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Individuals and most Individually owned SMLLCs:

• Under audit, it should be evidenced that the taxpayer had a substantial portion of his liquid net worth trading the market.   Ideally even using margin.
   
• There should be monthly sells.  preferably weekly sells, even more preferably daily sells.
   
• There should probably be at least 200 to 500 significant sells per year with a minimum of maybe 1/36^th of the year's number of sells occurring in each month.  Ideally, each week should see some selling.
  • Traders with 1,000 or more significant sells per year usually clearly qualify for trader status.
  • Traders with less than 100 or 200 sells may have a tougher time substantiating trader status.¹
  • Traders with significant sells numbering between 200 and 500 or 1,000 often can qualify for trader status but they might be under more scrutiny during an audit than would someone with more significant volume.
     
• The typical holding period for most sells should be four months or less, preferably one month or less, even more preferably one week or even daily.
   
• The taxpayer should spend a good part of most every day watching and trading the markets during trading hours.
   
• The taxpayer should be looking for this activity to be the primary way to provide his livelihood. i.e. he should avoid having a "regular day job."
   
• The taxpayer should maintain a business-like operation: good books and records, continuing education books and seminars and so on.
   
• It can be said that a better rule of thumb is to only claim trader status as an individual reporting income on tax form 1040 whenever the activity is your only job and you have no other funds available to support yourself with.  Otherwise form a separately filing entity that will not use form 1040
   

Entities (including SMLLCs) filing separate tax returns:

• Under audit, it should be evidenced that the trading entity had all it's capital in the market and was actively trading it.  Ideally even using margin.
   
• There should be monthly sells.  preferably weekly sells, even more preferably daily sells.
   
• There should probably be at least 100 to 300 significant sells per year with a minimum of maybe 1/36^th of the year's number of sells occurring in each month.  Ideally, each week should see some selling.
  • Traders with 750 or more significant sells per year usually clearly qualify for trader status.
  • Traders with less than 100 or 200 sells may have a tougher time substantiating trader status.
  • Traders with significant sells numbering between 100 and 500 or 750 often can qualify for trader status but they might be under more scrutiny during an audit than would someone with more significant volume.
     
• The typical holding period for most sells should be four months or less, preferably one month or less, even more preferably one week or even daily.
   
• The entity should spend a good part of most every day watching and trading the markets during trading hours.
   
• The entity especially should maintain a business-like operation: good books and records, continuing education books and seminars and so on.

Taxpayers who qualify to file as Trader Status may optionally "elect" to do so simply by filing with the IRS a tax return reflecting this procedure for the "election" year, as described below and more fully in the TradersTaxPlan, and then optionally "elect" again for each ensuing year.  Note: do not confuse "electing" TraderStatus with electing market-to-market.


This "election" treats what might otherwise be Schedule A "itemized deductions" as Schedule C "ordinary and necessary business expenses."   Generally a trader must make the "election" by filing a tax return or amended or superseding tax return that reflects this procedure (we suggest traders use certified mail with return-receipt-requested) with the IRS office where the trader normally mails his or her tax filings (1040, 1040X, 1065, 1120S, etc.) within the prescribed statute of limitation period.  That normally means within three years after the due date of the original tax return.  The IRS has seen tens of thousands of taxpayers who have made the decision to file this way since 2000.



Some other features of Trader Status are:   (see Mark-to-Market Trader for different features)

