Home office deductions after 1998.

• Author: Lasch, Eric S.

In this computer and information age, many taxpayers are efficiently managing trade and business activities from home offices. This business use of a portion of the home may give rise to deductions for allocable expenses for operating at home. Under Sec. 280A(c)(1), deductions are allowed only for the portion of a home used exclusively and regularly in one of the following ways:

* As the principal place of business for a trade or business;

* As a place of business used to meet with patients, clients or customers in the normal course of the taxpayer's trade or business; or

* In connection with the taxpayer's trade or business, if the portion so used is a separate structure not attached to the dwelling unit.

In the case of an employee, the home's business use must be for the employer's convenience.

The Supreme Court held, in Soliman, 113 S.Ct. 701 (1993), that a deduction for home office expenses was not allowed for a self-employed anesthesiologist who practiced at several hospitals but was not provided office space there. Although the anesthesiologist used a room in his home exclusively to perform administrative and management activities for his profession (e.g., bookkeeping, writing correspondence, reading medical journals and communicating with surgeons, patients and insurance companies), the Court ruled that the taxpayer's "principal place of business" was not the home office, because the taxpayer performed the "essence of the professional service" at the hospitals. The Supreme Court stated that the relative importance of the activities performed at each business location and the time spent at each should be the two major considerations in determining whether a home office is the taxpayer's principal place of business.

The Taxpayer Relief Act of 1997 (TRA '97) amended Sec. 280A(c)(1)(A) to provide that "principal place of business" includes a place of business used by the taxpayer for the administrative or management activities of any trade or business if there is no other fixed location of that trade or business in which the taxpayer conducts substantial administrative or management activities of the trade or business. If a taxpayer performs administrative or management activities at sites that are not fixed locations of the business (e.g., a car or hotel room), the ability to deduct home office expenses under the new rule is still available. The TRA '97's legislative history and IRS Pub. 587, Recordkeeping, state that this deduction is...