This is a little more in-depth look at the Home Office Deduction we touched on in Is Your Administrative Home Office a Principal Office?
The article is about Eddie Fiss, a self-employed Consultant. He works 40 hours a week at the small downtown office that he owns, and 12 hours a week working at a home office doing all the administrative tasks required for his consulting business.
When possible, you want to claim that your office in the home is a principal place of business because this classification:
- gives you the home-office deduction, and
- eliminates commuting from your home to your regular office
Current law gives you two ways to claim your office in the home as a principal office:
- First, as a principal office under the rules that the Supreme Court finalized in Soliman
- Second, as a principal office under the after-Soliman rules when lawmakers added this alternative: “… the term principal place of business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.”
The Soliman Test – Eddie Fails This Clearly
In the legislative history, lawmakers note that in response to the Supreme Court’s decision in Soliman, the IRS revised its Publication 587, Business Use of Your Home, to more closely follow the comparative analysis used in Soliman by focusing on the following two primary factors in determining whether a home office is a taxpayer’s principal place of business:
- The relative importance of the activities performed at each business location
- The amount of time spent at each location
Eddie clearly fails both tests:
- First, Eddie makes the cash register ring at his downtown office where his sales activity takes place, and that’s clearly where he does his most important activity.
- Second, he spends 40 hours a week in his downtown office and only 12 hours a week in his home office. He clearly fails the time test.
It is very clear that under the 1976 law and the clarification shown in Soliman, Eddie does not qualify for the Home Office Deduction.
But Wait A Minute
But Eddie does not fail. He qualifies for the home office under the changed law that added the administrative or management activities as a means to qualify for the home-office tax deduction.
In 1997, because of Soliman, lawmakers added the words that allow Eddie to qualify for the home-office deduction as a principal place of business if he uses his office in the home exclusively and regularly for the administrative or management activities of his business, and he does not use his downtown office to conduct substantial administrative or management activities.
Section 280A(c)(1) says that your home office qualifies as a principal place of business when you use it for your business’s administration or management and you use no other fixed location to conduct substantial administrative or management activities. The IRS gives you the following examples of administrative or management activities:
- Billing customers, clients, or patients
- Keeping books and records
- Ordering supplies
- Setting up appointments
- Forwarding orders
- Writing reports
Eddie does all his administrative or management activities at his home office, so he clearly passes the alternative test under the 1997 rules and his home office is his principal place of business.
Final Thoughts
When lawmakers addressed the home-office deduction in 1997, they did not do away with Soliman as a test for the home-office deduction as a principal place of business. They simply made Soliman one of two tests that you can use to qualify for the home-office deduction.
Test 2 allows you to qualify your home office as a principal place of business when you use it for the administrative or management activities of your business and don’t use any other fixed location (like Eddie’s downtown office) to conduct substantial administrative or management activities of that business.
If you have questions or help deciding if your home office qualifies for the deduction, feel free to give me a call 509-543-7600 and lets chat.