Meeting the home office "principal place of business" requirement.

• Author: Ellentuck, Albert B.

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A self-employed taxpayer may be able to claim deductions for the business use of his or her home. These deductions include mortgage interest, real estate taxes, maintenance, insurance, utilities, and depreciation. However, certain conditions must be met, and the IRS closely scrutinizes home office deductions because of perceived abuses in this area. To deduct home office expenses, a self-employed taxpayer must use the home office space exclusively and regularly:

1. As a principal place of business;

2. As a place to meet or deal with clients and customers in the normal course of business; or

3. In connection with the business if the space is a separate structure from the residence (Sec. 280A(c)(1)).

   Note: While employees may also claim home office deductions, the home's business use must be for the convenience of the employer, and the space must be used exclusively and regularly for job-related activities. As a practical matter, these are insurmountable hurdles for many employees.

   The "principal place of business" test is often the one that taxpayers try to meet. In Soliman, 506 US 168 (1993), the Supreme Court identified two primary factors for determining whether a home office qualifies as the taxpayer's principal place of business: (1) the relative importance of the activities performed at each business location and (2) the time spent at each place.

   The relative importance test is analyzed first; if no definitive answer is reached, the time test is considered. In analyzing the relative importance of the activities performed at each location, the place where clients are met or goods and services are delivered is given great weight (Strohmaier, 113 TC 106 (1999)). Whether the functions performed at home are essential to the business, while relevant, is not controlling, and the availability of alternative office space is irrelevant.

   However, in Popov, 246 F3d 1190 (9th Cir. 2001), the Ninth Circuit overturned a Tax Court decision on a musician's business use of the home. The delivery of services analysis, which is part of the relative importance test, was not an appropriate framework for determining whether a home office deduction was appropriate for the musician, who practiced at home four to five hours a day. The appeals court decision stated, "It is possible, of course, to wrench musical performance into a 'delivery of services' framework, but we see little value in such a wooden and unblinking application of the tax...