Dear Client:

Frequently, we find that business owners use their home to perform the administrative duties for their businesses.  There are beneficial ways to structure this, but it has to be done properly and the conditions of the law have to be met.  Accordingly:

1. Your office must be used regularly and exclusively for business.  However, you don’t have to have a separate room but an area where you don’t do anything else.

2. The office must either be your principal place of business, a place where you meet regularly with clients or patients, or where you conduct administrative tasks for your business.  For example, a plumber that works in different places but your administrative work is always done in that home, then you would qualify.

3. Your proof of regular use and administrative use requires some type of entry in a diary or calendar.  Kee the timely entry requirement in mind when making these entries.  The IRS recommends that you keep a weekly log.

As mentioned above, the IRS also requires you to supply proof of the expenses that you are requesting reimbursement for.  There is a simple way to do this.  It is called the IRS form 8829.  This form and its instructions contain the rules and help you make the proper allocations.

Now that you have completed the form, submit it to the corporation for reimbursement. The corporation writes the check to you for the amount on your Form 8829 and keeps the form as part of the proof of the deductions. You receive the check as a reimbursement of employee expenses—which is not taxable to the employee. With this reimbursement, your S corporation gets the deduction and you have no taxable income.

Also, unlike the arrangements above, this payment by the S corporation:

1. It is deductible by your S corporation as an office expense.

2. The payment is proper under Regulation 1.62-2(c)(4).

3. Sets you up to be allowed the business mileage on your vehicle for trips beginning from your home.

5. Reduces audit questions.

6. Increases the ability of your corporation to protect you from personal liability.

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September 18, 2023

Home Office Deduction

Also, another point to keep in mind.  When you claim the deduction as outlined above, you deduct only the unreimbursed portion of mortgage interest and property taxes on your personal return. Thus, if your home office makes up 15 percent of your home, the corporation reimburses 15 percent of your mortgage interest and property taxes. Your personal itemized deduction is for the remaining 85 percent.

Please don’t hesitate to contact us if you have further questions concerning the above.  Our main office number is 505-232-3275.

Regards,

Larry Filener, CPA

Southwest Accounting Pros, LLC

Albuquerque, New Mexico