• The year's net trading losses are "capital losses" and are therefore limited to the annual $3,000 "capital loss" limitation.  The year's net trading losses get added to any existing balance of your prior years' capital loss carryforwards.
• The year's net trading gains are "capital gains" and are therefore offset against any old prior years' "capital loss" carryforwards.
• The year's net trading gains, while part of a trade or business, are nonetheless not subject to Self-Employment tax because they are taxed as "capital gains" (and they are of course subject to the capital gain tax rates).
• Since net trading gains are not subject to Self-Employment tax no deduction for an IRA or other Retirement plan or Health Insurance plan may be directly based on them.
• The year's net trading gains remaining after any offsetting capital loss carryforwards are usually taxed at the short-term (held less than twelve months) capital gains rate.  Additionally, it is possible that some securities, if inherited or if held in excess of twelve months, may be taxed at the lower long-term capital gains rate.
• The year's net trading gains in §1256 contracts (futures) are usually taxed 40% at the short-term (held less than twelve months) capital gains rate and 60% at the long-term (held more than twelve months) capital gains rate.
• The year's trading gains in each specific §988 transaction (FOREX) is usually taxed at your regular ordinary rates as interest income and net losses are deducted as interest expense.
• Stocks are identified as either being subject to trader status or as held for investment.  Expenses associated with the investment securities are not subject to full deductibility as business expenses, but rather are itemized deductions subject to limitations.
• The Wash Sales rules are applicable for these securities.
• A wife may have a trader status business separate and apart from her husband's.
• Any paper gains or losses on securities held overnight on December 31st are usually deferred until they are actually sold and are not shown on the current year's tax return.
• Sole proprietors report expenses (which generally includes margin interest) on Schedule C and trading activity (which generally includes the commissions thereon) on Schedule D,  (see instructions page D-3 "Traders in Securities").
• Sole proprietors may report each sale on an IRS Schedule D-1.  IRS may restrict the old "see statement attached" along with summary totals, effective with the 2005 form 1040.  Also there's no allowable "details provided upon request" either (see instructions page D-6).
• Partners, LLC members and S-Corp shareholders report passthru amounts on Schedule E and other tax forms.
• Partners, LLC members, S-Corp shareholders and C-Corp shareholders may be subject to Self-Employment tax and therefore may be able to have a deduction for a Retirement plan or Health Insurance plan.

A securities trader is someone engaged primarily in speculative activity from which he or she derives most of his or her income, seeking to profit from short-term market swings. (Liang v. Comr.)

A trader will not be looking for interest income or dividends from the stocks he buys. The stocks held by a trader are usually characterized by high price volatility rather than a dividend yield or long-term growth potential.

But what if an individual is not primarily engaged as a trader?  In other words, what if trading, while very active, is only a part-time or seasonal activity?  What if the individual has full employment elsewhere?  What if the individual has significant interest income or dividends from non-trading investments?  There's still an answer!  Look into A Trader's Choice of Entities.

Strange as it may seem, the IRS Code does not define who or what a securities trader is (but starting in 2000 the IRS form 1040 instructions do). To further guide us there are a number of Tax Court decisions which decided whether a taxpayer's transactions in securities constituted a bona-fide trade or business.  Among the most important court decisions were those regarding whether a full-time professional gambler's wagering activity constituted a trade or business for income tax purposes. (Groetzinger v. Comr. 1985) "there is an equitable basis for according a high-volume short-term trader different tax treatment than the taxpayer who occasionally engages in a short-term trade."

In (Comr. v Groetzinger 1987), the Supreme Court concluded "to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose in engaging in the activity must be for income or profit." This landmark decision confirmed the availability of trader status for income tax purposes. (IRS Code §162(a) and §62(a)(1)).

Example:  An individual's trader status was approved where his entire income was derived from his securities trading (a good argument for setting up your own pure-play trading entity), he devoted his whole working day to his stock transactions (having W-2 wage employment is not helpful here, again an argument for establishing an entity),  and judgments regarding purchases and sales were made directly by him, based on his personal investigation of the assets, operation, and management of various corporations. In addition, the sheer quantity of transactions he conducted supported a reasonable conclusion that his business was trading on his own account. In the year in question, he conducted 332 transactions representing the transfer of 112,400 shares with a total value of over $3,000,000. Furthermore, it was his practice to buy to the maximum extent of allowable margin. (Levin, Samuel)

To substantiate your stock, option and futures trading activity, it is a good idea each day for some traders to print out their activity, including the unexecuted limit orders. This can then be given to IRS in the case of an audit.  These print-outs will show more activity than mere executed orders that are reported on Schedule D, form 6781 and  form 4797.


Definition of a Part-Time Trader

The Internal Revenue Service recently took a quasi-position regarding "part-time traders" which is discussed at this link: Part-time traders and other special situations.  Part-time traders should strongly consider forming a separate entity to trade through to avoid, as much as possible, negative IRS issues.

Definition of a Securities Trader

The Taxpayer Relief Act of 1997 summarized that "traders  in securities generally are taxpayers who engage in a trade or business involving active sales or exchanges of securities on the market. rather than to customers."

The IRS FAQ site has said that:  "Investors  trade solely for their own account and do not carry on a trade or business. Their securities sales result in capital gain or loss and their deductible expenses are itemized deductions. Dealers  sell securities to customers in the ordinary course of trade or business. Their sales result in ordinary gain or loss and their deductible expenses are trade or business expenses. Traders  buy and sell securities frequently but have no customers. Their purchases and sales result in capital gain and loss, and their deductible expenses are trade or business expenses."

