Home Office Expenses: K-1 Connection

If you're looking to connect home office expenses to a K-1 in ProSeries, there are a few things you need to know. First, the home office deduction depends on whether the K-1 came from a partnership or an S-Corp. If it's a partnership, you'll need to check if your partnership agreement requires you to pay office expenses out of your own pocket. If it does, you can calculate the expenses and enter them into TurboTax. However, if the agreement doesn't require you to pay office expenses, you won't be able to take a deduction. For an S-Corp, there are different options for handling the costs of a qualifying home office. You can deduct the costs if you are filing a Schedule C, or the S-Corp can pay you rent for the home office, or reimburse you under an accountable plan.

Home office deduction for K-1 from an S-Corp

The home office deduction is a valuable tax break for small business owners, allowing them to deduct certain expenses related to their home office. However, for owners of S-Corps, the home office deduction is more complicated and requires careful consideration. Here are the key points to understand and instructions to follow for claiming the home office deduction for K-1 from an S-Corp:

Eligibility for Home Office Deduction:

• The home office must be used regularly and exclusively for business purposes. This means 100% of the time spent in that area should be for business activities.
• The home office should be the principal place of business, where administrative and management activities are conducted, even if the taxpayer also conducts business outside their home.
• The home office can also qualify for a deduction if it is used to meet with clients, patients, or customers regularly and is considered "substantial and integral" to the business.
• If the home office is a separate structure not attached to the dwelling, it can qualify for a deduction even if it is not the principal place of business.

Calculating the Home Office Deduction:

There are two methods to calculate the home office deduction: the Regular Method and the Simplified Method.

Regular Method:

• This method involves determining the percentage of the home used for business and allocating direct and indirect expenses accordingly.
• Direct expenses, such as the cost of painting or carpeting the home office, are fully deductible.
• Indirect expenses, such as mortgage interest, real estate taxes, utilities, and insurance, are allocated pro-rata between business and personal use.
• The home office deduction is then calculated by multiplying the allocated indirect expenses by the percentage of the home used for business.

Simplified Method:

• The Simplified Method is a straightforward calculation of $5 per square foot of the home office, up to a maximum of 300 square feet, resulting in a maximum deduction of $1,500.
• This method is easier to calculate and reduces the risk of triggering an IRS audit.

Instructions for K-1 from an S-Corp:

• Sign in to your TurboTax Online account.
• Click on "Federal" and then "Wages & Income."
• In the "S-Corps, Partnerships, and Trusts" section, click on the box next to "Schedule K-1."
• Click "Yes" on the next screen when asked if you received any Schedules K-1.
• On the "Tell Us About Your Schedules K-1" screen, click on the "Start/Update" box next to the entity type (S-Corporation in this case).
• If you have already entered K-1 information, click on "Add Another K-1" to enter new information or "Edit" to modify existing information.
• Follow the screens, entering the requested information.
• When you reach the "Describe the Partnership" screen, select the box "I am required to pay supplemental business expenses."
• On the "Unreimbursed Partnership Expenses" screen, click the blue "Yes" box.
• Provide information about vehicle expenses, assets, and other categories of expenses as prompted.
• On the "Miscellaneous Supplemental Expenses" screen, enter the allowable expenses for the business use of your home, referring to IRS Pub. 587 - Business Use of Your Home.

Please note that S corporation shareholders are generally treated as employees, and unreimbursed business expenses are treated as miscellaneous itemized deductions, which have been eliminated on the federal return due to the Tax Cuts and Jobs Act (TCJA). However, you may still want to enter these expenses in case they are allowable on your state return. Consult a tax professional or refer to the latest IRS guidelines for the most up-to-date information.

Home office deduction for K-1 from a partnership

If you are a partner of a partnership and use a part of your home regularly and exclusively for partnership business, you may be able to deduct home office expenses. This depends on whether the K-1 came from a partnership or an S-Corp.

The simplified deduction for your home office is $5 per square foot, up to 300 square feet. The deduction for an office that is 200 square feet would be $1,000.

If the K-1 is from a partnership, you need to check your partnership agreement. If the agreement requires you to pay office expenses out of your own pocket, you will need to calculate the expenses and enter them into TurboTax. If not, you won't be able to take a deduction for office expenses.

To enter the K-1 and the related home office expenses, follow these steps:

• Click on Federal > Wages & Income.
• In the S-Corps, Partnerships, and Trusts section, click on the box next to Schedule K-1.
• Click Yes on the next screen, Did you receive any Schedules K-1?
• On the Tell Us About Your Schedules K-1 screen, click on the Start/Update box next to the type of entity (partnership, S-corporation, or trust/estate) that issued the K-1.
• If you have already entered K-1 information, you will see a Summary screen. Click Add Another K-1 to enter your information (or click on Edit to continue with the existing form entry). If you haven't started entering K-1 information, continue through the screens, entering the requested information.
• When you come to the screen, Describe the Partnership, select the box I am required to pay supplemental business expenses.
• On the Unreimbursed Partnership Expenses screen, click the blue Yes box.
• On the screens that follow, you will be asked about vehicle expenses, assets, and other categories of expenses.
• When you get to the Miscellaneous Supplemental Expenses screen, enter the allowable expenses for the business use of your home from the worksheet you used from IRS Pub. 587 - Business Use of Your Home.

Alternatively, you can deduct Unreimbursed Partner Expenses (UPEs) on Schedule E of Form 1040. To do this, the partnership agreement should expressly state that you are personally responsible for such expenses.

Unreimbursed partnership expenses

To deduct unreimbursed partnership expenses, there are several requirements that must be met. These expenses must be ordinary and necessary, and paid on behalf of the partnership as outlined in the partnership agreement. They should not be deductible as itemized deductions.

