Update on the allowability of the home office deduction.

• Author: Dunn, Bill

When are the expenses associated with a home office deductible? After the Supreme Court's 1993 decision in Soliman, 113 Sup. Ct. 701, rev'g 935 F2d 52 (4th Cir. 1991), aff'g 94 TC 20 (1990), the answer is "rarely." Soliman defined the "principal place of business" test so narrowly that even individuals who perform essential business activities in the home office will be denied deductions for utilities, depreciation, insurance, repairs, etc., for that office.

The Tax Reform Act of 1976 added Sec. 280A(c)(1), which provides that the "portion of the dwelling unit which is exclusively used on a regular basis ... [as] the principal place of business ... of the taxpayer" is exempted from the general rule that prohibits a business expense deduction for a portion of the cost of a personal residence. Judicial action has imposed severe restrictions on the ability of individuals to make use of this provision.

In Soliman, the Supreme Court established new guidelines for a home office to qualify as a "principal place of business." Currently, it is not sufficient to show that the activities performed in the home office are essential to the business; rather, it must be established that the functions performed in the home are the most significant events relative to the business in question.

Individuals must consider the relative importance of activities performed at each business location and focus on whether revenue is generated or services are performed in their home offices. The Court further held that individuals should compare the amount of time spent at home with time spent at other places where business activities occur. The Court noted that this comparative analysis may reveal no principal place of business analysis does not demonstrate that the principal place of business is the individual's home, the individual is not entitled to a deduction for the home office.

The Court decided that the actual treatment of patients by Soliman, who was an anesthesiologist, was the most significant event in his professional transactions. The Court also noted that the doctor spent 10 to 15 hours of essential administrative and preparation time in his home office, as compared to 30 to 35 hours performing services in three hospitals. The Court found that if the nature of the business "requires the taxpayer to meet or conference with a client ... or to deliver goods or services to a customer, the place where that contact occurs is often an important indicator of the...