March 2019 Tax Update. Home office deduction and QBI (Qualified Business Income)

Estimated Reading Time: 3 minutes 15 seconds

In today’s tax update we will answer two questions:

1. When the Second Office in the Home Is a Principal Place of Business?
2. How to Calculate and Improve Your QBI from a Partnership?

When the Second Office in the Home Is a Principal Place of Business?

When possible, you want to claim that your office in your home qualifies as a principal place of business because of this classification

• gives you the home-office deduction, and
• eliminates commuting from your home to your regular office.

Current law gives you two ways to claim your office in the home as a principal office:

• First, as a principal office under the rules that the Supreme Court finalized in Soliman
• Second, as a principal office under the alternative after-Soliman rules, wherein lawmakers added this alternative: “… the term principal place of business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business”

Question for you: If you have an office downtown where you spend 40 hours a week, can you claim that you have an office in your home that qualifies as a principal office if you spend only 12 hours a week working in the home office? If you said no, you are not alone. But you would also be wrong.

With the administrative or management rule, you can have your principal office in your home with 12 hours of work a week, even when you work at your other office for 40 hours.

How to Calculate and Improve Your QBI from a Partnership?

A general partner is taxed on partnership income that comes to him or her in the form of guaranteed payments and profit distributions. Profit distributions are qualified business income (QBI) for the Section 199A 20 percent tax deduction. Guaranteed payments and Section 707(a) payments are not QBI.

To increase QBI, you need to increase the profit distributions and reduce the guaranteed and Section 707(a) payments. Getting to this simple solution is not so easy; after all, this is tax law.

Two points to consider: First, are the guaranteed payments really guaranteed payments or simply a lazy man’s way to distribute profits? Second, should you use the more sophisticated Section 704 partnership allocation rules to get the results you want?