The home office revisited.

Last year in Commissioner v. Soliman (113 S.Ct. 701, 1993), the U.S. Supreme Court denied an anesthe-siologist a home office deduction because he worked at several nearby hospitals--even though none of the hospitals provided him with an office. (See "Supreme Court Gets Tough With Home Office Deductions," JofA, Mar.93, page 26, and "Tax Court Strikes Down Home Office Deduction Under Soliman," July93, page 27.)

The Court used two tests to determine whether a home office was a taxpayer's principal place of business: (1) the relative importance of the activities performed at each business location and (2) the amount of time the taxpayer spent at each location.

Revenue ruling 94-24 explains how the Internal Revenue Service plans to apply both tests.

Consistent with the Supreme Court's analysis in Soliman, the IRS will apply the "relative importance" test first. If a taxpayer meets with clients or patients or delivers goods or services to customers, the place where the contact occurs will be considered significant in determining where the most important activities of the business are performed.

Next, the IRS will compare the time spent on business at home with the time spent on business at other locations. This test will be applied only if the initial relative-importance test does not determine the taxpayer's principal place of business. Finally, after applying the two tests the IRS may determine a taxpayer has no principal place of business.

Revenue ruling 94-24 gives four examples showing how the IRS plans to administer the tests:

1. A self-employed plumber who installs and repairs plumbing fixtures spends 40 hours a week at work and another 10 hours in her home office talking with customers, ordering supplies and reviewing the books. Another full-time employee works in the home office answering the phone, scheduling appointments and keeping the books. A home office deduction is denied because the nature of the plumber's work requires her to perform services and deliver goods at various locations outside her residence.

2. A school teacher spends 25 hours a week at school and an additional 35 hours at home grading papers and tests and preparing lectures. A deduction is denied because while the work performed at his home is essential and more time-consuming, it is less important than the teaching activities performed at the school.

3. An author uses her home office to write books and articles. She also spends 15 hours a week at other locations conducting research, meeting with publishers and attending promotional events. The home office deduction is allowed because the outside activities, although essential, are less important and take less time than her writing.

4. A self-employed retailer of costume jewelry orders wholesale jewelry and sells it at craft shows on consignment and through the mail. He works 25 hours a week at home and 15 hours a week on the road, generating substantial income at each location. Since the relative importance of the work done at each location is essentially equal, the IRS applies the "time" test and decides his home office is the principal place of business.

Observation: Failing to qualify for a home office deduction does not eliminate other allowable business deductions for property and equipment used in a taxpayer's business. Also, real estate taxes and mortgage interest are allowed regardless of the home office deduction.