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Proposed Legislation Will Set Aside Supreme Court Decision on In-home Office Deductions

More than a year has passed since the Supreme Court reaffirmed the IRS' interpretation of rules curtailing deductions of in-home office expenses for independent consultants and contractors. Since that time, thousands, perhaps hundreds of thousands, of self-employed professionals have been adversely affected by this ruling.

Soliman vs. IRS

To recap, the Supreme Court, in January 1993, overturned a Tax Court decision allowing an in-home office deduction for Dr. Nader Soliman, a self-employed anesthesiologist.

While Dr. Soliman spent 10 to 15 hours of administrative time each week in his in-home office, the high court determined that he was not allowed a deduction for that office space, since he did not perform his principal work, that of anesthetizing patients prior to surgery, in his office and that therefore, it was not his "principal place of business."

The ruling reaffirms the Internal Revenue Service's interpretation of the current home office deduction rules:

• The office must be used exclusively for business. Guest rooms or dens used at other times for non-business purposes, such as watching television, are not allowable deductions.
• The office must be used on a regular and continuing basis. Occasional or incidental use of the space for business purposes is not enough to qualify.
• The office must be used for the convenience of the employer. For independent consultants, this one is easy, since you are your own employer.
• The office must be your principal place of business. If, as a computer consultant, you spend most of your time at your desk working for clients, no problem. If, on the other hand, you spend most of your time on client sites, you probably don't qualify under the current rules, even if your clients don't provide you with a permanent desk and chair. (This was the basis of the Supreme Court's rejection of Dr. Soliman's case.)

Proposed Legislative Fix

In June of 1993, Senator Conrad Burns (R-Montana) proposed legislation (S.1116) that would, if enacted, restore deductions for in-home offices "used regularly and solely for business purposes." The bill sets forth these criteria for determining whether an in-home office is truly one's "principal place of business":

• Is the office used to perform management or administrative activities that are essential to the trade or business?
• Is the office the only space available in which to perform such activities?
• Is the office essential to such trade or business?
• Does the worker spend a substantial amount of time in the office?

While Senator Burns' bill has merit, two newer companion bills have recently been introduced into the Senate and House of Representatives. Known as the "Home Office Deduction Act of 1994," Senate bill S.1924 (proposed by Senator Orrin Hatch [R-Utah]) and House bill H.R.3407 (proposed by Representative Peter Hoagland [D-Nebraska]) are identical. If enacted, they will amend the IRS code to define an in-home office as the principal place of business if:

"(A) the office is the location where the taxpayer's essential administrative or management activities are conducted on a regular and systematic (and not incidental) basis by the tax-payer, and

"(B) the office is necessary because the taxpayer has no other location for the performance of the administrative or management activities of the business."

The bills also extend the IRS code to include not only storage of inventory but of "inventory and product samples" as part of the test of whether an in-home office is deductible. If enacted, the legislation will apply retroactively, beginning with taxable year 1992.

Next Steps

In order to best represent us, our U.S. senators and representatives need to know our views on pending legislation. For additional information, contact me:

Christopher Juillet, Publisher
Independent Consultant's Briefing
P.O. Box 1725
Ann Arbor, Mich. 48106
Telephone: (313) 449-0310
Fax: (313) 449-0351
CompuServe: 70272,1327

Note: Thanks to Tara Pryde of Senator Conrad Burns' legislative staff for her assistance.

Christopher Juillet is an independently employed technical writer, consultant and publisher of the Independent Consultant's Briefing, a quarterly newsletter for and by independent consultants.

Copyright 1994 by Christopher Juillet. All rights reserved.