Tax Court Denies Lodging Deduction in New Case

Thanks to the COVID-19 pandemic, millions of people are working remotely, and their residence isn't necessarily in the same state as their workplace. So, which state should they file taxes in? Ken Berry discusses the latest Tax Court case on IRS "tax homes," which offers some insights into how the government views this subject.

Feb 17th 2021
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Where is your tax home? You may be surprised by the answer. As shown in a new case, Soboyede, TC Summary Opinion 2021-3, 1/26/21, it’s not always the place you consider your primary residence. According to the IRS, your “tax home” is the general area of your main workplace. This could have a major impact on travel deductions you claim you’ve incurred while being away from home on business.

In the new case, the Tax Court ruled that the individual‘s tax home was a hotel where he stayed to be close to his business activities. People affected by the pandemic may find themselves in similar circumstances. 

For example, suppose you perform work at various locations, without having a regularly established place of business for the year. The determination of your tax home is then based on several factors, including the time spent at each place, the work performed at each place and the income generated at each place. If you’re self-employed, your tax home is often your actual home, although the IRS may still dispute this.

Notably, the tax law doesn’t allow deductions for personal expenses, such as regular commuting costs or personal lodging expenses at your tax home.  

Facts of the new case: The taxpayer, an attorney, maintained solo law practices in both Minnesota and the Washington, D.C. area. Aside from a 54-day trip to Nigeria, he divided his time in 2015 between these two locations.

For the tax year in question, the taxpayer received $46,130 in wages from multiple companies for document review work. Of that amount, $38,548 was from work performed in the Washington, D.C., area and $7,582 was from work performed in Minnesota. On his 2015 return, the taxpayer deducted lodging expenses 0f $8,400 for at a hotel and an apartment in Maryland where he stayed while working in the D.C. area, among other travel expenses.

In 2015, the taxpayer spent at least 161 days in the Washington, D.C., area, 54 nonworking days in Nigeria and at least 115 days in Minnesota. Even if he spent the remaining 35 unaccounted for days in Minnesota, he still physically spent more than 50% of his total working days in the Washington, D.C. area.

With respect to the income reported on his 2015 return, the taxpayer earned at least $38,548 in income relating to his work in the Washington, D.C., area as compared to $7,582 earned in Minnesota.

Accordingly, the Tax Court concluded that the taxpayer’s principal place of business, and therefore his tax home during 2015, was in Maryland. He is not entitled to deduct the $8,400 of Maryland lodging expenses claimed on his return because he was not “away from home” on business.

Footnote: Regardless of where a client’s tax home is located, adequate substantiation of expenses is critical. The taxpayer in this case was not able to deduct other travel expenses due to incomplete or nonexistent travel records.   

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Julian Block
By Julian Block
Feb 19th 2021 02:37

Good summary of the tax rules.

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