When is an Exclusive-Use Room Exclusive?
As a family child care provider, the answer to this question will make a significant difference in reducing your taxes. The biggest expenses you have as a business are the ones associated with your home: property tax, mortgage interest, utilities, house insurance, house repairs and home depreciation.
Your Time-Space Percentage will determine the business portion of these expenses that you can deduct. In addition, you will use your Time-Space Percentage to deduct other expenses that are used for both business and personal purposes: furniture, appliances, toys, equipment, cleaning supplies, etc.
Because these expenses represent thousands of dollars, even a small increase in your Time-Space Percentage will make a big difference. One way you can substantially increase your Time-Space Percentage is to have an exclusive-use room. This is a room that is used only for business purposes. I've written a previous article, "How to Claim the Exclusive Use Rule" about how to calculate your Time-Space Percentage if you have an exclusive-use room.
There is a strict test you must pass to be able to call a room an exclusive-use room. As a general rule, a room must be used solely for business purposes. This means that if your own children enter the room to play on week nights or on the weekend, the exclusive use is destroyed. You must be able to testify that you never used a room for personal purposes, not even once. Otherwise, my advice is not to try to use the exclusive-use rule.
Here are several United States Tax Court cases that give us some guidance about exclusive-use rooms:
Rayden v. IRS Commissioner (2011): A den and vestibule are not exclusively used for business when they are used personally once or twice a year. The Court accepted that a living room was used exclusively for business even though visitors to the home walked through the room on occasion.
Hewett v. IRS Commissioner (1996): “The exclusive use test does not require that the portion of a room used for business must be separated physically from the rest of the room by a wall, partition, or other demarcation.” In this case a piano teacher claimed an exclusive-use room based on the area taken up by her concert grand piano located in her living room.
Lind v. IRS Commissioner (1985): A garage is an exclusive-use room even when family members occasionally walked through it.
Hughes v. IRS Commissioner (1981): Walking through a walk-in closet (office) to get to the bathroom does not destroy the exclusive use of the closet.
Let’s say you have a basement area that is one large open room. Along one wall you have a washer, dryer and your furnace. The rest of the room is a play area used exclusively for your business. Since no walls are required to create an exclusive-use room, you can divide up the basement into two areas; one that is exclusively used and one that is regularly used.
If you started your business in September and used a room exclusively for business from September through December, you can use the exclusive-use rule. If you don’t meet the exclusive-use test this year, you may want to make plans to use a room exclusively next year.
Note: Although the taxpayers in the above cited cases were not family child care providers, the rulings can be used to guide your decision on whether or not to use the exclusive-use rule in your business.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/130419557@N06/15973062727
For a detailed discussion on how to calculate your Time-Space Percentage, see my book Family Child Care Record Keeping Guide.
