How to deduct your home office expenses regardless if you are a Sole Proprietorship, LLC, Partnership, S or C Corporation.
So the IRS lists out two basic requirements for us to take advantage of this deduction.
- First is that there is a part of your home that is exclusively used for conducting business. For example, you are using a guest or library room to conduct your trade and that space is not used for personal reasons at all.
- Next that part of your home is the principal place for your business. Which means you can have an outside office of your home, but your home office is the main place where you conduct your business activities such as meeting clients, taking phone calls, doing your work, etc
So now, let’s dive into how you actually take these deductions:
If you have a Sole Proprietorship or a Single Member LLC, you’ll showing be your income and expenses on Schedule C. For Schedule C Filers there are two options available –
First is the Regular method:
For example, you have 300 square footage of your home out of 3000 Square footage of your home that is strictly used for business purposes.
So 10% of your home is used for business, which means you can take 10% of mortgage interest, insurance, utilities, repairs, and depreciation are deductible. All those items are deductible at 10%.
you would show these expenses on IRS Form 8829 and the expenses would flow into Schedule C.
The 2nd method is the Simplified method – Under the simplified method all you need to do is determine the space of the home that is used for business purposes and multiply the square footage of the space by 5 dollars. The maximum space you can use for this deduction is 300 square feet. The deduction can be taken on Schedule C Line 30. This option is fairly straightforward and less record keeping is required versus the conventional method.
Note: The Internal Revenue Code doesn’t recognize LLC as a separate entity from the individuals but at a state level they do. So for liability purposes, it may be best to still have a accountable plan for a LLC. Discussed later.
Now let’s assume you have a C or S corporation:
The concept is similar to using Regular method discussed above for schedule C filers but there is a workaround you have to do. Furthermore, you would still have to meet the two basic requirements as mentioned above.
Keep in mind both that both the corporation and shareholder are two different persons. So you have to treat the shareholder and the corporation separately. Once this concept is understood, it’s much easier to understand on how home office expenses can be deducted.
The corporation has to create an “Accountable Plan” under Regulation 1.62-2. Although there isn’t a written arrangement required, it is a good idea to have the Accountable plan to be written. Modi CPA can assist you in creating one, if needed.
Essentially under an Accountable plan, the Shareholder-employee would be reimbursed by the Corporation for the home office expense on a periodic basis. Then the corporation on its tax return would take the home office expense deductions on your 1120S or 1120.
Partnerships or Multi-member LLC:
Once again, the concept is similar as S-Corporation that either you can create an accountable plan for your partners or if a partnership agreement states that home office expenses must be paid out of the partners own funds, then the partner can deduct those expenses on Schedule E Line 28.
I hope this video gives you a better insight on home office use deductions! And if this video helped you in anyway, feel free to check out some of our other blogs at www.modicpa.com – the link is in the description below and don’t forget to subscribe, like and leave comments below on tax topics you would like to discuss in the future.
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