The general requirements for claiming home office deductions for sole proprietorships and partnerships are the same for corporations. The home office must be used regularly and exclusively for the business in order to be able to claim a deduction on the business return. In addition, the home office should be the principal place of business, the place where you deal with clients or be the place where you conduct administrative or management activities. For incorporated businesses, the owners should be compensated for the services they render to the company and are considered employees of the corporation. As employees, home office expenses that were incurred for the corporation’s benefit and reimbursed by the corporation are legitimate business deductions. Below are three ways that a corporation can claim a deduction for home office expenses.
Unreimbursed Employee Business Expense
Expenses in this category are deductible only if the taxpayer meets the additional criteria of the expense being for the convenience of the employer. Since the taxpayer is both the employer and employee, then meeting this criterion is negligible, but the taxpayer could qualify under the administrative or management activities requisite. The expenses are calculated the same way as sole proprietorships and partnerships, that is, by dividing office square footage by the total square footage of the house. The expenses in this category are deducted as itemized deductions to the extent that the total exceeds 2% of your adjusted gross income on Schedule A.
Rent for the Home Office
The corporation can pay the business owner rent for the home office space it is using. The taxpayer and the corporation will have a lease agreement stipulating the fair value of rent to be paid. This situation creates a deductible expense for the corporation but rental income to report on the taxpayer individual tax return. Even though this option requires the recognition of additional rental income on the part of the owner, it allows payroll tax-free distributions from the corporation to the shareholders.
Setting Up a Documented Reimbursement Plan
Under the reimbursement option, the corporation will reimburse the owner-employee a proportionate share of real estate taxes, homeowner’s insurance, oil, heat, gas, electric, water, sewer, alarm or security service, garbage disposal, general repairs, maintenance expenses and mortgage interest. Whatever amount is reimbursed by the corporation for the mortgage interest and real estate taxes must be reduced on Schedule A. There should be an “employee expense report” itemizing the monthly expenses submitted to the corporation and then in turn, a check should be issued against the business checking account to the owner-shareholder. The employee expense report should be retained on file with the other business records. This option allows the owner-shareholder to receive money, tax free, from the corporation and that same money to be deductible by the corporation.
Reimbursement through a documented plan provides the best tax advantage of all the three options provided above. However, there is little case law or other authoritative guidance giving specific approval to this strategy. Also, a corporation should be making a profit in order to be able to utilize the home office deduction and reap the corresponding tax benefits available. Please contact the Tax Club if you would like to learn more about claiming the home office deduction for your corporation.
Please feel free to call us at 866-840-1829 x5438 if you require a free consultation.
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