Academic journal article Journal of Accountancy

Home Office Deduction

Academic journal article Journal of Accountancy

Home Office Deduction

Article excerpt

Fewer restrictions spell relief for many businesses.

Starting this year, significant relief is available for the millions of taxpayers--self-employed and employees--who use some part of their home as a business office. A new law provides a less arbitrary standard for the home office deduction, which should make it possible for more taxpayers to take it. Although most of the provisions of the Taxpayer Relief Act of 1997 became effective in 1998, the home office rule changes did not take effect until January 1, 1999. While congressional committee reports and legislative language clearly indicate the new law does not fully eliminate restrictive prior legislation or judicial precedent, the good news is the law expands the definition of a principal place of business and allows a taxpayer who meets either the old or new standard to take a deduction.

CPAs advising clients on their eligibility for the home office deduction in 1999 and beyond will find it helpful to review the 1997 home office legislation and the related provisions of IRC section 280A as well as previous court rulings and regulatory guidelines that will remain relevant beyond January 1, 1999. In addition, CPAs will benefit from examples of how the new provisions expand the activities that qualify a home office as a principal place of business.

As CPAs begin to deliver completed 1998 tax returns to their clients, this is an ideal time to explain the new home office rules to them. Clients who were previously ineligible may need to begin keeping appropriate expense records and other clients may be eligible for an enhanced deduction that will involve different record-keeping responsibilities.

CURBING ABUSES

The primary guidance on the home office deduction comes from section 280A. Because taxpayers frequently abuse that section of the code, the IRS continues to scrutinize such deductions. The more stringent guidelines of this code section were introduced in 1976 to curtail such abuses. Alternative regulations were proposed a few years later but never adopted. Accordingly, case law provides most of the guidance on home office deductions, with occasional refinements from revenue rulings.

Section 280A(c) (1) (A) permits a taxpayer to deduct home office expenses when a specific portion of the home is used exclusively and on a regular basis as the taxpayer's "principal place of business." The definition of what constitutes a principal place of business is central to determining whether a taxpayer may claim a business deduction for allocated home-related office expenses such as utilities, repairs and depreciation. All taxpayers may claim personal residence mortgage interest and real estate taxes as itemized deductions even if they do not have offices in their homes.

Absent a codified definition, in 1993 the U.S. Supreme Court narrowly construed the principal place of business definition in a landmark case, Commissioner v. Soliman ([1993, S. Ct] 71 AFTR 2d 93-463; 93-1 USTC Par 50014). This caused many taxpayers to lose the home office deductions they previously had been allowed. Fortunately, the new law in effect expands the Court's narrow interpretation by providing additional specific criteria that will permit more taxpayers to meet the principal place of business definition.

THE SOLIMAN CASE

Soliman involved a self-employed anesthesiologist who practiced at several different hospitals but was not provided with an office by any of them. Dr. Soliman used a room in his home two to three hours a day exclusively and on a regular basis for bookkeeping, correspondence, reading medical journals and contacting patients, other doctors and insurance companies. Soliman deducted expenses relating to his home office, claiming the room was his principal place of business under section 280A(c) (1) (A).

The Supreme Court rejected Soliman's deductions, reasoning that his home office was not truly his principal place of business. …

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