Claim Your Home Office Tax Deductions
What you need to Know for claiming your Home office tax deductions
We all have our own style when it comes to setting up a home office.
Some like the basics – desk to work at, chair to sit on, internet to…uh, well everything. Others are all about the details - small plants, a decorative lamp, and a motivational poster about working hard, dreaming big, or drinking coffee.
Whichever home office kind of entrepreneur you are, one thing you all have in common is that you want a tax deduction for your home office expenses.
For details on how to qualify for the home office tax deduction and how to calculate your potential deduction, check out our blog post on Home Office Deductions – The Ins and Outs for Small Business Owners.
Assuming you are already past those steps, you now want to understand how to properly claim the deduction for your ecommerce business. Well, the answer is - it depends.
Understanding the tax form of your business is key to setting this up correctly. Keep in mind that the tax treatment of your business may be different than the legal treatment. For example, if you operate your ecommerce store through an LLC but elected to treat it as an S corporation, for tax purposes it's an S corporation, not an LLC.
1. Sole proprietorship / Single-member LLC
If you use your home in your trade or business and file Schedule C (Form 1040 or 1040-SR), report the entire deduction for business use of your home on line 30 of Schedule C.
Whether you need to complete and attach Form 8829 to your return depends on whether you choose the simplified method or the regular method. See Line 30 in the instructions for Schedule C for more information.
2. Partnership / Multi-member LLC
As a partner in a partnership, you generally can’t deduct partnership expenses on your individual tax return—the partnership should pay for and deduct its own business expenses.
But, if your partnership agreement or business policy requires you (as partner) to pay for the expense out of pocket with no reimbursement from the partnership, then you can deduct the business expense in full on your individual tax return as an unreimbursed partnership expense, or a UPE. Because the UPE is a trade or business expense, it also reduces your self-employment tax.
If you have checked your partnership or LLC agreement and confirmed you are eligible to claim UPE expenses, determine your home office deduction amount using Form 8829 to calculate it (but no need to include it with your tax return). On a separate line on Schedule E, line 28, enter “UPE” in column (a) and the expense amount in column (i).
Alternatively, the partnership can reimburse you for your home-office expenses and the partnership can claim the deduction (not the partner).
In order to ensure the partnership can qualify for the deduction, determine the reimbursement amount using Form 8829 (including depreciation) and submit this request with appropriate documentation within the time frames required by your partnership’s policy. Then the partnership can reimburse you for the appropriate amount and take a tax deduction.
3. C Corporation or S Corporation
For arrangements between an employee and employer, the 2017 Tax Cuts and Jobs Act (TCJA) disallowed the deduction of certain out-of-pocket expenses paid by employees on their personal tax returns.
Employees, in this case, can also include shareholders of the company.
What may offer more tax savings for home office expenses for owners/employees of a corporation is what is called an accountable plan.
For expenses that qualify under an accountable plan, the company can claim a deduction for expenses they reimbursed or advanced to employees (based on the general deductibility rules for those expenses) and the employees do not need to include these amounts as income. It’s a beneficial way to get money out of a closely-held corporation (without worrying about reasonable compensation, payroll tax, or other complex tax issues).
To offer an accountable plan to employees, there are three standards that need to be met:
- The expenses must have a business connection;
- The expenses must be substantiated within a reasonable period; and
- The employee must return any money that was advanced but not spent to the employer, within a reasonable period.
A “reasonable period” is determined based on facts and circumstances. The IRS provides two safe harbors:
(1) if an advance from the company is made up to 30 days before an expense is incurred, the amount is substantiated up to 60 days after the expense is incurred, and any excess amount is returned within 120 days, or
(2) if the expense is substantiated within 120 days after the payor provides a periodic statement (every quarter or every month) of the amount paid that exceeds the expense the employee substantiated.
In order to benefit from an accountable plan, it’s good practice to require employees (including shareholders) to submit receipts for all reimbursable expenses in a timely manner.
Receipts are only required, though, if an expense exceeds $75 (unless the expense is related to hotel or airbnb stays, in which case, a receipt is always required). When an accountable plan is used, the business only reimburses expenses that are substantiated (proved) by receipts and other documentation.
An accountable plan does not need to be in writing, but a written document is a good way to ensure that the three requirements are addressed.
A written expense reimbursement policy should cover :
- The required time period for you or other employees to submit expenses
- The process for how you need to request reimbursement (including what documents you need to prove the request)
- The process for returning excess reimbursements or allowances to your company;
- The types of expenses that are reimbursable and the maximum allowed amount for certain expenses.
As an ecommerce business owner, for example, where most of your business activities are likely taking place from your home office, being able to properly benefit from your home office tax deduction or other eligible personal expenses relating to your business can have a significant impact on your tax payment and should be carefully put in place.
The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.
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