"Even if you engage in extensive securities activities, you are an investor, not a dealer or trader, if you do not seek profit primarily in swings in daily market movements, and do not personally engage in or direct the purchases or sales. An investor trades for profit-motivated reasons such as long-term appreciation, dividends and interest. Whether the activities of an individual constitute trade or business or investment is determined from the facts in each case. These distinctions have been established through court cases."

  Definition of a Securities Trader

The 2004 instructions for form 1040, Schedule D state:  "To be engaged in business as a trader in securities:

• You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
• Your activity must be substantial.
• You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a business.

• Typical holding periods for securities bought and sold.
• The frequency and dollar amount of your trades during the year.
• The extent to which you pursue the activity to produce income for a livelihood.
• The amount of time you devote to the activity."
  

  What a typical Trader in Securities looks like (per the Courts):

• A trader purchases and sells securities frequently to catch the daily market movements and to profit on a short-term basis. (C.H. Liang v Commr)
• A trader's profits are derived through direct management of purchasing and selling. (R.E. Purvis v Commr)
• A trader does not perform merchandising functions or any services that need be compensated, and does not have any customers. (G.R. Kemon v Commr)
• A trader engages in a continuous volume and magnitude of purchases and sales. (J.M. Ferguson, Sr. v Commr)
• The amount of time spent on trading is important to trader status. (Chemical Bank & Trust Co. v US)
• A trader's activities are directed to short-term trading, not the long-term holding of investments, and income principally is derived from the sale of securities rather than from dividends and interest paid on those securities. Relevant considerations in determining whether a taxpayer is a trader or investor are the taxpayer's investment intent, the nature of the income to be derived from the activity, and the frequency, extent, and regularity of the taxpayer's securities transactions. (R.E. Purvis v Commr)
• Consider the subjectivity of what in particular is meant by the frequency, extent and regularity of transactions that identify the person entering into them as a trader rather than an investor.
• A trader engages in transactions almost daily for a continuous period that exceeds a single tax year. (F.Chen v Commr)
• Traders ordinarily engage in trading activity as a sole or primary source of income. (F.Chen v Commr)
   

Definition of a Securities Trader from IRS Auditors' guide book:

What Is a Securities Trader?

"Although the Supreme Court has yet to find a taxpayer properly characterized as a ‘securities trader,’ it is clear that such a ‘businessman’ exists, given the proper facts."  (Levin v. United States, 79-1 U.S.T.C. 9331)   The standard applied by the lower courts to distinguish between an investor and a trader was first enunciated by the Tax Court in Liang v. Commissioner (23 T.C. 1040):  "In the former, securities are purchased to be held for capital appreciation and income, usually without regard to short-term developments that would influence the price of securities on the daily market.  In a trading account, securities are bought and sold with reasonable frequency in an endeavor to catch the swings in the daily market movements and profit thereby on a short-term basis.  There is general agreement amongst the courts (Moeller v. United States, 83-2 U.S.T.C. 9698 and Purvis v. Commissioner, 76-1 U.S.T.C. 9270) that the following factors are to be considered in determining whether a taxpayer is an investor or engaged in the trade or business of securities trading:

1. The taxpayer’s intent- investment negates trader status.
2. Nature of the income from the activity- only short term gains qualify as trading income.
3. Frequency, extent and regularity of transaction- holding period can be critical.

Items 2 and 3 are objective (and quantitative) indicators of intent which are principally relied on.  Taxpayers who mention "capital appreciation" or even "conservation of capital" do not prevail.  Significant long term capital gains, and even dividends and interest, are strong indications of an investor and not a trader.

In one instance, the Court of Claims (Mayer v. United States, 94-2 U.S.T.C. 50,509) took the position that a taxpayer who carefully selected money managers and farmed out a portion of his funds to each could not be considered a securities trader since he did not actually make any purchase or sale decisions himself; “To claim a trade or business deduction, taxpayer must himself perform the activity characterizing the ‘trade or business’ citing Groetzinger (87-1 U.S.T.C. 9191).  The Tax Court considered the same taxpayer for subsequent years and came to the same result based on holding period and frequency of trading.  (Mayer v. Commissioner, TCM 1994-209)

The Supreme Court provided in Higgins that expenses related to real estate rental were deductible and that office and salary expenses could reasonably be allocated between investment and trade or business.  Accordingly, even where it has been determined that a partnership is engaged in the trade or business of securities trading, care must taken to ensure that any portion of the partnership’s activity or expenses that are properly allocable to investment should be separately stated.

http://www.irs.gov/businesses/partnerships/article/0,,id=134701,00.html#5



IRC Sec. 469. Passive Activity Rules show consistency in the requirements for regular, continuous and substantial.

