If you are an employee of your own S corporation, there are several choices for handling the costs of a qualifying home office. Firstly, the S corporation can pay you rent for the home office. Secondly, the S corporation can pay you for the costs of a home office under an accountable plan for employee business expense reimbursement.
Being reimbursed under an accountable plan provides the greatest tax savings. The corporation can deduct the amount of the reimbursement and you do not have to report the payment on your personal income taxes. This option is better than having the corporation pay you rent for the home office. While your corporation can deduct the rent paid to you, you must report the rent as income on Schedule E.
What You'll Learn
Home office reimbursements for S-corporation owners
S-corporation owners can deduct home office expenses in a few ways.
Firstly, S-corporation owners can deduct the costs of a home office if they are filing a Schedule C. Under the Tax Cuts and Jobs Act (TCJA), employees working remotely can no longer deduct home office expenses on their tax returns to the extent they exceeded 2% of adjusted gross income (AGI). Business owners may qualify to claim the home office deduction if they have their own business and use a portion of their home as their primary place of business.
Secondly, the S-corporation can pay rent to the owner for the home office. However, this is considered a less optimal approach as the corporation can deduct the rent paid, but the owner must report the rent as income on Schedule E.
Thirdly, the S-corporation can pay the owner for the costs of a home office under an "accountable" plan for employee business expense reimbursement. This is the most tax-efficient method. The corporation can deduct the reimbursement amount, and the owner does not need to report the payment on their personal income taxes. To qualify as a home office, the space must be used regularly and exclusively for the owner's trade or business and must be their principal place of business. Additionally, the home office must be for the convenience of the employer, meaning it is required as a condition of employment, necessary for the business to function, or necessary for the owner to properly perform their duties.
To be considered "accountable", the expenses reimbursed must be for actual job-related expenses, and the owner must provide their corporation with receipts or other documentation as evidence. Owners should create a monthly "Employee Expense Report" form for their corporation, which includes lines for business mileage and other out-of-pocket business expenses. A "Home Office" section should be included in the report, calculating the business use percentage of the home office by dividing the square footage of the office area by the total square footage of the home. Each item of expense paid during the month should be listed, such as homeowner's insurance, gas and electric, general repairs and maintenance, and mortgage interest. The total of these expenses should be multiplied by the business use percentage to determine the reimbursement amount. It is important to note that the owner must reduce their itemized deduction for real estate taxes and mortgage interest by the reimbursement amount received from their corporation.
Overall, by using an accountable plan, S-corporation owners can effectively deduct home office expenses and benefit from tax savings.
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Home office deductions for small business owners
Small business owners who work from home may be able to claim a tax deduction for their home office. There are two methods for figuring out this deduction: the regular method and the simplified method.
The Regular Method
The regular method involves dividing expenses of operating the home between personal and business use. Self-employed taxpayers file Form 1040, Schedule C, and compute this deduction on Form 8829.
The Simplified Method
The simplified method allows for a rate of $5 per square foot for business use of the home, up to a maximum of $1,500.
Special Rules
Special rules apply for certain business owners:
- Daycare providers complete a special worksheet found in Publication 587.
- Self-employed individuals use Form 1040, Schedule C, Line 30, to claim the deduction.
- Farmers claim the deduction on Schedule F, Line 32.
Requirements for the Home Office Deduction
To qualify for the home office deduction, the space must be used regularly and exclusively for your business. This means that the area must be used solely for business purposes and cannot be a multi-purpose space. It must also be your principal place of business, meaning it is the primary location for your business activities.
Deductible Expenses
The following expenses may be deductible for small business owners claiming the home office deduction:
- Homeowner's insurance
- Homeowners association fees
- Cleaning services or cleaning supplies used in the business space
- Mortgage insurance and interest
- Utilities, including electricity, internet, heat, and phone
- Repairs and maintenance
- Business insurance
- Business taxes
- Travel expenses
- Supplies and materials
- Professional services, such as accounting, consulting, or legal fees
Calculating the Deduction
The deduction can be calculated using either the simplified method or the regular method. The simplified method is easier and involves multiplying the square footage of the home office by $5, up to a maximum of $1,500. The regular method involves determining the percentage of the home used for business and applying this to eligible expenses.
Considerations
It is important to note that the IRS has strict rules regarding the home office deduction, and it is not advisable to claim deductions that you are not eligible for. Additionally, small business owners should consult with a tax professional to ensure they are claiming deductions correctly and maximizing their tax benefits.
