Can you claim your home office?
I get this question a lot because there's tons of misinformation out there about home offices. Who can and cannot claim it? Are they an audit flag? What can you claim? All sorts of stuff. So we're going to go through all of that stuff right now.
Will you Get Audited if you Claim your Home Office?
First off a legal home office deduction is not going to be any more of a red flag than anything else on your tax return. There were audit flags in the 1970s for home offices. However, that is no longer the case. If you are legally going to deduct your home office, that is not going to cause you to get audited.
Who Can Claim a Home Office Deduction?
Second of all, let's talk about who can claim a home office deduction. You can claim a home office deduction if you own a business and work from home. Also, that business is either:
- sole proprietorship
- partnership
- S-corporation.
Now, if you are a partnership or an S corporation, it's going to look a little bit different than if you are a sole proprietorship. But basically, those three types of businesses can claim a home office deduction.
What do you need to have in order to claim a home office?
In order to claim a home office, you must have a location in your home that is regularly and exclusively used for business.
So what does that mean? According to the IRS, you must use a specific area of your home for business on a regular basis. Incidental or occasional use is not regular use. Now if you use exclusively for business, that is very well defined. But, it has to be a space in your home that is not used for anything else. It can only be used for your business. For instance, you cannot use your dining room table and claim that as your home office. You can't have a space that is sometimes your office and sometimes not.
Can You Use A Portion of A Room as Your Home Office?
You can use a portion of a room that is separately identifiable as your office. It doesn't have to have a partition, but that portion of the room is clearly the office section. You can devote a part of a room and say, “this is exclusively used for business.”
It is helpful if you partition it off, but it’s not necessary. But again, everything with the IRS is form over substance. So if you can partition off your space that's going to help even more.
For example: in the IRS publication: Business Use of Your Home, they use the example of an attorney that uses his den to do legal briefs and tax returns, and his family also uses the den. That is not considered exclusive use of a space to conduct business in.
Can You Have Another Location and Still Claim A Home Office?
According to the publication, you can still claim your home office. There is a really cool chart on page four that walks you through by asking you different questions. If there is another place of business, but you use your home office to meet with clients, customers, patients, et cetera, then yes, you would take a home office. Even if you don't meet with patients, clients, or customers, if you have a separate structure, then the deduction is allowed.
So if it’s your principal place of business, then check, you're good. If it's not your principal place of business, but you meet with clients there, then check, you’re good.
If you have a retail location, but you have no place to do paperwork, you may also be able to take a home office. So again, you just kind of have to look to see what you are doing in that location. It has to be used regularly and exclusively for business.
It's easy to claim if it's your principal place of business. If it's not, there are a couple of other questions that you need to deal with.
How Do You Pay For Things For Your Home Office?
So how do you pay for things for your home office? Do you reimburse yourself? How does this work? You would pay all your personal expenses, personally. You should always pay your personal expenses out of your personal account.
Sole Proprietorship
If you are a sole proprietorship, then what you're going to do is you're going to keep track of things like your mortgage interest, or your rent, your real estate taxes, your utilities, you are not going to reimburse yourself for those things out of your business.
What you're going to do is you're going to fill out the form 8829, which lists all of these things. You're going to put all of your expenses on that form, attach it to your schedule C but no money is going to change hands.
Partnership or S-Corporation
Now, if you are a partnership or you are an S-corporation, then what you would do is you would reimburse yourself for the costs.
Now with an S-corporation., if you do this for you, then you're also going to have to do this for your employees. You would have, what's called a qualified plan and you would submit your expenses for your home office on a regular basis. So what does that look like? You would want to put together an expense report for your S-corporation just like if you worked for somebody else.
If you own an S-corporation, you can reimburse yourself for mileage. If you pay for anything out of pocket, you can reimburse yourself for that. And you can reimburse yourself for your office. Just remember that if you are doing this for yourself, you're probably going to have to do this for your employees as well if they're working from home. So keep that in mind.
How do you Deduct the Costs of Having a Home Office?
This is different from renting space from yourself. Because essentially, what you're doing here is you're saying the business has no other place for you to work. And so the business is reimbursing you for your office and your costs at home. These costs at home would be mortgage interest, real estate taxes, insurance, utilities, repairs, and also Internet.
This can be a really nice little deduction, but what you're going to do is you're going to take the square footage of your space that you're using regularly and exclusively for your business. And you're going to divide that by the square footage of your house.
So let's say your office is 200 square feet and your home is 2000 square feet. That's 10% of your house. What you would do is you would look at your mortgage statement and see how much your interest is on your mortgage. So your cost for the home office would be 10% of that, 10% of your real estate taxes when those are paid; 10% of your insurance, that's paid; and 10% of your utilities paid last month; 10% of any repairs you had on the house in general, or a hundred percent of any repairs you had to the office.
You would then add all that up and you would put that on your reimbursement sheet. Make sure to submit that on a regular basis. You can do it monthly. Or you can do it quarterly. You could also do it annually, but that's going to get messy.
What about renting out the home office space for yourself?
If you do reimbursement, that is not taxable income to you. Whereas if your business rented space from you, you would have to include that as income on your taxes, and you'd have to treat it like a rental.
If you do reimbursement and don't treat it like a rental, you are essentially getting reimbursed for your expenses. It's an easier way to do it. It potentially reduces your taxes more than if you did it as a rental. Anytime you can get some tax free income out of your business, that's a good thing.
Who can do a reimbursement?
You can do this as a sole proprietorship. You can do this as an S-Corp or as a partnership. It's just the form that looks a little bit different as far as actually moving money or not and in which forms you're going to do this.
If you have an S-corporation, how do you pay yourself for this reimbursement? What you would do is you can either write a check from your business account, or you can include it as a reimbursement as part of your payroll. Either one works just fine.
If you do the reimbursement as part of your payroll then you can use a payroll company. We use Gusto for payroll. What you would do is you would just put in your paycheck and there's a little line for reimbursements. And you can just use that. It works really, really well.
What kind of documentation do you need to have?
You really need to have your office set up. And you want to make sure that it's a bonafide office. And then you just want to make sure that you keep track of how much you are paying for your utility bills right now. Those invoices are easy to keep track of.
If you have any repairs and maintenance, you would need to keep receipts. Or for your mortgage interest, you can get that from your mortgage company. That's pretty easy to pull up. So you just want to make sure that you can get the justification when you need it.
A lot of times your real estate taxes and your insurance are paid out of your mortgage. So that's really easy to find. Now it's not the escrow amount, it's the actual amount paid to your insurance company and your town for your real estate taxes. You can go into your escrow and you can figure out when those things are paid.
If you have any questions, please feel free to let me know by commenting below or filling out the form at askkristin.net.
