Tax Home Defined
Your tax home and your permament residence may be two different places. When the IRS says you must be away from home to deduct business-related travel expenses, they are referring to your so-called tax home. This may or may not be where you maintain your permanent residence.
Your tax home is your regular (fixed) place of business, employment, or post of duty, including the entire city or general area of your regular (fixed) place of business.
For travel expense purposes the IRS says:
- You must be away from your tax home, regardless of where you maintain your family residence.
- If you run your business out of your home, then your home, including the metropolitan area within which your home is located, is your tax home.
- If you operate your business outside of your residence, say at a retail store or office building, your store or office is your tax home.
- If your regular place of business is San Diego, California and you maintain your residence in Phoenix, Arizona, San Diego is your tax home even though your permanent residence is in Phoenix.
Your residence may be your tax home if...
- you see clients/customers/patients there regularly and exclusively, or
- you maintain a home office that qualifies as your principal place of business. This is possible if you satisfy the administrative and management test:
- Under the administrative and management rule, if you use your home office regularly and exclusively to perform administrative and management activities for your business (e.g., bookkeeping, appointment setting, follow-up calls to clients/customers, preparing financial reports) your home office will qualify as your principal place of business.
Example of Tax Home:
You are self-employed:
- You live in Phoenix, AZ and maintain a home office there.
- Your home office qualifies as your principal place of business because you use it regularly and exclusively to conduct administrative and management activities (e.g., bookkeeping, appointment setting, follow-up on business calls).
Your residence is your tax home.
This means your transportation costs from your home to client locations and back home are deductible; they are not considered commuting expenses, which are generally not deductible.
You are an employee:
- You live in Phoenix, AZ but don't work there.
- You have a regular (fixed) place of employment in San Diego, CA where you work Monday through Friday.
- You return home on week-ends.
Your tax home is San Diego because it is your regular place of business.
This means your costs for traveling between Phoenix and San Diego, lodging, and meals while there, are not deductible because they are considered personal expenses.
More than One Place of Business:
Your main business location is generally where you spend most of your time and earn most of your income and is generally considered your tax home.
To determine your main business location compare the time and income associated with each business location where you work.
- You live and work in Phoenix, AZ nine months of the year.
- You work in San Diego three months of the year.
- You earn most of your income in Phoenix.
- This arrangement has been going on for several years.
Phoenix is your tax home because it is your main place of business. Consequently, when you are in San Diego you are away from home.
This means your round-trip travel costs between Phoenix and San Diego and lodging in San Diego are fully (100%) deductible.
However, your meal costs while in San Diego are only 50% deductible (including taxes and tips).