ADMINISTRATION THAT MAKES THE HOME OFFICE DEDUCTIBLE

At the end of each year, the Joint Committee on Taxation issues its General Explanation of the tax legislation enacted during the year.  On Capitol Hill, this is known as the Blue Book, and it is an official part of the legislative history.  Here is what the Blue Book had to say in the year lawmakers changed the home-office rules to allow the home-office deduction for administration or management use.

The new law amends the rules to allow the rules to allow the home-office deduction

• if a portion of a taxpayer’s home is exclusively and regularly used to conduct administrative or management activities for the business of the taxpayer, and
• the taxpayer does not conduct substantial administrative or management activities at any other fixed location of the business.

The Blue Book is telling you this: Do your administration at home and not at your regular office to qualify for the home-office deduction.

The old employee rule still exists; that is, for an employee to qualify for the home office deduction, the use of the home office by the employee must be for the convenience of the employer.

Also, the old no-renting-the-office-to-the-employer rule still exists, so renting your home office to an employer, such as your S corporation, does not work.

You can have a gaggle of people in your outside-the-home office doing all kinds of administrative and management activities and it will have no effect on your inside-the-home office.  Your employees and agents are not relevant.  You stand alone.  The new law looks at you, and you alone, to decide if you qualify for the home-office deduction.

In other words, the law looks at your administration.  You are in charge.  You can decide to do your administration at home, in your regularly and exclusively used home office.

The law allows some administrative or management activities at your regular office, but those activities must not be substantial.  Unlike the Black’s Law Dictionary definition of “substantial,” the legislative history contains a far narrower definition, saying that you can qualify for the home-office deduction even when you occasionally do minimal paperwork at another office.  Keep that work, minimal, etched in your mind.

The Joint Committee notes that your eligibility to claim a home-office deduction is totally unaffected by your conduct of substantial non-administrative or non-management activities at an office outside your home.  Thus, the dentist who sees patients in his dental office may claim the home office for his administrative and management activities.  The insurance agent who manages sales activity in her regular office may have a home office for her administration.

The tricky words in the new law are administration or management.  Lawmakers provided no definitions or examples.  Further, the terms are not defined in the income tax law.  Black’s Law Dictionary defines administration as “management or conduct of an office or employment; the performance of the executive duties of an institution, business, or the like.”  Black’s definition is so broad that it is just as useless as the lack of a definition in the income tax law.

Why did lawmakers use “administration or management” in the language?  Unfortunately, they gave us no clues and, as you have just see, the legal dictionary is no help.

Of course, this is no problem for the lawmakers, who simply shifted the definition dilemma to the IRS.  This is one of the IRS’s many jobs, to provide official guidance on the tax laws.  In its Publication 587, Business Use of Your Home (2004), the IRS gives you its definitions of “administration or management.”

Just like the lawmakers, the IRS does not distinguish or separate “administration” from “management” in its publication.  It is as if they are the same thing.  Weird!  Why bother putting the “or” in “administration or management” when writing the law?

In Publication 587, the IRS considers the following activities administration or management:

·         reading books and journals that pertain to your profession

·         satisfying continuing education requirements

·         maintaining billing records and patient logs

·         preparing for treatment of patients

·         preparing for presentations

·         contacting patients, surgeons, and hospitals regarding scheduling

·         ordering supplies

·         keeping the books

·         setting appointments

·         writing orders

·         forwarding orders

·         writing reports

Keep in mind that this is the IRS official list at the moment.  You may not consider apparent sales activities such as setting appointments and writing orders part of administrative or management, but they are on the IRS list.

Until more guidance becomes available, your best bet is to divide your activities into two groups:

1. administrative and management, and
2. everything else, like sales, marketing, production, and patient care.

Smbiz.com says that an administrative expense is an expense that is not directly associated with selling, manufacturing, and distribution but rather is part of overall management, such as accounting, and general management.  Our CPA group also considers this a logical explanation of an administrative expense.

To qualify for the home-office deduction, keep these rules in mind:

• You must use your office exclusively for the qualifying business or businesses.
• You must not use your office for any other purpose.
• You must use this office regularly for business (follow the Green case and use it more than 10 hours a week).
• You qualify your home office as your principal office when you use it for administration or management as discussed above.
• If you operate as an employee of your corporation, your administrative or management use of the home office must be for the convenience of your employer corporation.

Now think proof.  Gather proof that you are using your home office more than 10 hours a week for your administrative or management activities, and that you are not using your regular office for such activities.  Entries in your appointment book are perfect.  Do this for at least 90 days in a row.  Perhaps use the same 90-day test period that you use to sample your car mileage.

Take advantage of the new rules that allow the home-office deduction for administrative or management activities.  This is easy stuff.  You simply identify your administrative or management activities, and then you do them at home.

If you are in sales, it is likely that you use your office outside the home as your sales office.  If you are a dentist, is likely that you use your office outside the home to see patients.  If you are an accountant, it is likely that you use your office outside the home to perform the accounting functions.  In these cases, the home office makes a totally logical and financially beneficial administrative office.