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Answer from our Guest Expert Peter Soh of AdviseInc.com
PAGE 2
A Quick History of the Home Office Deduction
In the early 1990s, the U.S. Supreme Court effectively eliminated the home-office deduction for many people when it ruled that an anesthesiologist, who used a home office for business, didn't qualify for the home-office deduction. The Court concluded the doctor's home office was not his principal place of business since he actually performed his services in hospital operating rooms. As a result of that decision, which in effect concluded that your principal place of business is where you spend most of your time or where you earn income, it has been difficult for many home-office workers and businesses to meet the principal place of business test.
New House Rules for the New Millennium
The good news is under the Taxpayer Relief Act of 1997, the home-office deduction rules now contain a more liberal definition of your principal place of business. Today, a home office qualifies as a principal place of business if both:
- You, as the taxpayer, use the home office to conduct administrative or management activities of a trade or business; and
- You have no other fixed location of the trade or business where you conduct substantial administrative or management activities of the trade or business. (Administrative and management activities might include scheduling appointments, billing, ordering supplies, and bookkeeping.)
This change is likely to be a great help tax-wise if you're someone who performs services outside your offices, but you still do your billing and other business-related tasks from a home office. The fact that you may conduct management activities in a non-fixed location, such as your car or hotel room, will not cause you to forfeit the deduction. Similarly, conducting some management activities in another fixed location of the business does not mean you lose the deduction, as long as those activities are not substantial.
But the "exclusive use requirement" is another kettle of fish. (continued)
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