Tax-Home Rule, Do You Know It?

When you travel out of town overnight, you need to know the tax-home rule. The IRS defines your tax home, and it’s not necessarily in the same town where you have your personal residence.

If you have more than one business location, one of the locations will be your tax home. It’s generally your main place of business.

More Than One Business Location

In determining your main place of business, the IRS takes into account three factors:

1. the length of time you spend at each location for business purposes;
2. the degree of business activity in each area; and
3. the relative financial return from each area.

The most important consideration is the length of time you spend at each location.

Lawyer Loses $8,400 in Business Travel Deductions  

Here’s a recent court case that illustrates this rule.

Akeem Soboyede, an immigration attorney, was licensed to practice law in both Minnesota and Washington, D.C., and he maintained solo law practices in both Minneapolis and Washington, D.C.

Although Mr. Soboyede’s primary personal residence was in Minneapolis, he divided his time between his office in Minneapolis and his office in Washington, D.C.

IRS Audit Result

In the audit, the IRS agent determined that Mr. Soboyede’s tax home was in Washington, D.C. Accordingly, the agent disallowed Mr. Soboyede’s hotel charges and apartment rent of $8,400 related to his lodging expenses while working in Washington, D.C.

The IRS agent also disallowed Mr. Soboyede’s deductions for toll fees, parking expenses, and car and truck expenses, because Mr. Soboyede failed to properly substantiate those expenses.

What Happened in Court 

Get ready for a chuckle: in court, Mr. Soboyede admitted in his testimony that he did not keep the necessary documentation because he “did not know . . . [he] was going to get audited.”

Due to the lack of records, the IRS disallowed most of the deductions. The remaining issue for the court was the travel expenses for lodging for which Mr. Soboyede had the records.

The court noted that Mr. Soboyede’s lodging expenses were only deductible if he was “away from home” as required by Section 162(a)(2).

In deciding whether Mr. Soboyede’s tax home was in Minneapolis or Washington, D.C., the court used the following two factors:

• Where did he spend more of his time?
• Where did he derive a greater proportion of his income?

Answer: Washington, D.C. Think about this: He had his home in Minneapolis, but the court ruled that his “tax home” was in Washington, D.C. As a result, he lost his travel deductions.

 

Tax-Home Rule: Planning Points

You have to love the comment: I didn’t keep the records because I did not know I was going to be audited.

Don’t make that mistake. Always plan on the IRS audit. Always keep the records.

In this case, there were valid travel deductions on the table. Think about this: you have one tax home. If you were this taxpayer, your tax home would be Washington, D.C., and you would deduct airfare, lodging, and meals for your business travel to work in Minneapolis.

Tax-Home Rule: Takeaways

Your tax home can be different from where you have your family residence.

When you have work in more than one location, make sure to know the tax-home rule. Your tax home generally is the place where you spend the most time and make the most money.

And of course, the rule to never forget: keep the records that prove your deductions. It takes a little time, but not much—certainly less than you would spend with the IRS and the court in a dispute.

With respect to travel deductions, the IRS says this: good records are essential.

If you have questions, call me directly at 509-543-7600 or send a request HERE.

October 2021