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When the Second Office in the Home Is a Principal Place of Business



When possible, you want to claim that your office in your home qualifies as a principal place of business, because this classification

  • gives you the home-office deduction, and

  • eliminates commuting from your home to your regular office.


Current law gives you two ways to claim your office in the home as a principal office:

  • First, as a principal office under the rules that the Supreme Court finalized in Soliman

  • Second, as a principal office under the alternative after-Soliman rules, where lawmakers added this alternative: “... 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”


Test Under Soliman

In legislative history, lawmakers note that in response to the Supreme Court’s decision in Soliman, the IRS revised its Publication 587, Business Use of Your Home, to more closely follow the comparative analysis used in Soliman by focusing on the following two primary factors in determining whether a home office is a taxpayer’s principal place of business:

  • The relative importance of the activities performed at each business location

  • The amount of time spent at each location

Under Soliman, you have to make the cash register ring from your home office. If you have an office downtown, you are not likely to make the cash register ring from your home office.


If you earn your money in the field, such as a plumber does, you make the cash register ring in the field and not in the home office.


Under Soliman, if you spend 40 hours a week in your downtown office and only 12 hours a week in your home office, you fail the time test.


Under the 1976 law that still exists and that Soliman verified and clarified, you are unlikely to qualify for the home-office deduction.


But you can avoid the Soliman failure. You can qualify for the home office under the changed law that added the administrative or management activities as a means to qualify for the home-office tax deduction


Instead of Soliman

Way back in 1997, because of Soliman, lawmakers added the words that allow you to qualify for the home-office deduction as a principal place of business if you use your office in your home exclusively and regularly for the administrative or management activities of your business and you do not use your downtown office to conduct substantial administrative or management activities.


You would think that after 22 years, everyone would know about the alternative to Soliman. But we know that’s not true, and that’s why we have this article.


For a more in-depth look at the “administrative or management” rule, see Home Office Deduction—Show Me the Proof!


Takeaways

When lawmakers addressed the home-office deduction in 1997, they did not do away with Soliman as a test for the home-office deduction as a principal place of business. They simply made Soliman one of two tests that you can use to qualify for the home-office deduction.


Test 2 allows you to qualify your home office as a principal place of business when you use it for the administrative or management activities of your business and don’t use any other fixed location to conduct substantial administrative or management activities of that business.


The big deal with the home office as your principal office is twofold:

  • First, you deduct a portion of your home expenses as business expenses

  • Second, your trips from your home office to your downtown office are business trips



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