Every year, thousands of people perform some type of business activity in their homes. Until 1993, many of these people who had home offices qualified for tax deductions.  In 1993, the U.S. Supreme Court interpreted IRC Sec. 280A in such a manner that it became very difficult for most taxpayers to qualify for a home office deduction. When Congress passed the Taxpayer Relief Act of 1997 (TRA 97), it included a provision that allows more taxpayers to qualify for a home office deduction. Although the TRA 97 was passed in 1997, the provision that pertains to home office deductions did not become effective until after December 31, 1998.
This article examines the rules concerning home office deductions, discusses other deductions that are closely associated with the home office, and examines potential pitfalls associated with the home office deduction. It is important to note that in defining the term home office; "home" can be a house, apartment, condominium, mobile home or boat. 
Prior to the Soliman case, Section 280A (c)(1) stated that in order for a taxpayer to deduct home office expenses, the office had to be used "exclusively" and on a "regular basis" as:
(1) The principal place of business for the taxpayer's trade or business, or
(2) A place of business which is used by patients, clients, or customers in meetings with the taxpayer in the normal course of business.
Principal Place of Business
The term "principal place of business" was, at that time, defined as the location where persons earn their income. This definition made it impossible for plumbers, electricians and interior decorators to qualify for the deduction because these people earned their income at locations other than in their offices. Both the IRS and the courts have stated that the taxpayer must be involved in a trade or business and that activities such as clipping coupons or reading investment magazines do not constitute a trade or business. 
The term "regular" means that a specific area of the house is used on a continuous basis. Occasional or incidental use does not meet the test.  Even if the area is not used for any other purpose, it still fails the test if the area is used only occasionally. Neither the courts, nor the IRS, have specifically stated how many hours per day (or per week) that the office must be used for business purposes. All available authority indicates that the time element depends on the circumstances. 
The term "exclusively" means that the office is only used for business purposes. If the area is used eight hours a day for business, but the children come in at night and play video games on the computer, the office fails the exclusive use test and the deduction is lost.
There are two exceptions to the "exclusive use" test. If the taxpayer is in the business of selling products, the area of the home that is used to store inventory does not have to meet the exclusive use test.  The storage space must be, however, a specific, and identifiable area.
Sue is a cosmetics distributor. She uses her kitchen closet to store her inventory of cosmetics. Even though she uses the closet to store canned goods, as well, the area is still deductible as part of her home office.
Another situation that is exempt from the exclusive use test is when the home is used regularly to provide day-care services to children, handicapped persons, or the elderly. The home office deductions for a daycare service is computed as follows:
Expenses x Square footage used for day care/Total square footage of home x Hours of operation per year/Total hours per year
Soliman v. U.S.
In the Soliman case, an...