The Home Office Business Mileage Rule
Article 2 of 3
- Joshua M. Cantwell, CPA, MBA, CFM,
CMA
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The business mileage rule provides
that where a pastor’s home office in a personal residence qualifies
as a ‘home office’ within the meaning of the law, any mileage from
the home office to another location and the return trip is
reimbursable (or deductible if left unreimbursed) as long as the
trip serves a qualifying business purpose and is properly
substantiated and documented. However, there is a widespread
misconception as to the criteria for a ‘home office’ to qualify for
tax purposes. Each requirement must be met in order for the home
office to receive favorable tax treatment.
This article is not meant to be an all-inclusive discussion of the
rules pertaining to home offices, but rather the focus of this
article is reimbursable or deductible business mileage related for
trips to and from home offices. In a follow-up legal update, we will
address the other financial advantages and potential disadvantages
of home offices.
QUALIFYING A HOME OFFICE FOR TAX PURPOSES
The IRS has imposed three hurdles that an individual must clear
in order to qualify their residence as a home office. The first is
that the home office must be regularly and exclusively used for
business. The second is that the home office must be the pastor’s
principal place of business. The third test is that the home office
must be for the church’s convenience.
I. Regularly and
Exclusively Business Rule. The first hurdle is
straightforward but can be insurmountable: At all times, the
space must be used regularly and exclusively for business.
Regularly means often, rather than occasionally. More important,
exclusively means exclusively. The rule absolutely prohibits any
personal use of the home office. As an extreme example, if the
IRS were to determine that you used the desk in your home office
to balance your personal checkbook, then the office could fail
to qualify for tax purposes. This hurdle must be met in addition
to the following hurdles.
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II. Principle Place of
Business. The second hurdle is almost as insurmountable as
the first. This rule states that the home office must be the
individual’s principal place of business. There are four
alternative ways to comply with this requirement:
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A. The easiest way to qualify
is if your home office is in fact your principal place of
business, meaning you do most of the work that earns your
livelihood at your home office. This is no problem for church
employees where the church has no or little office space. Be
aware that the IRS is very strict about the tests used to
determine if your home is indeed your principal place of
business. If you are provided a place to work in the church
and choose not to use it, the IRS probably will not allow you
to treat your home as your principal place of business.
B. Your home office may also qualify as your principal place
of business if you use it for administrative and management
activities (as opposed to ministry or preaching)- provided
that you do not use some other fixed location to do your
administrative and management duties. If a church employee
does any administrative and management activities at any place
other than the home office, this hurdle will not have been
met.
C. The third way your home office may qualify is if you use
the home office to personally meet (telephone calls do not
count) with clients, customers, or patients. This criteria may
be met even if your home is not your principal place of
business. For clergy, examples could include meeting with
members of the church, guest speakers, other ministers, or
staff, etc. You need not meet with them every day; even once a
week may be adequate. However, see hurdle III below for the
“convenience of” requirement that is also relevant here.
D. The last way to meet the principle place of business
qualifying criteria is if your office is in a building that is
separate from your home. For example, a home office in a
detached garage, outbuilding, guest cottage, converted pool
house, or the like, could qualify as a home office.
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Note: Remember, in each of the above
scenarios, you must use your home office exclusively for
business purposes and you must do so regularly. Because of the
IRS’s recent crack down on home offices, churches and their
employees should always consult a tax advisor before claiming,
in particular, this exemption and in general the home office
deduction. |
III. Employer Convenience Rule. The work-at-home arrangement must be for the
convenience of the employer. This means that pastors who
work at home for the joy, privilege or personal advantage of a
home office do not qualify. But on the other hand, if the
employee spends so much time at home that the church gives away
the employee’s office, then the convenience-of-the-employer test
has been met.
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Remember, only if all three hurdles
have been met can a church employee be reimbursed tax-free for
all mileage from his/her home office to the church facility or
any other business location (or deduct the expense if
unreimbursed).
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PRACTICAL CONSIDERATIONS
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- If seeking to qualify church
staff for home offices, consult a tax professional familiar
with church accounting and administration to assess whether
you meet the qualifying criteria.
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- Document each of the three
qualifying criteria and how the home office meets each
criteria.
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- Advise your CPA or tax
preparer that you have a home office when filing your taxes
each April 15.
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Publication 587 – Business Use of
Your Home
Should you have any questions, please don’t hesitate to call the
Sozo Consulting hotline at 650.906.7272 or send an
email.
We are here to serve and protect you.
*CA State Income Tax withholding is also
required. But for purposes of this article, only Federal
withholdings will be addressed directly. In most cases, CA
withholding rules are very similar to those detailed within this
article.
| Protect the Church is sponsored
by Christian attorneys and CPA's to provide periodic updates of the laws and
legal and accounting issues of general interest to religious organizations.
This article is not to be construed as specific legal advice or as a
substitute for legal counsel regarding your case. Any ideas or opinions
expressed herein should not be implemented without consulting an attorney or
CPA familiar with your situation. To learn more about legal and accounting
resources for ministries log onto our website at
www.protectthechurch.org. If you have a specific legal issue
or problem, you may contact Sharonrose Cannistraci, Esq. at 408.297.5400
ext. 206 or via e-mail. If you have a tax
or financial question, you may contact Joshua at his consulting firm
Sozo Consulting at
650.906.7272. |
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