Academic journal article Journal of Accountancy

Supreme Court Gets Tough with Home-Office Deductions

Academic journal article Journal of Accountancy

Supreme Court Gets Tough with Home-Office Deductions

Article excerpt

Dr. Soliman, a self-employed anesthesiologist, maintained a home office in the spare bedroom of his residence. He did not see patients there, treating them only at the hospitals where he rendered services. He did administrative work in the home office - managing paperwork, returning phone calls, reviewing charts, doing billing, etc. He claimed home-office deductions for the expenses of the office.

The Internal Revenue Service denied the deductions, claiming the home office was not Soliman's principal place of business (Internal Revenue Code section 280A(c) (1)(A)). Among other requirements, a taxpayer claiming deductions for home-office expenses must meet either of these tests:

1. The home office must be the principal place of business.

2. It must be used as a place for meeting customers or clients, even if the principal place of business is elsewhere.

The Tax Court allowed the deductions, adopting a more liberal test for determining what constitutes a principal place of business than had been used before (94 TC 20, 1990). Under the test, a home office was a principal place of business if all the following apply:

* It was essential to the business.

* The taxpayer spent a substantial amount of time there.

* No other location was available for performing the tasks done in the home office. (Under previous Tax Court rulings, the home office had to be the "focal point" of the business - the place where services were performed or income was generated. See JofA, "Lifting the Cloud on Home Office Deductions," July 91, page 41, for a review of home-office cases.)

The Tax Court was swayed by the following factors in Dr. Soliman's case:

* The hospitals did not provide Dr. …

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