When you travel out of town overnight, you need to know the tax-home rule. The IRS defines your tax-home, and it’s not necessarily in the same town where you have your personal residence.
If you have more than one business location, 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.
Here’s a recent court case that illustrates this rule.
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.
Get ready for a chuckle: in 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.”
Due to the lack of records, the IRS disallowed most of the deductions. 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 used the following two factors:
• Where did he spend more of his time?
• Where did he derive a greater proportion of his income?
Answer: Washington, D.C. Think about this: He had his home in Minneapolis, but the court ruled that his “tax home” was in Washington, D.C. As a result, he lost his travel deductions.
In conclusion, the science involved in tax law is finding cases, rulings, procedures, and publications that support your position. The art form is planning ahead and having some fun while you travel for business.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.