• §469(h) Material Participation Defined
  For purposes of this section--
  §469(h)(1) In General
  A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is--
• §469(h)(1)(A) regular,
• §469(h)(1)(B) continuous, and
• §469(h)(1)(C) substantial.

IRS ATG on Passive Activity Losses

Publicly Traded Partnerships (PTP) have a special Passive Activity Rule:

Income from commodities and commodity futures, forwards, and options with respect to commodities (including options) if the partnership's principal activity is buying and selling commodities are considered passive activity income for PTP's §7704(d)(1).

The IRS issued final regulations under Regs. §1.7704-3, which generally expanded the types of qualifying income to include certain investment income such as capital gain from the sale of stock, income from holding annuities, income from national principal contracts (as defined in Regs. §1.446-3), and other substantially similar income from ordinary and routine investments to the extent determined by the IRS.

However, under Regs. §1.7704-3(a)(2), qualifying income does not include income derived in the ordinary course of a trade or business. Regs. §1.7704-3(b)(2) clarifies that gain recognized with respect to a marked to market position will not fail to be qualifying income solely because there is no sale or disposition. Regs. §1.7704-3(b)(3) also clarifies that certain ordinary income may be qualifying income. Regs. §1.7704-3(b)(4) provides rules for computing qualifying and gross income of a partnership that makes a mixed straddle account election under Regs. §1.1092(b)-4T. Also, Regs. §1.7704-3(b)(1) clarifies that, in general, all losses will be ignored in determining partnership gross income for purposes of §7704(c)(2).

Definition of a Commodities Trader

§1258(d)(5)(B) Definitions. --
For purposes of this paragraph --
1258(d)(5)(B)(i) Options Dealer. --
The term 'options dealer' has the meaning given such term by section 1256(g)(8).

1258(d)(5)(B)(ii) Commodities Trader. --
The term 'commodities trader' means any person who is a member (or, except as otherwise provided in regulations, is entitled to trade as a member) of a domestic board of trade which is designated as a contract market by the Commodity Futures Trading Commission.

 

1256(g)(8) Options Dealer
1256(g)(8)(A) In General
The term "options dealer" means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.

1256(g)(8)(B) Persons Trading In Other Markets
In any case in which the Secretary makes a determination under subparagraph (C) of paragraph (7), the term "options dealer" also includes any person whom the Secretary determines performs functions similar to the persons described in subparagraph (A). Such determinations shall be made to the extent appropriate to carry out the purposes of this section.

An individual trader's expenses relating to his trade or business are usually fully deductible under IRS Code §162 as "above the line" items. Thus, unlike an investor, most of an individual trader's expenses (within reason) are deducted on Schedule C rather than as itemized expenses on Schedule A.

The expenses  are deductible only  if  they are ordinary and necessary expenses and they are directly connected with or pertain to the trade or business.   An expense is "ordinary" if it is customary or accepted in the taxpayer's business.  A "necessary" expense is appropriate and helpful to the business; it doesn't have to be indispensable or essential.  Adequate records documenting your expenses should be maintained.

These expenses can include but are in no way limited to:

• tax advice including, for example, fees paid to TraderStatus.com™
• trading counsel
• subscriptions to financial magazines and newspapers
• trader guides and books
• custodial fees
• seminars and ongoing education (if not merely qualifying an investor to become a trader)
• Most start-up and early organization expenses incurred after October 22, 2004 for an entity are fully deductible, rather then being amortized over 60 months as the earlier rule required.
  • start-up and organizational costs (paid after 10/22/04)
    • up to $5,000 maximum is deducible in the first year
    • any amount over $5,000 must be amortized over 15 years
    • this deduction is only allowed if tax return is not filed late
• dedicated telephone usage and long distance
• cell phone, pager and messenger fees
•  wireless trading fees
• cable fees
• on-line services and connection fees
• real-time quotes, charting and analysis
• stock tip services & newsletters and news service fees
• trader chat room fees or subscriptions
• office rent (but not if paid to yourself)
• office supplies, postage, bank charges and wire fees
• certain club memberships, dues and fees
• clerical and record keeping expenses
• prepayments that do not extend beyond 12 months are deductible when paid, except these have some limitations:
  • prepaid interest
  • prepaid rent
  • prepaid leases
  • prepaid taxes
• wages paid to your spouse, kids, or parents for their assistance
• deductible retirement plans, including the Single-Participant 401k on those wages (click here for more) (if the business is properly designed)
• a non-deductible Roth IRA in lieu of a regularly deductible IRA
   
