IRS Issues Guidance on Home Office Deduction

WASHINGTON - The Internal Revenue Service is updating its guidance for taxpayers considering home office deductions for 1992 in light of the Supreme Court's recent decision in Commissioner v. Soliman. The guidance, including examples, will accompany IRS' publication "Business Use of Your Home" (Publication 587). The version of this publication for use in preparing 1992 returns was printed before the Soliman decision was made, but the updated information will be inserted in the publication by the end of February.

In announcing the new guidance, IRS stated that it would not disallow home office deductions claimed on pre-1992 tax returns where taxpayers reasonably followed previously existing guidance in Publication 587.

IRS also explained that taxpayers who would have qualified for a home office deduction on their 1992 returns by reasonably following previously existing guidance in Publication 587 will not have to pay estimated tax penalties to the extent a 1992 tax underpayment is attributable to the loss of the deduction.

The IRS said that the revised guidance focuses on the principal place of business test used in determining home office deductions. In the Soliman decision, the Court set forth two factors taxpayers must consider to determine their principal place of business -- the relative importance of activities conducted at each business location, and the amount of time spent at each location.

According to Soliman, "great weight" must be given to the location where required meetings with clients are usually held, or where goods or services are delivered to clients. IRS said this means that taxpayers who must meet with their clients, or must deliver their goods or services to customers, will usually conclude that their principal place of business is where those meetings or deliveries occur.

Taxpayers who meet with their clients in more than one location, or have businesses involving no customer meetings, need to determine which activities are the most important to the conduct of their business and where those activities take place.

Taxpayers should also look at the time spent at each business location, especially where a comparison of activities performed at each business location provides no clear answer as to the location of the most important activity.

In addition to the test for principal place of business, taxpayers still need to use their home office regularly and exclusively in order to qualify for a deduction.

Note to Editors:

The following three examples illustrate the considerations taxpayers will make in determining if their home office is their principal place of business. These examples will appear in the update sheet to IRS Publication 587. You may use these examples.

Home Office Examples

Example 1. Jane Williams is an anesthesiologist. Her only office is a room in her home used regularly and exclusively to contact patients, surgeons, and hospitals by telephone; to maintain billing records and patient logs; to prepare for treatments and presentations; to satisfy continuing medical education requirements; and to read medical journals and books.

Jane spends approximately 10 to 15 hours a week doing work in her home office. She spends 30 to 35 hours per week administering anesthesia and postoperative care in three hospitals, none of which provided her with an office.

The essence of Jane's business as an anesthesiologist requires her to treat patients in hospitals. The home office activities are less important to Jane's business than the services she performs in the hospitals. In addition, a comparison of the 10 to 15 hours per week spent in the home office to the 30 to 35 hours per week spent at the hospitals further supports the conclusion that Jane's office is not her principal place of business. Therefore, she can not deduct expenses for the business use of her home.

Example 2. Joe Smith is a salesperson. His only office is a room in his house used regularly and exclusively to set up appointments, store product samples, and write up orders and other reports for the companies whose products he sells.

Joe's business is selling products to customers at various locations within the metropolitan area where he lives. To make these sales, he regularly visits the customers to explain the available products and to take orders. Joe makes only a few sales from his home office . Joe spends an average of 30 hours a week visiting customers and 12 hours a week at his home office.

The essence of Joe's business as a salesperson requires him to meet with the customers primarily at the customer's place of business. The home office activities are less important to Joe's business than the sales activities he performs when visiting customers. In addition, a comparison of the 12 hours per week spent in the home office to the 30 hours per week spent visiting customers further supports the conclusion that Joe's home office is not the principal place of business. Therefore, he cannot deduct for the business use of his home.

Example 3. Fred Jones, a salesperson, performs the same activities in his home office as Joe Smith in Example 2, except that Fred makes most of his sales to customers by telephone or by mail from his home office. Fred spends an average of 30 hours a week at his home office and 12 hours a week visiting prospective customers to deliver products and occasionally take orders.

The essence of Fred's business as a salesperson requires him to make telephone or mail contact with customers primarily from his office, which is in his home. Actually visiting customers is less important to Fred's business than the sales activities he performs from his home office. In addition, a comparison of the 30 hours per week spent selling to customers from their home office with the 12 hours per week spent visiting customers further supports the conclusion that Fred's home office is his principal place of business. Therefore, he can deduct expenses for the business use of his home.

Previous | Next

1993 IRS News Releases | News Releases Main | Home