Telecommuting employees and the amended home office deduction rules.

• Author: Ferrone, Marina L.

As more families rely on two incomes to make ends meet and as technology continues to allow for more creative work environments, telecommuting is quickly becoming a very popular and viable work option for many families. Studies have shown that telecommuting employees record fewer sick days and demonstrate increased worker satisfaction (two factors that contribute to higher worker productivity).

One tax aspect to the growing phenomenon of telecommuting employees is the ability to deduct direct and indirect home office expenses. Direct and indirect expenses relating to a home office located in a residence are deductible only if part of the home is used regularly and exclusively as a principal place of business or as a place to meet or deal with customers or clients in the ordinary course of business. Moreover, the gross income test is applicable in all instances. The deductions claimed cannot be greater than the income earned by the business. Employees must meet an additional test--their home office use must be for their employer's convenience (Sec. 280A(c)(1)). The convenience-of-the-employer test will be met if the employer requires the employee to work out of his home. An employee will not meet this test if he asks permission to telecommute from home instead of commuting to the office; in this case, any direct and indirect home office expenses are not deductible.

Telecommuting employees generally will not be using the home office location to meet or deal with customers or clients in the ordinary course of business. Under Sec. 280A, deductions will be available to telecommuters if the home office is used only regularly and exclusively as the employee's principal place of business. A flail-time telecommuter satisfies the principal-place-of-business test, but a part-time telecommuter may fall short of this test. Under prior law, the rules set forth by the Supreme Court in Soliman, 506 US 168 (1993), would determine the principal place of business, whether it be the employer's office location or the home office.

Under the Supreme Court's more restrictive facts-and-circumstances test, the two primary considerations used to determine whether a home office was a taxpayer's principal place of business were the relative importance of the activities performed at each business location and the time spent at each place. The part-time telecommuter (telecommuting some days and commuting to the office on others) would apply this comparative analysis test...