Home Offices Gain Under Tax Rules

Peter G. Miller
OurBroker®

Home is not only where the hearth is, but for growing numbers of people it's also where the office can be found. And now home offices have become more attractive as the result of new tax rules which have gone into effect this year.

For many years the myth was that having a home office was a sure way to invite an IRS audit. The myth was never true, but the old tax rules severely limited the ability to write-off home office costs.

To deduct a home office under the rules in effect until this year there was a "focal point" test: an area of the home had to be used "exclusively" and "regularly" for business purposes such as generating income and seeing clients. Also, there was the matter of money. There had to be an effort to generate a profit.

But what about the Virginia anesthesiologist, Nader E. Soliman, who worked with surgeons at several hospitals yet did the books and made appointments from a home office: Could he get a deduction even though he was not providing medical services or seeing patients at home? The government said "no." His place of work, it claimed, was actually the hospitals where he delivered services.

This question went to the Supreme Court -- which ruled for the IRS. But while the good doctor lost, the Soliman case set in motion new thinking about how home offices should be treated in an evolving business environment.

Under the Taxpayer Relief Act of 1997 passed by Congress, the requirements for a deductible home office have evolved, standards that take effect this year. Now the doctor can get his write-off -- and so will a lot of other people.

According to the IRS, you may be able to obtain a home office deduction if a portion of your house is used, "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."

"You still must use the business part of your home both exclusively and regularly for your trade or business," under the new rules, says the IRS.

"If you are an employee, the business use of your home must be for the convenience of your employer. In addition, your deduction may be limited if your gross income from the business use of your home is less than your total business expenses."

What are substantial "administrative" and "managerial" tasks? The IRS gives these examples:

• Billing customers, clients or patients.
• Keeping books and records.
• Ordering supplies.
• Setting up appointments.
• Forwarding orders or writing reports.

Freddie Mac has a consumer home inspection kit available online in English and Spanish.

Published: February 9, 1999

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Editor's Note: This article reflects the opinions of Peter Miller only and not necessarily the views of this or any other publication, organization or Website owner.