Reviewing client's return

[JG EA]

I am reviewing a clients Turbo Tax return. He is SE and most of his work is traveling and working at client locations. He has an OIH where he does work and of course his administrative work.

TT has a worksheet that asks the question "Percent of gross income from business use of home reported on Schedule C. He put in a % I assume for the actual in office work. Then the amount on line 8 of the 8829 us reduced.

I've never even thought of such a thing. Have you???

This won't change any numbers either way in this case but do you do this on your returns?

[KBTS]

I found the same thing on a TT return I reviewed last year. I had never seen this before either, but I guess it is there if someone would have more than one office for their business. Of course that might cause the loss of the OIH deduction....don't you just love DIY'ers.

[FEDUKE404]

Some info on TurboTax approach

The TT instructions for that line make reference to the amount of Sch C income "that can be attributed to the business use of this home office." They then give example of 25% of sales made "on the road" and 75% of sales "made from your home office" for a Sch C.

Their default number is 100%.

My guess is that TT is once again covering all bases. I think most software these days tracks things such as mortgage interest and property taxes, and then on Sch A reduces the personal amount by whatever has been claimed on any Form(s) 8829. This principle would apply to more than one Sch C, whether for the same taxpayer or for a H/W both with a Sch C.

I hate Form 8829, but have found the basic approach is to think through it first (the limitations on limitations idea), and then see if "the numbers" your software gives you are consistent with your own overall conclusions.

Hope this helps!

FE

[JG EA]

KBTS I found the same thing on a TT return I reviewed last year. I had never seen this before either, but I guess it is there if someone would have more than one office for their business. Of course that might cause the loss of the OIH deduction....don't you just love DIY'ers.

Thank you. This makes me feel much better. I thought maybe it was one of those discoveries where I should have been doing something differently all along.

He always pays full price for me to redo so I don't mind.

The TT instructions for that line make reference to the amount of Sch C income "that can be attributed to the business use of this home office." They then give example of 25% of sales made "on the road" and 75% of sales "made from your home office" for a Sch C.

Thank you. But what you just said here - is this a thing? I've never read anything like this being required. And although things are passed from 8829 to other places - if there is just one Sch C why should there be any limits on income from the division of sales?

[LawrenceGR]

Jg

I use Proseries and they use the same system. I used it once when I was doing a Sch C for a hairdresser, she work both in a salon and a home salon. The program is putting a percentage on the income from the OIH and income NOT from a OIH. I hope this makes sense.

[JG EA]

Yes, thank you. I understand it better. Some do have two places of work.As KBTS explained also. And this makes sense.

Not to push this too far, but do you see this % necessary when having an administrative office and doing work "on the road"? (Which covers most C's I have contractors, sales people, consultants etc.)

Or in your opinion is it just for a 2 office situation?

[erchess]

In my opinion it is for

a two income situation. For example a Plumber might work as a W-2 Employee as the plumber in a large factory and also have a side business serving residential customers. TT is concerned that the home office is probably applicable to the Sch C income and not to the larger employee income.

I can see where it might also apply to a situation where the person uses a home office and another office in the same business.

I cannot see it applying to work done on the road. Most contractors and employees spend most of their work lives outside of their home offices. Except for the brief period when the Soliman (sp?) Decision was in effect, that has always been beside the point.

[JG EA]

Pub 587 pg 7

"More than one place of business. If part of the gross income from your trade or business is from the business use of part of your home and part is from a place other than your home, you must determine the part of your gross income from the business use of your home before you figure the deduction limit. In making this determination, consider the time you spend at each location, the business investment in each location, and any other relevant facts and circumstances.

I can see how someone would think of where they made their money and start doing %'s. The word place is not very clear and my client was being careful. Especially when it is followed by
a tip

If your home office qualifies as your principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business.

That makes a place sound like any place you do business.

[erchess]

OK my knowledge may be out of date

The first quote souns like to me something from the days of the Solimon Decision. Those days were short because as I understand it New Law clarified that a home office could be deducted if you regularly did in it one or more functions without which you would not have a business such as billing and/or prospecting. I thought the whole point was that most people with home offices do most or all of the work for which they get paid outside the home office.

[Bees Knees]

I think the Turbo Tax instruction example is a poor example. The Pub doesn’t say that. A sales person on the road could very well consider all of the income as earned in the home office under the administrative use test.

