News from the home (office) front.

NEWS FROM THE HOME (OFFICE) FRONT

One area of perennial interest to taxpayers (and to the Internal Revenue Service) is the home office deduction for individuals who do not work in an office setting or from some other business location. The IRS has always been wary of these expenses, and has carefully monitored and strictly limited the availability of this deduction, to keep personal expenses from being converted into deductions simply because they may have some connection to a business activity.

REQUIREMENTS

To deduct the costs of a home office, a room in a home (or a portion of a room) must be used exclusively on a regular basis for one of these purposes:

* As the taxpayer's principal place of business. * Where the taxpayer meets with clients, customers or patients.

"Focal point" test. The requirements of exclusivity and regularity are fairly well defined; meeting these standards is a relatively clear-cut and straightforward process.

The concept of a principal place of business has not been so easily determined, especially for taxpayers who do work at more than one location or do various parts of their job in different places. One standard that has evolved is the "focal point" test. Under this test, a taxpayer's principal place of business is where goods and services are provided to customers or clients or where income is produced.

Soliman. In a recent case (Soliman, 94 T.C. no. 3), the Tax Court moved away from the focal point test for certain taxpayers. The court ruled this standard will not apply if (1) a taxpayer's home office is essential to his business, (2) he spends a substantial amount of time at his office and (3) there is no other available location to perform the business's administrative functions.

Essential activities. The activities the taxpayer (an anesthesiologist) performed at his home office (bookkeeping, billing, preparation, review and continuing education) were distinct from his other work. However, these duties were essential to a successful business.

Substantial time. While the court did not define the "substantial time" requirement, the taxpayer in Soliman spent about 30% of his time at his home office.

Lack of alternative location. The court also specifically noted that the taxpayer was not provided with office space and had no place to manage his work other than from his home.

Note: The IRS has said it will not follow the Tax Court's opinion and will appeal the decision.

THE EMPLOYER'S CONVENIENCE

For employees, the home office must also be for the employer's convenience: The employee must maintain the office as a condition of employment, it must be required for the functioning of the employer's business or it must be necessary for the employee to perform his duties properly.

Multiple businesses. For an individual who regularly uses a home office for more than one activity, each use must meet this standard. If a home office is used for numerous business activities, no deduction will be allowed unless each activity meets the home office requirements.

Such was the situation in another recent Tax Court case (Hamacher, 94 T.C. no. 21). The taxpayer was an actor who also worked as the administrator of an acting school. He used his office at home to prepare for auditions, rehearse roles and do school administrative work. While his preparation and rehearsal work presented no problem, his use of the office for school administrative duties rendered the office expenses nondeductible. Because he had access to an office at school and was not required to do any schoolwork at home, this use was not for the school's convenience. Therefore, this activity was not a valid business use and totally disqualified the home office's deductibility.