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Home office reimbursements for employees
Employees who work remotely are no longer allowed to deduct home office expenses on their personal tax returns. However, if you are self-employed or own a business and work from home, you may be able to claim a home office deduction and be reimbursed for certain expenses. Here's what you need to know about home office reimbursements for employees:
Qualifying for a Home Office Deduction
To qualify for a home office deduction, the space you use for work must be regularly and exclusively for business purposes. This means that the area should be used solely for work-related activities and not for any personal use. It also needs to be your principal place of business, where you conduct administrative or management activities, or a place where you regularly meet with clients or customers.
Reimbursable Expenses
If you qualify for a home office deduction, you can be reimbursed for a portion of your home expenses. These may include:
- Mortgage interest
- Insurance
- Utilities
- Repairs and maintenance
- Depreciation
- Rent
Calculating the Reimbursement Amount
To calculate the reimbursement amount, you need to determine the "business use percentage" of your home office. This is done by dividing the square footage of your office area by the total square footage of your home. Then, you can multiply each eligible expense by this business use percentage to find the reimbursable amount.
Accountable Plans
Setting up an accountable plan is the best way to handle home office reimbursements. With this option, your corporation can reimburse you for all home office expenses, and you don't need to report the reimbursement as income on your personal tax return. This provides greater tax savings than having your corporation pay you rent for the home office, as rent would need to be reported as income on Schedule E.
General Guidelines
When deducting or being reimbursed for a home office, it's important to note that you must reduce your itemized deductions for real estate taxes and mortgage interest by the amount you receive in reimbursements during the year. Additionally, if you sell your home, you won't have to pay income tax on the portion of the gain that corresponds to the percentage of your home office.
Remember to consult with a tax professional or accountant to ensure you're complying with all relevant tax laws and regulations when claiming home office reimbursements.
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Home office deductions for sole proprietors
Sole proprietors can take advantage of tax deductions for their home office space. Here's what you need to know:
Eligibility
To be eligible for the home office tax deduction, you must be self-employed, which includes independent contractors, sole proprietors, and freelancers. Your home office must also meet the following criteria:
- Exclusive Use: The space must be used exclusively for business purposes and cannot be used for any personal activities.
- Regular Use: The space must be used regularly for business, not just occasionally or infrequently.
- Principal Place of Business: Your home office should be your primary place of conducting business. If you have another office or storefront, you cannot claim the home office deduction.
Calculating the Deduction
There are two methods to calculate the home office deduction: the standard method and the simplified method.
Standard Method
The standard method involves calculating the actual amount of deductible home office expenses. Here are the steps:
- Calculate the square footage of your home office and divide it by the total square footage of your home to determine the percentage of your home used for business.
- List all the expenses related to your entire home, such as mortgage interest, real estate taxes, insurance, utilities, and depreciation for the year.
- Expenses that are solely for the benefit of the office space are listed separately.
- Multiply the total indirect expenses (expenses related to your entire home) by the percentage calculated in step 1 to determine the deductible amount.
- Add the total indirect and direct expenses to find the total home office deduction.
Simplified Method
The simplified method is a quicker option with a standard deduction of $5 per square foot of home office space, up to a maximum of $1,500 for 300 square feet. With this method, you cannot deduct depreciation or home-related itemized deductions.
Important Considerations
- Deductions vs. Income: Your total deductible expenses for the home office cannot exceed the income derived from the business. Any excess amount can be carried forward to future years.
- Documentation: Keep accurate records and documentation of your home office expenses and usage in case of an audit by the IRS.
- Separate Business and Personal: If you have both business and personal accounts, be sure to separate expenses and only deduct those that are solely for business purposes.
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Home office deductions for owners of partnership interests
If you are a partner in a partnership, you can deduct home office expenses on your individual tax return. This is done by reporting them as "unreimbursed partnership expenses" (UPE) on Schedule E. However, the partnership agreement must expressly state that you are required to pay these expenses yourself.
To calculate your home office deduction, you must first determine the percentage of your home that is used exclusively for business purposes. You can do this by dividing the square footage of the office area by the total square footage of your home. This percentage is then multiplied by the total amount of eligible reimbursable expenses, which may include:
- Homeowner's insurance
- Utilities
- Alarm or security services
- General repairs and maintenance
- Mortgage interest
The total amount of your home office deduction cannot exceed the net income generated by your business. If you have a loss for a given year, you can carry the deduction forward to a future year.
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Frequently asked questions
Calculate the "business use percentage" of your home office by dividing the square footage of the office area by the total square footage of your home.
Expenses that can be included in your home office deduction are homeowner's insurance, oil heat, gas and electric, alarm or security service, general repairs and maintenance, and mortgage interest.
The space must be used regularly and exclusively for your trade or business, and it must be your principal place of business or a place where you physically meet with patients, clients, or customers on a regular basis.