Be Sure to Know the Tax-Home Rule

As a business taxpayer, you likely cross swords with the tax-home rule often.

We suspect that it’s a rule you have not thought of often. It may even be a rule you don’t know. And it may be a rule that will never give you any trouble.

But it’s a rule you should know.

Tax Home for Overnight Travel

To deduct business travel, you generally need to stay overnight at a business location that’s outside the area of your tax home. But you can find exceptions to this rule, such as you find in 3 Rules Ensure That You Can Deduct Lodging Expenses under New Regs—Even When You’re Staying Close to Home!

Tax Home for Business Vehicle Expense Deductions

When you drive your business vehicle outside the area of your tax home, you qualify for business vehicle deductions. 

Tax Home

According to the IRS website, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home.

For example, let’s say you live with your family in Chicago but work in Milwaukee, where you stay in a hotel and eat in restaurants. You return to Chicago every weekend.

In this scenario, you cannot deduct any of your travel, meals, or lodging in Milwaukee, because that’s your tax home.

Technical note. Your tax home is unlikely the entire metro area. It’s more likely in a 50-mile-or-so radius of your principal work location.

More Than One Business Location

If you have more than one business location, as does the taxpayer in the court case we discuss later, one of the locations will be your tax home. It’s generally your main place of business.

In determining your main place of business, the IRS takes into account three factors:

1. the length of time you spend at each location for business purposes;
2. the degree of business activity in each area; and
3. the relative financial return from each area.

The most important consideration is the length of time you spend at each location.

Temporary Work Location

One rule that will come into play when we examine the court case below is the temporary work location rule. It works like this.

You can deduct travel expenses paid or incurred in connection with a temporary work assignment away from your tax home, but you cannot deduct travel expenses incurred for an indefinite work assignment.

The tax code provides that a work assignment is not temporary if it lasts longer than one year. The IRS considers any work assignment that is reasonably expected to last more than one year to be indefinite.

This means that you may not deduct travel expenses at a work location if you realistically expect that you will work there for more than one year, regardless of whether you actually work there for longer than one year.

Key point. The “more than one year” rule makes the temporary work location your tax home. This is a big deal if you have only one work location. If you have two work locations, you can make the temporary work location irrelevant.

If you realistically expect to work at a temporary location for one year or less, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become non-deductible when your expectation changes.

Okay, now you have the rules. Let’s get to this taxpayer who lost his case but whose case provides some valuable insights.

Lawyer Loses $8,400 in Business Travel Deductions

Akeem Soboyede, an immigration attorney, was licensed to practice law in both Minnesota and Washington, D.C., and he maintained solo law practices in both Minneapolis and Washington, D.C.

Although Mr. Soboyede’s primary personal residence was in Minneapolis, he divided his time between his office in Minneapolis and his office in Washington, D.C.

In addition to his solo law practice, Mr. Soboyede also worked as an employee of other law firms. He received $46,130 in wages from multiple companies for document review work.

Of the $46,130 wage income that Mr. Soboyede reported, $38,548 was from work performed in the D.C. area, and $7,582 was from work performed in Minnesota.

On Schedule C of his 1040, Mr. Soboyede reported gross receipts from his solo law practice of $10,650 and total business expenses of $26,816, which produced a net loss of $16,166.

IRS Audit Results

In the audit, the IRS agent determined that Mr. Soboyede’s tax home was in Washington, D.C. Accordingly, the agent disallowed Mr. Soboyede’s hotel charges and apartment rent of $8,400 related to his lodging expenses while working in Washington, D.C.

The IRS agent also disallowed Mr. Soboyede’s deductions for toll fees, parking expenses, and car and truck expenses, because Mr. Soboyede failed to properly substantiate those expenses.

What Happened in Court

Get ready for a chuckle: on appeal to the U.S. Tax Court, Mr. Soboyede admitted in his testimony that he did not keep the necessary documentation because he “did not know . . . [he] was going to get audited.”

The IRS disallowed the deductions where Mr. Soboyede failed to keep the records. The remaining issue for the court was the travel expenses for lodging for which Mr. Soboyede had the records.

The court noted that Mr. Soboyede’s lodging expenses were only deductible if he was “away from home” as required by Section 162(a)(2).

In deciding whether Mr. Soboyede’s tax home was in Minneapolis or Washington, D.C., the court considered the following factors:

1. Where did he spend more of his time? Mr. Soboyede did not provide complete documentation as to his work schedule, but he spent at least 161 days in the Washington, D.C., area, 54 non-working days in Nigeria, and at least 115 days in Minnesota. Even if he spent the remaining 35 unaccounted for days in Minnesota, he still spent more than 50 percent of his total working days in the D.C. area. 
2. Where did he have more business activity? Mr. Soboyede produced little evidence to demonstrate that he engaged in greater business activity in Minnesota, even though he controlled the information necessary to show such activity (e.g., billable hour logs, statement of client expenses, verifiable calendar entries and meetings, and other credible contemporaneous evidence). Because Mr. Soboyede failed to keep and present accurate records of his business activity, the court counted that heavily against him.
3. Where did he derive a greater proportion of his income? Mr. Soboyede reported earning $38,548 from work performed in the Washington, D.C., area and $7,582 from work performed in Minnesota. Even if all of his reported $10,650 gross receipts from his solo law practice were from Minnesota, he clearly earned the majority of his income in the D.C. area.
4. Were his business activities in the D.C. area temporary, or for an indefinite period of time? The court noted that a narrow exception to the tax-home rules applies when a taxpayer’s place of business or employment in a particular location is temporary. But the court determined that Mr. Soboyede’s business activities in the Washington, D.C., area were not temporary, and instead that he was indefinitely working there in furtherance of his immigration practice. The first and third factors clearly supported the IRS’s case, and the court dismissed the second factor due to Mr. Soboyede’s lack of business records. Thus, Mr. Soboyede’s tax home was clearly Washington, D.C., and not Minneapolis, and the court agreed with the IRS and disallowed the $8,400 in lodging expenses.

Planning Points

You have to love the comment: I didn’t keep the records because I did not know I was going to be audited. Don’t make that mistake. Always plan on the IRS audit. Always keep the records.

In this case, there were valid travel deductions on the table. Think about this: you have one tax home. If you were this taxpayer, your tax home would be Washington, D.C., and you would deduct airfare, lodging, and meals for your business travel to work in Minneapolis.

Takeaways

You tax home can be different from where you have your family residence.

When you have work in more than one location, make sure to know the tax-home rule. Your tax home generally is the place where you spend the most time and make the most money.

And of course, the rule to never forget: keep the records that prove your deductions. It takes a little time, but not much—certainly less than you would spend with the IRS and the court in a dispute.

With respect to travel deductions, the IRS says this: good records are essential.

‍