If you read our winter newsletter, you will already know that the office-in-home deduction is available to certain self-employed individuals that use an area of their home regularly and exclusively as a principal place of business. Keep in mind that a “principal place of business” must either be the place where your cash register rings or it can be a place you use for administrative or management activities if there is no other fixed location where you conduct these activities.

If you have established your home office as a principal place of business, you may also be eligible to deduct your mileage between home and other work locations as a business expense.

The maximum benefit of a home office is achieved differently depending on the structure of your business:

S- Corporation: Calculate your direct and indirect office expenses on form 8829. Set up a reimbursement plan for the S-Corp to reimburse you for the expenses on form 8829. These reimbursements count as a business expense for the business and non-taxable income to you as an individual. The individual should use an expense report or the form 8829 as substantiation for the validity of the expenses. The business will cut a non-payroll check to the individual in the amount of the calculated reimbursable expenses.

Make sure that the business is not renting a room from you individually. If the business rents a room in your house, you will need to record the income on a Schedule E on your individual return. Your expenses against this income will be very limited, resulting in higher overall tax. Using an Accountable Reimbursement Plan will protect you from this mistake.

Partnership: A partnership may also pay partners through an Accountable Reimbursement Plan. Calculate the amount of the reimbursement using form 8829, provide proper supporting documentation for the expenses, and then write a reimbursement check from the partnership to the partner. Do not charge the partnership separate rent for the home office and be sure to understand the rules of an Accountable Reimbursement Plan.

If the partnership agreement forces each partner to pay out of pocket expenses, you can instead deduct your home office costs as unreimbursed partner expenses. You will still calculate the amount of the deduction using Form 8829, but then you will enter the amount on your personal tax return.

Use the IRS’s Form 8829 and the Home Office Expense Calculator to determine the amount of your reimbursement check or unreimbursed partner expenses. Here is a sample Accountable Plan that you will want to follow to comply with federal law. Consult a tax professional to verify that you are eligible for the Office-in-Home deduction. These reimbursements should be paid in December of the tax year for which you are claiming the deduction. Please contact our office if you would like further guidance in claiming this deduction.