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, throw in some pens and paper and you are good to go. Others are all about the details, the small plants to connect you with nature, a decorative lamp, and a motivational poster about working hard or dreaming big or, my personal favorite, the importance of coffee before any human interaction. Whichever home office kind of business owner you are, one thing we all have in common is the desire to be able to get a tax deduction for our 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 and want to understand how to properly claim the deduction for your small business, it’s important that you understand the entity form of your business for tax purposes. Keep in mind that the tax treatment of your business may be different than the legal treatment.
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 actual expense method (as explained in the blog post referenced above). 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 the Form 8829 (but no need to include it with your tax return) and 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 return. 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 reimburse or advance 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 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, also within a reasonable period.
A “reasonable period” is determined based on facts and circumstances. The IRS provides two safe harbors: (1) if an advance 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 the excess is returned within 120 days; (2) if the expense is substantiated within 120 days after the payor provides a periodic statement (no less frequently than quarterly) of the amount paid under the arrangement 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 lodging, 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.
In order to set up an accountable plan, it 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 employees to submit expenses; the process for requesting reimbursement, including what documents are required to prove the request; the process for returning excess reimbursements or allowances; the types of expenses that are reimbursable and the maximum allowed amount for certain expenses.
If you own an ecommerce business, for example, where most of your business activities may be 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 ecommerce tax liabilities and should be carefully considered.
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.