NYC In Home Office Deduction

Technical topics regarding tax preparation.
#1
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Have a client that works as a W-2 employee and has a side business doing video editing out of his apartment in NYC.

Last year he deducted the simplified method (return prepared by someone else).

This year I asked him if we would like to go for the full method instead of the simplified method. He provides his office is 144 square feet and the total apartment is 700, which seems reasonable for NYC. What jumped out at me was the fact he said he paid $34,000 for his annual rent, which again doesn't surprise me because its NYC. However, this gives him an extremely large in home office deduction of 8K, which may be normal for NYC, but to me seems really high.

Are my concerns valid?

If he uses this office space for his W-2 job if he's WFH, he violates the exclusively used test, correct?
 

#2
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Sounds like good tax planning
 

#3
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HenryDavid wrote:Sounds like good tax planning


Care to expound? One article I read stated that you can use the same office for multiple activities, you just have to find a reasonable way to allocate the expenses between the various activities such as percentage of time.
 

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warnickcpa wrote:If he uses this office space for his W-2 job if he's WFH, he violates the exclusively used test, correct?


Yes. See below.

I see no reason to not use the actual expense method assuming he qualified for the OIH deduction.
Last edited by ManVsTax on 28-Mar-2023 8:03pm, edited 1 time in total.
 

#5
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ManVsTax wrote:
warnickcpa wrote:If he uses this office space for his W-2 job if he's WFH, he violates the exclusively used test, correct?


Yes.

I see no reason to not use the actual expense method assuming he qualified for the OIH deduction.


So in this situation, if we uses the space for his W-2 job 50% of the time and he works his side business 50% of the time, but there is no personal use of the space, can he take 50% of his expenses on the OIH?
 

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See HAMACHER v. COMMISSIONER, 94 TC 348. You apply the convenience of the employer test to the W-2 activity. If it fails the convenience of the employer test, the W-2 activity use of the OIH is deemed personal use and the exclusive use test is failed.

If it passes, I'd be okay with a reasonable proration between W-2 (nondeductible unreimbursed expenses under TCJA) and business use.
 


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