• interest expense paid:
  • on loans used for the purchase of the trader's positions
  • including, in certain circumstances, your credit card interest under the §1.163-8T general tracing rules
  • on home mortgage debt if an irrevocable §1.163-10T(o)(5) election is made
  • this so-called "margin interest" is generally fully deductible for active traders because it is not subject to the regular "investment interest" limitation on IRS form 4952
  • passive investors in trading entities are subject to the limitation on IRS form 4952  (update: IRS Rev Rul 2008-12 has officially agreed with this position)
    
    
• depreciation on furniture, television, computer equipment and software.
  • computers & equipment 5 year life (Rev Proc 87-56)
  • office furniture & fixtures 7 year life (Rev Proc 87-56)
  • it is penny wise and pound "audit bait" foolish (or just plain ignorance) taking a deduction using other periods such as 3 year lives (which by law is basically limited to tractors and horses ( §168(e)(3))
    • the 50% bonus depreciation rule expired on 12/31/2004
    • a new 50% bonus depreciation rule is effective 1/1/2008 for many new (not used) items of personal property.  Many passenger vehicles can get as much as approximately $11,000 first year depreciation.
  • Depreciation Limits for Passenger Cars
     
• up to $128,000 $250,000 of "§179 deduction" in 2008 ($102.,000 in 2004, $105,000 in 2005 and $108,000 in 2006 and retroactively modified from the original $112,000 to $125,000 for 2007) in lieu of depreciation (if proper election is filed)
  • computers, other equipment, software and furniture qualify.
  • automobiles and SUV's on a car chassis with unloaded GVW of 6,000 pounds and SUV's on a truck chassis , Trucks & Vans with a loaded GVW over 6,000 pounds may be eligible for §179 (through 10/22/2004)
  • Effective 10/23/2004 SUV's weighing 6,001 to 14,000 pounds may be eligible for §179 to a maximum of $25,000.  SUV's over 14,000 pounds or holding a driver + 9 passengers still have the $112,000 limitation.
  • Effective 1/1/2008 SUV's weighing 6,001 to 14,000 pounds as proposed may NOT be eligible for §179. First year depreciation would be limited to $2,960.
  • $108,000 limit (as adjusted for inflation) was scheduled to revert to $25,000 on January 1, 2006 (on 10/22/04 this provision was extended to January 1, 2008)
  • to qualify for the annual $250,000  §179 deduction you must spend less than $510,000 $800,000 in 2008 ($410,000 in 2004 and $420,000 in 2005 and $430,000 in 2006 and $500,000 in 2007)
    
• travel and automobile expense
• auto mileage rate 2008 up to four cars at a time @ 50.5¢/mile thru Jun. Aug to Dec @ 58.5¢
  • note that the medical & moving mileage rates are 19¢/mile thru Jun. Aug to Dec @ 27¢
  • the charitable purposes mileage rate is 14¢/mile
• auto mileage rate 2007 up to four cars at a time @ 48.5¢/mile
  • note that the medical & moving mileage rates are 20¢/mile
  • the charitable purposes mileage rate is 14¢/mile
• auto mileage rate 2006 up to four cars at a time @ 44.5¢/mile
  • note that the medical & moving mileage rates are 18¢/mile
  • the charitable purposes mileage rate is 14¢/mile, there's special rates for Katrina
• auto mileage rate 2005 up to four cars at a time @ 40.5¢/mile thru Aug. Sept to Dec @ 48.5¢
  • note that the medical & moving mileage rates are 15¢/mile thru Aug. Sept to Dec @ 22¢
  • the charitable purposes mileage rate is 14¢/mile, after Aug 24^th there's special rates for Katrina
• auto mileage rate 2004 up to four cars at a time @ 37.5¢/mile
  • note that the medical & moving mileage rates are 14¢/mile
  • the charitable purposes mileage rate is 14¢/mile
• auto mileage rate 2003 one car at a time @ 36¢/mile
  • note that the medical & moving mileage rates are 12¢/mile
  • the charitable purposes mileage rate is 14¢/mile

