40.16 Home Office for Sideline Business

You may have an occupation and also run a sideline business from an office in your home. The home office expenses are deductible on Form 8829 if the office is a principal place of operating the sideline business or a place to meet with clients, customers, or patients. See the deduction tests (40.12) and the income limit computation (40.15) for home office deductions. Managing rental property may qualify as a business.

Managing your own securities portfolio.

Investors managing their own securities portfolios may find it difficult to convince a court that investment management is a business activity. According to Congressional committee reports, a home office deduction should be denied to an investor who uses a home office to read financial periodicals and reports, clip bond coupons, and perform similar activities. In one case, the Claims Court allowed a deduction to Moller, who spent about 40 hours a week at a home office managing a substantial stock portfolio. The Claims Court held these activities amounted to a business. However, an appeals court reversed the decision. According to the appeals court, the test is whether or not a person is a trader. A trader is in a business; an investor is not. A trader buys and sells frequently to catch daily market swings. An investor buys securities for capital appreciation and income without regard to daily market developments. Therefore, to be a trader, one’s activities must be directed to short-term trading, not the long-term holding of investments. Here, Moller was an investor; he was primarily interested in the long-term growth potential of stock. He did not earn his income from the short-term turnovers of stocks. He had no significant trading profits. His interest and dividend income was 98% of his income. See the discussion of trader expenses in 30.16.