In reaction to the Supreme Court's decision in Soliman, as part of the Taxpayer Relief Act of 1997 (TRA '97), Congress passed legislation redefining a taxpayer's principal place of business
. Congressional concern was that the Supreme Court's decision effectively closed the door to legitimate home office deductions for many taxpayers and unfairly penalized small businesses simply because they operated out of a home, rather than from a storefront, office building or industrial park.
Example 3: A self-employed CPA in Scottsdale, Arizona has a qualifying office in his home, which is his principal place of business
. He does per diem consulting for a large CPA firm in downtown Phoenix (30 miles away).
Supreme Court narrowly construed the principal place of business
definition in a landmark case, Commissioner v.
While Walker's residence was not established as his principal place of business
under the home-office deduction standards, it was established as his regular place of business under the language of revenue ruling 90-23.
280A(c)(1), which requires only that the office itself be used exclusively on a regular basis as the principal place of business
(in contrast to additional use for other purposes, such as personal activities); see Prop.
Observation: The new ruling stresses the importance of qualifying one's home as a principal place of business
(not merely a regular place of business).
In Soliman, the Supreme Court established new guidelines for a home office to qualify as a "principal place of business
." Currently, it is not sufficient to show that the activities performed in the home office are essential to the business; rather, it must be established that the functions performed in the home are the most significant events relative to the business in question.
This test will be applied only if the initial relative-importance test does not determine the taxpayer's principal place of business
. Finally, after applying the two tests the IRS may determine a taxpayer has no principal place of business
90-23 should not have been applied; instead, the court should have applied the case law precedent that the commuting expenses from Walker's home would be deductible only if his home qualified as a "principal place of business
The Internal Revenue Service denied the deductions, claiming the home office was not Soliman's principal place of business
(Internal Revenue Code section 280A(c) (1)(A)).
280A(c)(1), expenses allocable to a home office are not deductible unless that home office is "exclusively used on a regular basis" for the following qualifying business purposes: (1) a principal place of business
, (2) a place used to meet or deal with patients, clients or customers, or (3) in the case of a separate structure not attached to the taxpayer's home, in connection with the taxpayer's business.
An exception to IRC section 280A stipulates the home office be the principal place of business