Okay I’m taking another case to IRS appeals regarding the home office deduction. In preparation I reviewed IRS Publication 587: Business Use of Your Home and I pulled some relevant quotes.
“You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. To determine whether your home is your principal place of business, you must consider: the relative importance of the activities performed at each place where you conduct business, and the amount of time spent at each place where you conduct business.”
Your home office will qualify as your principal place of business if you use it exclusively and regularly for administrative or management activities of your trade or business. And you have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
The publication is clear that the two prong test which must be satisfied in addition to the “regular and exclusive test” are 1) the relative importance of the work being performed and the allocation of time spent between the two locations and 2) conduct of “Substantial” management activities.
Examples 2, 3 and 4 of IRS Publication 587 all discuss a very important point: the availability of a “Fixed Location” from which to conduct managerial or administrative functions.
IRC Sec 280A (c) (1) (c) commentary states, “For purposes of subparagraph (A) , the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.” Sub paragraph A identifies the principle place of business as a condition allowing the deduction for allocating costs connected with the business use of home.
However the conference report for P.L 105-34 (1997) (the law that reversed Soliman) supports the conclusion that an office in home deduction is possible even when the taxpayer has another fixed office at which (s)he also performs INSUBSTANTIAL administrative and management activities. The key for the home office deduction to be considered when another professional office is available is that the administrative and management activities performed at the taxpayer’s professional office must be INSUBSTANTIAL.
On a personal note I have conflicting thoughts about the Home Office Deduction. I don’t take one for myself mostly because it is such a pain in the proverbial hinder to tabulate and report. For my client’s that are entitled to it I usually encourage them to leave out depreciation expenses mostly because it requires precise bookkeeping to accurately recapture depreciation when the property is disposed. Also through people I communicate with at the IRS excessive home office deduction expenses are flagged in the Automated Collection System for an Automated Under Reporter Correspondence Audit.