Tax deductions for a home office
If you’re a business owner who works from a home office, you might be leaving money on the table. Here is an overview of the tax deductions that are available to you.
Today’s classic will be republished by The White Coat Investor You can see the original Hise.
I’ve blogged for nine years and work from home all the time. However, I’ve only written once about the tax breaks available for those with a home business and it was about how I don’t get any of them! Well, things have changed over the years and it’s time to bring this up again.
The home office fume cupboard
The first tax break to consider when working from home is the home office deduction. This used to be a very complicated trigger. You had to figure out all of the costs of your home (mortgage, property taxes, depreciation, utilities, etc.) and then multiply those by the proportion of your home that the business uses.
However, as of 2013, the IRS offered a MUCH easier way to make this deduction. You just calculate the home office square footage and subtract $ 5 per square foot. It goes on line 30 of Schedule C for a sole proprietorship, line 20 of Form 1065 for partnerships, and line 19 of Form 1120S for S Corps. (Technically, for an S Corp, you should create an Accountable Plan where the company reimburses you for these costs and then places them on line 19. We do this for a lot of WCI expenses these days.)
You can still use the old method (and you’ll have to do this if your home office is larger than 300 square feet), but I’d try to avoid this just for the sake of simplicity. Unfortunately, that $ 5 / square foot figure is not tied to inflation. Unless you find yourself in a reasonably priced home (especially when renting), you are likely to get a larger deduction than the simplified method if you use form 8829 on line 44. But AT LEAST the simplified method. The simplified method also has the advantage that if the house is sold, it will not be recaptured, which is worth something.
3 rules to qualify for the home office deduction
# 1 Must be the main location for your business
This one can get tricky, although easy for many who have no other place to do business. If there is another place to do business, the IRS will take it into account
- the relative importance of the activities being carried out in each location where you do business, and
- the time you spend in each place you do business
# 2 Must be used regularly
This one doesn’t usually trip over too many people, but if you don’t work at home every week you may not meet this requirement.
# 3 Must be for the exclusive use of your business
This stumbles over people much more often. Exclusive use means that whatever space you take up for a home office is not used for anything else. It cannot serve as a guest room, business storage space, space for the kids to do their homework, etc. The idea is that just because you run your business from your dining room table, you can’t pull off your dining room as a home office.
In the past few years we have applied for the home office fume cupboard for the basement room where we record podcasts and videos from White Coat investors. When we did our renovation, we allocated a significant amount of space to WCI office space (in fact, it could be just over 300 square feet) so we will certainly make this deduction in the future. But despite the fact that I work for hours in the kitchen, living room and dining room, we do not use this room as a home office due to the requirement of “exclusive use”.
Can employees move from home?
What if you are an employee, not a business owner? Can you pull off a home office? Unfortunately, as of 2018, the place where this non-reimbursed deduction of employee costs in Appendix A (individual deductions) was made is basically gone. In addition, fewer people submit Schedule A due to the higher standard deduction. It was never great for doctors anyway, as it was subject to a minimum amount of 2% of adjusted gross income, which is a respectable number for most doctors.
Subtract business miles
If you work at home AND elsewhere, driving between these two locations becomes more of a deductible business mile than a non-deductible commute mile. I don’t even think there’s a rule that you need to take a qualified home office deduction to get the business mile deduction, but it definitely does make it look less squirrel-like.
This deduction is due to the fact that you are driving between two business locations (the home office and the other business location) rather than between home and business (commuting). Note that the two offices must be in the same industry. Just because I blog at home before going on a shift at the hospital doesn’t mean I can subtract those miles. Different industries, so it is not about business kilometers, but about commuting.
This puts many doctors in a gray area. They reason that since they check their emails or make some diagrams at home, they can deduct their drive to the clinic or hospital. Keep careful records and determine that an audit may not do this. The key is really to avoid having another location that is the main place of business. If you are a hospital doctor who works in shifts in 4 different hospitals it is much easier to argue than if you are an internist who always works in the same clinic.
Rent your home to your company
Do you know what the best possible deduction for a home-based business? Rent your home to your company. This is a deductible expense for your business. And if you do it less than 15 days a year, it is not taxable income for you as an individual. Did you get that? This is FREE MONEY. And it can be a lot of money.
For example, I have business meetings at my home. The space that we use as a home office is too small for these meetings, so we basically have to use the area in which my family lives like the dining room. Why shouldn’t I calculate the business rent instead of just giving that space to the business? It is certainly allowed.
How high is the price? Well, that’s pretty easy to figure out these days with VRBO or AirBNB. And since I live in a big, fancy doctor’s home near some very popular ski resorts, the price of renting my home for a business meeting is actually quite high. Especially when you pay a cleaning fee, booking fee, and taxes. See what a single night in your own home costs to rent. You will probably be surprised at how expensive it could be, especially during high tourist season. That deduction is an order of magnitude larger than what I can take for the private business deduction. But it’s not “either / or”. It is both “.
Do I have 14 business meetings a year in my home? Absolutely. The minutes for these meetings are well documented. They take hours. If I were to rent a hotel suite, conference room, or private home for these meetings, the cost would be significant. These costs are now a deduction. Would it be a smart business move for my company to rent a private, fancy doctor’s house to hold their meetings? May not, but the IRS doesn’t require you to do business wisely in order for your expenses to be deductible.
However, don’t bother renting your own home for more than 14 days. Then all you do is shift the income from the business return to your individual return. If the company is a transit company like a sole proprietorship, partnership, or S Corps, you’re probably not saving money there.
Where are these costs going? I would include it in Part V of Appendix C (lines 48 and 27a) or lines 20 or 19 of Form 1065 and 1120S, respectively.
Of course, don’t forget all of those office supplies, office furniture, the second phone line, computers, etc. If you use them for business more than 51% of the time it is a business expense, although you can only subtract the percentage of the actual cost for that Business used. That is, if you use a $ 500 chair for business 60% of the time, it is a $ 300 drop, not a $ 500 drop. They better believe that all furniture that goes into the new WCI office space will be used on the WCI credit card.
What do you think? Do you take the home office deduction? Why or why not? Have you ever rented your home to your business? Why not? Comment below!