Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.
Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
– As your principal place of business; or
– As a place to meet or deal with patients, clients or customers in the normal course of your business; or
– In any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.
Additionally, please note that to qualify as a home office the office must solely be used for business purposes and that even small amounts of personal use of this space would disqualify the space as being considered a home office.
Where to deduct these expenses depends on whether you are:
– A self-employed person, or
– An employee
Self-employed persons that file a Schedule C (Form 1040), will complete and attach Form 8829 to your return and deduct those expenses on line 30 of the Schedule C. See IRS Form 8829, instructions for more information.
For employees, essentially there are two ways business expenses, including home office expenses, paid by you on behalf of the company can be deducted:
An employee must itemize deduction on Schedule A (Form 1040), to claim a deduction for unreimbursed business use of your home office and related expenses. Unreimbursed business expense including the expenses incurred for your home office could be deducted on Schedule A, Line 21 of your personal tax return as unreimbursed employee expenses. However, these expenses are subject to a 2% adjusted gross income limitation. This means that any unreimbursed business expenses and/or home office deductions would first be reduced by 2% of your AGI. You must also file Form 2106 if you are claiming job related vehicle, travel, meals or entertainment or your employer reimbursed you for any of your job related expense. See IRS Form 2106 and Publication 463 for more information.
The company could reimburse you for any business expenses, including home office expenses. Then the company would deduct 100% of these expenses when they reimbursed you and the reimbursements you received would not be taxable to you. In order for the company to deduct these expenses and to ensure the reimbursement would not be taxable to you, you would need to adequately account for these expenses to the company. Adequate accountability would include documentation such as receipts, business purpose, dates, amounts etc. See IRS Publication 587 for explanation on adequate disclosure.
Your real estate taxes and home mortgage interest are being deducted on Schedule A, Lines 6 and 10, and the company would not reimburse you for these expenses nor are you allowed to depreciate (expense) the home office itself (building).
What type of expenses are reimbursable/deductible business expenses?
You will need to determine the expenses related to conducting business at your home office. There are two types of business expense that you will need to track, direct and indirect.
Direct Expenses: Expenses paid personally that are for the benefit of the business only and would include expenses for paper, ink cartridges; exclusive phone line, exclusive utilities (meaning that you receive a separate invoice for utilities and phone for the business office only) and other business expenses paid personally that are solely for the benefit of the business. You would need to provide invoices (or other documentation such as a credit card statement) to the company and then they would issue you a check for the amount spent (this would be non-taxable to you and an expense of the company).
Indirect Expenses: Expenses that are for keeping and running your entire home but a portion would qualify for a business expense reimbursement up to the actual portion used for conducting company business. These types of expenses include insurance, repairs and maintenance, internet service, utilities etc. Unless separately stated on an invoice you would be reimbursed for the pro-rata share of these expenses based on the square footage used for business purposes divided by the total square footage of the home. (example: insurance for the entire home is $1,000, the business expense (the amount that could be reimbursed to you by the company) would = $1,000 X (office square footage/total square footage). If we estimated the office square footage to be approximately 300 square foot and the entire home to be approximately 3,000 square foot. This would mean that approximately 10% (300/3,000) of the indirect expenses would qualify as reimbursable business expenses (in our example this would mean that $100 of the $1,000 for insurance would be a reimbursable expense). Keep in mind that the most significant indirect expenses (real estate taxes and mortgage interest) are already being deducted on your personal return as itemized deductions on Schedule A.
Please contact ShindelRock if you have any questions or to further discuss. In the meantime here are some links where you can go to get more information:
Publication 587, Business Use of Your Home
Form 8829, Expense for Business Use of Your Home
Form 8829, Instructions
Schedule C, Instructions, Profit or Loss from Business
Schedule C, Profit or Loss from Business
Schedule A, Instructions, Itemized Deductions
Schedule A, Itemized Deductions
Form 2106, Employee Business Expense
Form 2106, Instructions
Publication 463, Travel, Entertainment, Gift and Car Expense