There is often a lot of confusion surrounding an office in home and the mileage deduction and the difference between commuting and business miles. I have heard many accountants over the years selling the deductions like in an infomercial, claiming that by simply setting up an office in the home used exclusively for the business that it will amazingly increase their auto deduction by 60%. Plus, if you act now, they will throw in an exclusive tax table mouse pad and two free months of the tax savings newsletter…
Seriously though, while an office in home can increase your auto deduction in many cases, it is unfortunately not that simple – as is the case with the majority of IRS rules. It is very important you understand all the requirements so that you can maximize your deduction without exposing yourself to audit risk.
I am not going to get into the details of business vehicle expenses in this post, but in general terms, business use of a vehicle does not includes personal or commuting miles. Whether you use the standard mileage rate or the actual expense method, your deduction is limited to actual business use – which will be calculated based on your mileage log or reports from your mileage calculator app (for you iPhone enthusiasts). For your standard business owner with rented office space outside the home who does not perform substantial administrative and management activity from a home office, the miles to and from the office each day are not deductible. Depending on the business owner’s commute, this can be a significant portion of overall vehicle use, so you can see why this is a crucial issue.
How can these commuting miles be turned into business miles?
Well, it can be a bit complex when reading IRS Pub 587 as there are many requirements and exceptions, so I set up this office in home deduction mind map using FreeMind software, which walks through the first few pages of IRS Pub 587 and lays everything out visually. If you look at the first three requirements, you’ll notice that you have probably heard about them before if you have a general understanding of the office in home. Exclusive, regular, and business use are usually what most people focus on because the classic example you think of with office in home is the sole proprietor who uses their home as the sole business location. However, most small or micro-businesses have office space at a location outside the home, so the fourth requirement that the home office be the principle place of business is the most crucial issue. If this requirement can be met either through an exception or by re-arranging your business operations, then you have a qualifying office in home and mileage from that office to other business locations would qualify as business mileage.
How can you satisfy the principle place of business requirement?
In order for your home office to be considered the principle place of business, it must be used exclusively and regularly for administrative and management activities including:
- Billing customers, clients, or patients
- Keeping books and records
- Ordering supplies
- Setting up appointments
- Forwarding orders or writing reports
This means that it must be the only location that these administrative and management activities are conducted. However, there are some exceptions to this rule and situations where it is permissible for these activities to be performed outside of the office in home :
- service providers can conduct administrative activities at other locations (payroll service, etc);
- management and administrative work done in a non-fixed location like a car or hotel room is permissible;
- administrative activities can be conducted at a fixed location outside the home office if occasional and minimal;
- substantial non-administrative, non-management activities can be performed outside the home;
- and even if suitable space is available outside the home for administrative and management activities, you can still choose the home office as the primary location for these activities.
If your home office does not qualify for any of these exceptions and is not the principle place of business, there are still two more exceptions that could help you:
- If you physically meet with clients, patients, or customer in you home office – and it is substantial and integral to your business;
- or your home office is a separate structure from the dwelling unit.
Meeting either of these exceptions will qualify your office in home even though it is not the principle place of business. Again, this would make your mileage from the home office to the other business office deductible as business miles. This can create significant tax savings, but you have to make sure you have a solid position as this issue does often come up in IRS audits.
Let’s look at an example…
Dr. Bob is a dentist who has two dental offices in the metro area and his commute is significant since he lives far outside the city. Without a qualifying office in home, the commute to the an office and the commute home are personal and are non-deductible commuting miles. Any trips made between the offices or for other business purposes during the day are deductible, but that long commute that is a majority of the miles driven is personal.
Now let’s assume that Dr. Bob has a large bonus room that he converts into a home office. The office is not separate from his house, and he does not meet with patients at his home (for a number of reasons), so he must make the home office be the only place for administrative and management activities or meet one of the exceptions. If Dr. Bob uses a third party service provider for billing and factoring, he and his wife complete the bookkeeping in QuickBooks at the home office, and his wife sets up appointments from the home office – then I think he would have a very solid position for a qualifying office in home and the mileage from the home office would be deductible. However, if all the billing is done internally at one or both of the dental offices, or if an internal bookkeeper does a majority of bookkeeping at one of the dental offices, or the office managers at the two offices setup up all the appointments – then I think Dr. Bob is going to have a very weak case for arguing that his home office is the principle place of business.
Every case is going to be different and most business owners are not going to have clear-cut circumstances like our Dr. Bob; however, it is very important you go over this in detail with your CPA or accoutant to make sure you have a solid position for the auto expenses you are claiming. With the technology available today, many business owners should be able to arrange their business so that the requirements are met.
If you like to discuss this with me or need help in laying out a strategy to maximize your tax deductions, feel free to email or call me at 503.244.8844 to find out more about our consulting services.