Under qualification rules for business use of home, TTB on page 13 says the following:

Requirements to qualify for a deduction. To take a business
deduction, a taxpayer must use part of his or her home under one
of the following situations:
• An area in the home is exclusively and regularly used as the
principal place of business.
• An area in the home is exclusively and regularly used as a place
where the taxpayer meets or deals with patients, clients, or customers
in the normal course of a trade or business.
• In the case of a separate structure which is not attached to
the home, the structure is used in connection with a trade or
business.
• An area in the home is used on a regular basis for storage of
inventory or product samples.
• The home is used for a rental activity. (See page 7-7 for rental
rules.)
• The home is used as a day care facility.

There are additional rules for employees, but for the purpose of this topic, the above quote will do.

Notice that the first bullet is the principal place of business test. That means the home office is the place where the principal business activity is conducted. Any additional location where business is conducted must be secondary. If, for example, you are self employed and have a tax business and office located in town where you conduct most of your business, but occasionally take work home on the weekends and work in your home office (without meeting clients), your home office is not the principal place of business and none of the office in home expenses would be deductible.

In contrast, the second bullet is the meeting clients test. That means if the home office is a place where you meet clients in the ordinary course of your business, office in home expenses are allowed even if the home office is not the principal place of business.

TTB page 5-15 says:

The principal place of business test is not required if a taxpayer
meets patients, clients, or customers in his or her home. The regular
and exclusive use test must still be met. This exception only
applies if the taxpayer meets both of the following tests:
• The taxpayer physically meets with patients, clients, or customers
in the home.
• Customer use of the home is substantial and integral to the
conduct of the taxpayer’s business.

So in the above example, if you are self employed and have a tax business and office located in town where you conduct most of your business, but also on a regular basis meet with clients in your home office, your home office expenses are deductible, even though the home office is not your principal place of business.

Now we get to the administrative use test. For example, a self employed plumber or electrician using the home office for administrative purposes, but doing the actual plumbing and electric work outside the home office. TTB, page 5-14 says:

Principal Place of Business Test—Business Use of Home

A trade or business can have more than one location. To qualify
for a business use of home deduction, the home must be the principal
place of business for that trade or business. To make this
determination, the following are considered:
• The relative importance of the activities performed at each
place where business is conducted, and
• The amount of time spent at each place where business is
conducted.
A home office qualifies under this test if:
• The home office is used exclusively and regularly for administrative
or management activities of the trade or business.
• There is no other fixed location where substantial
administrative or management activities are
conducted.

Note that the administrative use test is tied in with the principal place of business test. Or, in other words, if you do administrative duties in your home office, it can qualify for a home office deduction if there is no other location to perform substantial administrative duties.

On the other hand, if you are self employed with your tax practice located in town, and that location is the principal place of your business, taking work home to perform administrative duties in your home office will not qualify for a home office deduction.

In other words, the administrative use rule is an all or nothing rule. If you qualify for a home office deduction for your administrative use, it is as if all of your business is conducted in the home office, even though you may be performing work outside of the home office.

Now we get to the quote from IRS Pub 587, page 7:

More than one place of business. If part of the gross
income from your trade or business is from the business
use of part of your home and part is from a place other than
your home, you must determine the part of your gross
income from the business use of your home before you
figure the deduction limit. In making this determination,
consider the time you spend at each location, the business
investment in each location, and any other relevant facts
and circumstances.

This is why Turbo Tax and ProSeries ask for the percentage of Schedule C gross income allocated to the home office. If you have more than one place of business, you must allocate the percentage of income that is earned in the home office before applying the office in home limitations.

An office in home that qualifies under the administrative use test must be the only location where administrative functions are performed. If it passes this test, the office in home is then considered the principal place of business. That means even though the actual work of the plumber or electrician is being performed in other locations, the income is considered earned at the principal place of business. Thus, 100% of the Schedule C gross income can be allocated to the office in home, since 100% of the administrative functions of the business are being performed in the home office.

In contrast, if the office in home does not meet the principal place of business test, but instead meets the meeting clients test, you would have a situation where there is more than one business location. A self employed tax practitioner meeting clients in an office in town, and also meeting clients in a home office is an example of having more than one place of business. If the home office qualifies under this test, then you must allocated the Schedule C gross income earned between the office in town and the office in home before applying the office in home limitations.

[JG EA]

I really appreciate your weighing in and clearing it all up!!!!