Taxes: The Home Office Ploy

You're a productive individual, right? You don't ride on the backs of working people by taking food stamps or other welfare handouts from the pig bureaucrats. Well, if that's the case, here's some good news about another "people's loophole" that seems to be widening.

Most of us in the tax business remember back before the 1976 tax "reform" act was passed, there was a dandy little deduction that lots and lots of people could take advantage of. That was the venerable "home office" tax break. If you used part of your home for your business—for instance, if you brought work home from your place of business and burned the midnight oil to get the stuff done—then you could take a deduction for part of the cost of owning and running your home, since part of that home was used for business purposes.

Well, the '76 tax act ended all that. As usually happens with these kinds of things, when the people's loophole becomes popular enough to attract the attention of the IRS commissars, then something bad is bound to happen soon to the tax break. So it was when the '76 act was passed. Since the home office deduction had become so popular, the people who serve in Congress were convinced by the IRS that this one had to end. And end it did.

Today the law—the Revenue Code, section 280A—says basically that no deductions will be allowed for office space in a building that is also used during the year as a taxpayer's residence. A few tiny, little exceptions were thrown in, as is usual in cases like this: you can take a home office deduction if you're self-employed and you use a portion of your home on a "regular" and "exclusive" basis (1) as your principal place of business, or (2) as the place of business where you meet or deal with "patients, clients, or customers" in the normal course of your business, or (3) there's a totally separate building, not attached to your regular residence, and it's used in the normal course of your business.

In the case of employees—the real target of this deduction-destroying law—the above tests have to be met, plus the business use of your dwelling has to be "for the convenience of" the taxpayer's employer. That is, your employer has to tell you to do the work at home and for some reason that makes it more convenient for him. Oh well…

Well, the first major interpretation of that law has now come down from the US Tax Court. And indications are that the law is at least going to be construed liberally. In this instance, the E.R. Curphey case, it seems there was a doctor who worked full-time at a local hospital. In addition, he owned and managed six rental properties. One of the bedrooms in his two-bedroom condominium was used solely for bookkeeping and phone calls and the such, dealing with the management of those rental units—and when they say the use has to be "exclusive," it means just that: no guest beds, no toy storage for the kids, no workshop on the side for your hobbies.

Now, the IRS conceded that the room was used by the good doctor on a "regular and exclusive" basis, but they denied the doc's deductions by arguing that the rental management activities weren't really a "trade or business." And even if they were, said the IRS, the hospital the doctor worked at was his "principal place of business," and you can't have two principal places of business at the same time!

To its eternal credit, the Tax Court came back with the following observations:

• The good doctor's activities could be called a "trade or business," because they were sufficiently "systematic and continuous" to be looked upon as a business. But take note: the court also agreed with the IRS that if something is done "merely for the production of income" (like investing in the stock market), then it won't be characterized as the all-important "trade or business," and no home office deductions will be allowed.

• Under section 280A of the code, the word principal does not mean "exclusive." Thus, for home office deductions, a taxpayer may have more than one "principal place of business," where he has another separate business entirely. In this case, the doctor's first "principal place of business" was at the hospital; the second, having to do with his rental property business, was based at his home.

• Since the taxpayer has two principal places of business, and since the Revenue Code says that transportation expenses incurred in moving between two places of business are deductible, the costs of driving between those two places are deductible and not commuting expenses (which are not deductible).

The general thrust of this important decision is that the Tax Court is going to generally go easy on construing the negative terms of section 280A, and that has just got to be good news for us taxpayers, forever being squeezed among government-caused inflation, government-passed tax laws, and a voracious government-created tax-collection bureaucracy.

Tim Condon is a tax lawyer currently practicing in Florida.