If the K-1 is from an S Corporation, the amount may come from the asset tab, which is an incorrect data entry. In this case, the K-1 shareholder asset should be entered as an itemized deduction.

For a home office deduction, the eligibility and exclusivity tests must be met. The home office must be used exclusively and regularly as the principal place of business, or as a place to meet patients, clients or customers. If the home office is a separate structure, it must be used exclusively and regularly in connection with the taxpayer's trade or business. It can also be used for the storage of inventory or product samples if the home is the only fixed location of the trade or business.

The simplified method for home office deduction allows qualifying taxpayers to claim a prescribed rate of $5 per square foot, up to a maximum of 300 square feet. This can be claimed directly on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). For partnerships, the home office deduction is treated as an unreimbursed partnership expense.

Home office expenses as a percentage of total home expenses

To connect home office expenses to a K-1 in ProSeries, you must first determine whether the K-1 is from a partnership or an S-Corp. This is because the simplified deduction for your home office varies depending on the source of the K-1.

If the K-1 is from a partnership, you must check whether your partnership agreement requires you to pay office expenses out of your own pocket. If it does, you will need to calculate the expenses and enter them into TurboTax.

To enter the K-1 and the related home office expenses, follow these steps:

• Click on Federal > Wages & Income.
• In the S-Corps, Partnerships, and Trusts section, click on the box next to Schedule K-1.
• Click Yes on the next screen, which asks if you received any Schedules K-1.
• On the "Tell Us About Your Schedules K-1" screen, click on the Start/Update box next to the type of entity (partnership, S-corporation, or trust/estate) that issued the K-1.
• If you have already entered K-1 information, you will see a Summary screen. Click "Add Another K-1" to enter your information or click "Edit" to continue with the existing form entry. If you haven't started entering K-1 information, continue through the screens, entering the requested information.
• When you reach the "Describe the Partnership" screen, select the box "I am required to pay supplemental business expenses."
• On the Unreimbursed Partnership Expenses screen, click the blue "Yes" box.
• On the subsequent screens, you will be asked about vehicle expenses, assets, and other categories of expenses.
• When you get to the Miscellaneous Supplemental Expenses screen, enter the allowable expenses for the business use of your home from the worksheet in IRS Pub. 587 - Business Use of Your Home.

Now, onto the topic of "Home office expenses as a percentage of total home expenses":

The IRS allows individuals to deduct certain home office expenses, such as utilities, mortgage interest, and property taxes, from their annual tax returns. To calculate how much of your home constitutes a home office and how much of your expenses are deductible, you can use either the regular method or the simplified method.

The regular method involves calculating your actual expenses. This includes determining which of your business expenses are direct, indirect, or unrelated, and finding the percentage of your home used for business purposes. Direct expenses are those incurred solely for the benefit of the office space, such as painting or repairs. Indirect expenses benefit both the entire home and the home office, such as insurance, utilities, and general repairs.

To find the percentage of your home used for business, you can divide the area of the business space by the total area of your home. Alternatively, if all the rooms in your home are about the same size, you can divide the number of rooms used for business by the total number of rooms.

Once you have determined the percentage of your home used for business, you can allocate that percentage of your total home expenses toward the home office deduction.

For example, let's say your home office takes up 300 square feet in a 2,000-square-foot home. This means 15% of your total home expenses can be allocated toward the home office deduction. If your total home expenses for the year were $10,000, you could deduct $1,500 ($10,000 x 0.15) as home office expenses.

The simplified method, on the other hand, was introduced in 2013 to simplify the calculation of allowable deductions for your home office. This method involves multiplying an IRS-determined rate by the square footage of your home office. The rate is currently $5 per square foot, up to a maximum of 300 square feet.

Using the previous example, if your home office takes up 300 square feet, you can deduct $1,500 ($5 x 300) as home office expenses using the simplified method.

It's important to note that the simplified method has certain restrictions. For instance, if you share the space with another person, you can't both deduct the same space. Additionally, you won't be able to deduct depreciation or home-related itemized deductions using this method.

Home office deductions, reimbursements and expenses

The home office deduction is a tax break for self-employed people who use part of their home for business activities. It allows you to deduct expenses directly related to maintaining your home office, as well as a portion of certain expenses that are associated with your home but are not deductible by the average homeowner.

Requirements

To qualify for the home office deduction, you must use the business part of your home exclusively and regularly for trade or business purposes. This means that the space you're using for business must be used exclusively for conducting business and meets the exclusivity and use tests.

Direct and Indirect Expenses

If a given expense pertains only to the home office, the entire expense will be deductible as a "direct" home office expense. For example, the cost of window treatments installed only in your home office to ensure privacy for clients.

If the expense applies to the entire house, it's an "indirect" home office expense, and only a proportionate part of it will be deductible. Heating, air-conditioning, rent or mortgage payments are examples of indirect expenses.

Simplified Method

The simplified method is a straightforward way to calculate your home office deduction. With this method, you multiply the square footage of your space by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space, with a maximum deduction of $1,500.

Actual Expenses Method

The actual expenses method is more complex and involves measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses.

ProSeries and K-1

When it comes to connecting home office expenses to K-1 in ProSeries, there is no direct way to link a home office deduction worksheet to a K-1 reported on Schedule E. You can either calculate it manually or create a temporary 'fake' Schedule C with the home office expenses to get the amounts.

Reimbursements

Regarding reimbursements, it is important to note that W-2 employees who work from home are generally not able to take the home office deduction or deduct unreimbursed home office expenses. However, if you are self-employed or have a separate business, you may be able to take the home office deduction and deduct unreimbursed expenses, but specific requirements must be met.

Frequently asked questions