasoned that the principal place of business for a musician is the concert hall, which is provided by the employer. Because the employer was providing the “office” in the form of a concert hall, no deduction was allowed for the home practice room. However, a court decision involving a symphony musician went contrary to the IRS position. A home office deduction was allowed to the musician who was able to substantiate that:
- 1. S/he spent more time practicing in his/her home office than performing on location at the concert hall
- 2. Practicing was essential to maintain his/her skills to keep his/her position in the orchestra,
- 3. The orchestra did not provide a place for him/her to practice.
Therefore, the court ruled that the home practice room was the principal place of business by the simple fact that more time was spent there than in the concert hall. At this point it seemed that musicians employed by symphony orchestras could now claim the home office deduction for a practice room, at least until a rather famous court case in 1993.
In 1993 the US Supreme Court reversed the lower court ruling and upheld the IRS interpretation of the home office deduction, disallowing a home office deduction for an anesthesiologist. The anesthesiologist administered anesthetic to patients in various hospitals, but did all his billing, record keeping, communications with other physicians and patients, research, etc. in his home office. Even though the anesthesiologist spent more time in his home office than in the hospitals, the home office deduction was disallowed. The court ruled that the home office was not his principal place of business; rather, administering the anesthetic to patients in the hospitals was his primary business and the hospitals provided the “office” for him to meet his clients, making these hospitals his primary place of business. This interpretation could also be applied to musicians who “meet clients” at the concert hall. This became known as the “Soliman test,” named after the anesthesiologist involved in the court case. After 1993 it would seem that performing musicians could no longer claim a deduction for a home office practice room.
In 1998 Congress approved the 1997 Taxpayer Relief Act. As part of this act, Congress believed that the decision in Soliman unfairly denied a home office deduction to a growing number of taxpayers. The code was amended to provide that a home office qualifies as a principal place of business if:
- 1. The office is used by the taxpayer to conduct administrative or management activities of a trade or business; and
- 2. There is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.
This amendment would seem to allow the home office deduction for the above mentioned anesthesiologist and also allow musicians to claim a home office for practicing, even if “clients” are met at the concert hall. In fact, several courts have now allowed the deduction for performing musicians. The home office area still must be used regularly and exclusively for the business and, in the case of an employee, for the convenience of the employer.
Advantages of the home office
The advantages of claiming a home office can be significant. To calculate the deduction, total square footage of the home office area is divided by total square footage of the entire house. This ratio is then multiplied by:
- 1. Mortgage interest
- 2. Property taxes
- 3. Any casualty or theft losses
- 4. Homeowners insurance
- 5. Rent payments
- 6. Repairs and maintenance
- 7. Utilities
- 8. Other expense
In addition, depreciation of the building and capital improvements to the building can be claimed for the office percentage. Direct expenses, such as new carpeting for the home office, are deducted in their entirety. Landscaping and lawn care should not be deducted. Neither should an expense for water unless water use is required for the business. An additional advantage to having a home office is that, if considered the primary place of business, mileage from the home to other job locations may be deductible (commuting expenses from home to first work location and back home are not deductible without a home office).
Home office deductions generally are deducted on Schedule C for self-employed individuals, or as an un-reimbursed employee business expense on form 2106 or Schedule A. A home office deduction (with the exception of mortgage interest and real estate taxes) cannot reduce income from the business activity below $0. For an employee, gross wages derived from the activity that uses the home office are the limiting factor. For self-employed individuals it is net (after expenses) self-employment income. Any expenses disallowed because of the above limitations can be carried forward to future tax years.
The home office deduction is fairly straight-forward for some musicians; musicians who teach privately in their homes are a good example. For performing musicians, while the rules have changed over the years, the home office practice room may provide a significant tax deduction as long as the requirements are met. Considerable care should be taken to be sure all these requirements are met to prevent an audit from disallowing the deduction. Record keeping is also more complex with a home office, as the home office area must be treated separately if the home is sold; depreciation of the home office claimed in prior years may have to be recaptured as ordinary income.