For years, the "home office" deduction was a popular way for people who work at home to reduce their taxes. In recent years it helped greatly in the development of small high-tech businesses in the US.
Among the major beneficiaries were computer consultants and contract programmers, who are typically retained as outside contractors for software, communications, or training projects. The deduction also helped subsidize the electronic cottage industry - made up of small businesses serving customers through telecommunications, courier services, and the mails.
It was easy to qualify for the home office deduction, according to accepted wisdom. Just set aside part of your home strictly for business use. This allowed you to claim the home office as a "principal place of business," and deduct part of your rent or mortgage payments from your income. The tax authorities didn't squawk much at this common practice.
In January, the Supreme Court changed the rules. It is now much harder for certain businesses to claim the deduction. In Commissioner of Internal Revenue v. Soliman, the Court stated that a home office will not qualify as the "principal place of business" unless it is the taxpayer's most important place of business. This decision denied the deduction to Dr. Soliman, an anesthesiologist who worked regularly in three hospitals, but had no offices in any of them. He kept an office at home to process records, issue invoices, and receive payments and other correspondence. The Court decided the hospitals where Soliman actually anesthetized patients were more important places of business for him than his home.The ruling is a blow to those who travel to provide personal services, yet keep their offices at home.
Likely victims include health-care professionals without inpatients like Dr. Soliman, consultants, and sales people. Among the hardest hit will be the computer consultants and contract programmers mentioned above. They are paid as independent contractors and denied the benefits packages paid to full-time employees, but their corporate customers often require that they report to the project site on a daily basis. This factor alone will deny most of them the deduction under the Court's new test.
Coupled with other recent developments such as the influx of low-priced services offered by Eastern-bloc programmers and the competing high-tech consulting services aggressively marketed by the Big Six accounting firms, the decision adds to the growing pile of woe for individual US computer consultants and programmers who want to continue plying their trades as independents.
Other major electronic cottage-businesses - writing, desktop publishing, mail- and phone-order operations, and computer bulletin-board services - will not be affected much by the decision. They already deliver their services and products directly from their homes, often without ever meeting their customers and clients.
Expect to see attempts to reverse this decision soon in Congress. Failure to do so will lead to a high-technology marketplace of small, highly skilled service providers afraid to leave the house.
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