February 08, 1993
IRS Issues Guidance on Home Office Deduction
WASHINGTON - The Internal Revenue Service is updating its
guidance for taxpayers considering home office deductions for 1992 in light of the Supreme
Court's recent decision in Commissioner v. Soliman. The guidance, including examples, will
accompany IRS' publication "Business Use of Your Home" (Publication 587). The
version of this publication for use in preparing 1992 returns was printed before the
Soliman decision was made, but the updated information will be inserted in the publication
by the end of February.
In announcing the new guidance, IRS stated that it would not disallow home office
deductions claimed on pre-1992 tax returns where taxpayers reasonably followed previously
existing guidance in Publication 587.
IRS also explained that taxpayers who would have qualified for a home office deduction
on their 1992 returns by reasonably following previously existing guidance in Publication
587 will not have to pay estimated tax penalties to the extent a 1992 tax underpayment is
attributable to the loss of the deduction.
The IRS said that the revised guidance focuses on the principal place of business test
used in determining home office deductions. In the Soliman decision, the Court set forth
two factors taxpayers must consider to determine their principal place of business -- the
relative importance of activities conducted at each business location, and the amount of
time spent at each location.
According to Soliman, "great weight" must be given to the location where
required meetings with clients are usually held, or where goods or services are delivered
to clients. IRS said this means that taxpayers who must meet with their clients, or must
deliver their goods or services to customers, will usually conclude that their principal
place of business is where those meetings or deliveries occur.
Taxpayers who meet with their clients in more than one location, or have businesses
involving no customer meetings, need to determine which activities are the most important
to the conduct of their business and where those activities take place.
Taxpayers should also look at the time spent at each business location, especially
where a comparison of activities performed at each business location provides no clear
answer as to the location of the most important activity.
In addition to the test for principal place of business, taxpayers still need to use
their home office regularly and exclusively in order to qualify for a deduction.
Note to Editors:
The following three examples illustrate the considerations taxpayers will make in
determining if their home office is their principal place of business. These examples will
appear in the update sheet to IRS Publication 587. You may use these examples.
Home Office Examples
Example 1. Jane Williams is an anesthesiologist. Her
only office is a room in her home used regularly and exclusively to contact patients,
surgeons, and hospitals by telephone; to maintain billing records and patient logs; to
prepare for treatments and presentations; to satisfy continuing medical education
requirements; and to read medical journals and books.
Jane spends approximately 10 to 15 hours a week doing work in her home office. She
spends 30 to 35 hours per week administering anesthesia and postoperative care in three
hospitals, none of which provided her with an office.
The essence of Jane's business as an anesthesiologist requires her to treat patients in
hospitals. The home office activities are less important to Jane's business than the
services she performs in the hospitals. In addition, a comparison of the 10 to 15 hours
per week spent in the home office to the 30 to 35 hours per week spent at the hospitals
further supports the conclusion that Jane's office is not her principal place of business.
Therefore, she can not deduct expenses for the business use of her home.
Example 2. Joe Smith is a salesperson. His only
office is a room in his house used regularly and exclusively to set up appointments, store
product samples, and write up orders and other reports for the companies whose products he
Joe's business is selling products to customers at various locations within the
metropolitan area where he lives. To make these sales, he regularly visits the customers
to explain the available products and to take orders. Joe makes only a few sales from his
home office . Joe spends an average of 30 hours a week visiting customers and 12 hours a
week at his home office.
The essence of Joe's business as a salesperson requires him to meet with the customers
primarily at the customer's place of business. The home office activities are less
important to Joe's business than the sales activities he performs when visiting customers.
In addition, a comparison of the 12 hours per week spent in the home office to the 30
hours per week spent visiting customers further supports the conclusion that Joe's home
office is not the principal place of business. Therefore, he cannot deduct for the
business use of his home.
Example 3. Fred Jones, a salesperson, performs the
same activities in his home office as Joe Smith in Example 2, except that Fred makes most
of his sales to customers by telephone or by mail from his home office. Fred spends an
average of 30 hours a week at his home office and 12 hours a week visiting prospective
customers to deliver products and occasionally take orders.
The essence of Fred's business as a salesperson requires him to make telephone or mail
contact with customers primarily from his office, which is in his home. Actually visiting
customers is less important to Fred's business than the sales activities he performs from
his home office. In addition, a comparison of the 30 hours per week spent selling to
customers from their home office with the 12 hours per week spent visiting customers
further supports the conclusion that Fred's home office is his principal place of
business. Therefore, he can deduct expenses for the business use of his home.
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