• home office expenses².
• maid service and cleaning
• unreimbursed expenses (if business entity's papers are properly documented)
• on-premises athletic facilities (if your business entity is properly designed)
• fully deductible medical & health care expenses or even a §501(c)(9) VEBA trust (if the plans are properly designed) - Note effective in 2006, IRS is attacking "abusive VEBA plans" that are promoted elsewhere on the internet.
• child care and other §125 cafeteria plan deductions (if the plan is properly designed)
• other fringe benefit plans (if the plans are properly designed)
• 50% deductible restaurant meals had with friends who are fellow daytraders, lawyers, bankers, advisors
• gifts to friends and 50% deductible entertainment with people who are fellow daytraders, lawyers, bankers, advisors
• all the above with your spouse (if business purpose is properly documented and conducted)
• 100% deductible §119 daytrader's daily pizza and Chinese take-out meals (if your c-corp or other entity is properly designed)
• 100% deductible §119 daytrader's monthly residence rent payments (if your c-corp is very strictly and properly designed)
• charitable contributions
   
• Other Tax Deductions and Your Small Business
   

Commissions paid to your brokers are capitalized and applied to reduce capital gain or increase capital loss when you sell the stock.

In spite of this favorable "trade or business" treatment, a trader's net gains are not subject to Self-Employment tax, under IRS Code §1402 (a)(3)(A) (but they are of course subject to the Income tax)

Taxpayers who qualify to file as Trader Status may "elect" such classification each year by a filing an appropriate tax return with the IRS.



Practical thoughts - things that support your position that you or your entity truly are in a for-profit trade or business:

• Open a checking account for the business, separate from a personal use account
• Obtain a credit card for the business, separate from a personal use card
• Take a training class, attend a seminar, buy books on how to make the business profitable
• Set up a budget for the business and/or a projection showing goals and profit ability in future years
• Document you plans, at least annually showing goals for the year to make the business profitable

A Trader's Responsibilities


Additional informational overview sites:
Distinguishing Traders from Investors
Tax Rules for Day Traders
Tax Issues for "Traders" - Part I
Tax Issues for "Traders" - Part II
IRS Guidance - Special Rules for Traders in Securities
IRS Guidance - FAQ about Day Traders




¹ Mostafavi, California State Board of Equalization, July 1, 2005, The taxpayer was not in the business of being a day trader and was not entitled to related business expense deductions, because he did not trade frequently, regularly, and continuously throughout the year and his trading activity was not the primary source of his income during the year. The taxpayer conducted only 238 trades on 83 days during the year, and he had a full-time job as a field sales engineer.

² Deduction for Business Use of Your Home

One provision of the 1997 tax act, which was delayed to be effective for years after 1998, greatly relaxes the rules that must be met in order to deduct business use of your home.

A major change is the elimination of the rule that required the office be your "principal place of business" -  the place where you meet with customers or the place where you generate most of your income. That is not the current requirement.

The new rule is a simple test requires that the use of the office be an "ordinary and necessary" expense for the business and, unless this is the only fixed location of the business, it must be the only place available where you can perform the necessary "administrative or managerial" functions of the business.

Note that this does not change the requirement that the office must be used "totally and exclusively" for the business, and have no other use whatsoever. This is very strictly interpreted, and any degree of non-business use will disqualify the office. (Theoretically, if you have your computer in your home office, and sometimes use it to track personal investments, surf the web, or play an occasional game that can cause you to lose all deductions for use of the home office for the year.)

Also, if the use of the office is as an employee, that use must clearly be solely for your employer's convenience, not yours. If you are provided a suitable place to work by your employer (even if that means a 25 mile drive to the office in the middle of the night, when you are on-call to return customer emergency calls), that precludes you from claiming deductions for use of your home.

Note that, if your office in home qualifies for a deduction under the revised laws, it can be considered a "place of business" for determining your deductible business mileage, therefore it would not be non-deductible commuting.

The office in the home deduction generally is limited to an amount not to exceed your trading profits less your trading expenses. The excess office in the home deduction may be carried forward to be used in the following year(s).

Pass-thru entity unreimbursed expenses require proper documentation and must have no waived right for reimbursement.

Last updated: June 24, 2008
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