Your tax home is the city or general area where your business or place of employment is located. It can be the place where you regularly live if you don't have a main place of business. Your tax home can also affect your ability to claim a tax deduction for your business travel expenses.
Below, we’ll delve further into what a tax home is, how it works, and what it means for you when you work in multiple locations.
Definition and Example of a Tax Home
A tax home is the city or general area where a taxpayer’s main place of business is located. It can be where their primary residence is located if the taxpayer doesn't have a main place of business.
For example, your tax home would be Phoenix if you live with your family in Los Angeles on weekends, but regularly commute to Phoenix to work during the week. However, if you have clients all around the country and you fly to a different city every week, you would not have a regular place of business and your tax home would be Los Angeles.
Still, not everyone necessarily has a tax home. The Internal Revenue Service (IRS) may consider you to be an “itinerant” (transient) for tax purposes if you don't have a main place of business nor a place where you regularly live. Maybe you simply travel from hotel to hotel for business purposes, and you never return to any one location when you're not working.
An itinerant doesn't have a tax home and therefore can't deduct travel expenses.
How a Tax Home Works
A taxpayer’s tax home determines whether they're eligible to some or all of their travel-related expenses as a business expense.
You're considered to be traveling away from home and you may be permitted a deduction for ordinary and necessary travel expenses you incur on a trip if you must travel away from your tax home for substantially longer than a typical day’s work. You must sleep or rest at this location to meet the demands of this work.
Costs incurred while traveling from where you live to your tax home generally aren't deductible expenses because you're not traveling away from your tax home. But you may be able to deduct some or all travel expenses incurred on your work trip to the area where your primary residence is located. This is deductible if your tax home and your primary residence are in different areas, and you're temporarily working in the area where your primary residence is located. In this case, you're traveling away from your tax home.
You're not permitted to deduct travel-related expenses incurred in your tax home if you're not traveling away from there, even if they're incurred for business purposes.
While the IRS defines a taxpayer’s tax home as the “entire city or general area," it doesn't provide a precise definition. However, the United States Tax Court has held in at least one case that it's the entire area surrounding the taxpayer’s place of business from which they could reasonably be expected to commute to work.
When You Work in Multiple Locations
You must determine which is your main place of business or work based on a couple of factors:
- How much time you spend in each location for business purposes if you regularly work in multiple locations
- How much money you made related to the time spent in each location
You might own a business and have clients in both New York and Philadelphia that you regularly visit for business purposes. You would add up all the days during the year that you spent in each location for business in this case, as well as the amount of money you made from your New York and Philadelphia clients, respectively. Philadelphia is clearly your tax home, regardless of where you live, if you spent more time in Philadelphia and you made more money from your Philadelphia clients.
You may have to go deeper with your analysis if the results are split, with you spending more days for business in New York but earning more money from clients in Philadelphia. If that’s the case, you may have to reconstruct how much of each day in each location was spent on business.
The number of days spent for business per location is a primary factor in determining one’s tax home.
- Your tax home is the main area where you work or do business.
- You may be able to take a travel expenses deduction for related costs incurred on a trip when you travel away from your tax home for business purposes.
- The area where your primary residence is located may be considered your tax home if you have no location where you regularly work.
- Taxpayers who don't regularly work in any location and who don't have a primary residence are considered itinerants and cannot deduct travel expenses.
- You must determine which is your main place of business based on your time spent in each location, and how much revenue is generated from their time spent in each location, if you regularly work in multiple locations.