Do you operate your business as a corporation? If yes, are you an employee of the corporation? If yes, would you like to deduct an office in your home? If yes, know this: Your route to the deduction follows a one-way path that requires. The information below was provided to us from Bradford Tax Institute.
If yes, are you an employee of the corporation?
If yes, would you like to deduct an office in your home?
If yes, know this: Your route to the deduction follows a one-way path that requires
Why Only One Way?
The Tax Cuts and Jobs Act eliminated “employee business expenses” as itemized deductions for the years 2018 through 2025. Thus, you may not currently obtain the home-office deduction as an employee.
Key point. The workaround is to have the corporation claim the deduction. It does this by reimbursing you, the corporate employee, for your home-office expenses.
Rent Does Not Work
The IRS audit manual, in its boilerplate language for denying the home-office deduction, addresses the rent-asexpense issue as follows: “If you rent all or part of your residence to your employer and use the rented portion when performing services for the employer, you cannot deduct home-office expenses.”
Convenience of Employer
To qualify as a tax-deductible expense, your use of your home office must be for the convenience of your employer (your corporation)
Office in the Home Is the Only Office
If your corporation has no office outside your office in the home, your home office is obviously for the convenience of your employer corporation. In this case, you don’t need any special documentation as to the need for the office.
To deduct the office, the corporation reimburses you for its expenses and claims the deduction as office space on the corporate tax return.
You must provide the corporation with proof of your expenses and that you used the home office regularly and exclusively for the corporate business.
Key point. If the office in your home is the only office of the corporation, it is a tax-law-defined principal office. More on the benefits of this later.
More Than One Office
When you have more than one office—say, an office in your home and a downtown office—you want the IRS to consider the office in your home a tax-law-defined “principal office.” Why?
Because the principal office in the home turns the vehicle mileage from your home to your downtown office into business mileage. It eliminates commuting mileage.
Example. Glen drives 21 miles from his principal office in his home to his downtown office and back home. The 42 miles round trip are all business miles.
Because the home office eliminates Glen’s commuting miles, his business use of his corporate vehicle is 93 percent. Without the home office, he would have only 29 percent business use. On his $60,000 vehicle, that’s a difference of $38,400 in vehicle depreciation deductions alone.
Glen is not done. He adds 93 percent of his operating cost deductions. Those could equal the depreciation deductions. You can see that this principal office can produce big deductions.
Creating the Principal Office
If you have both an office in the home and a downtown office, you need to meet all of the following rules to make the office in your home a principal office:
Convenience of Employer
Neither the law nor the IRS has given guidance on what is an office in the home that’s for the convenience of the employer. One recent court case states: “A home office is not for the employer’s convenience if it is maintained for the employee’s personal convenience, comfort, or economic benefit.
Here’s another rule to know. It’s from the legislative history of the convenience test:
In the case of an employee, the question whether an employee chose not to use suitable space made available by the employer for administrative activities is relevant to determining whether the present-law “convenience of the employer” test is satisfied.
Documentation Is Key
Once you establish that you meet the basic rules of administrative use, regular use, and exclusive use, you need to spend some time documenting how and why you meet the convenience-of-the-employer test.
Once you have that figured out, have the corporation write you a letter requiring you to do your administrative or management activities at home for the corporation’s convenience.
For example, your corporation might require that your administrative or management work be carried out at home
This list is by no means exhaustive, but it should help trigger some viable reasons for your administration or management at home.
More Possible Reasons
The convenience-of-the-employer test is a facts-and-circumstances test. To pass this test, you want the office in the home to be a condition of your employment with the corporation, because you need this office to ensure the functioning of the corporation’s business or to allow you, the employee, to perform the duties required by your position.
With these thoughts in mind, consider the following as possible reasons why you absolutely must do your administration in your home office rather than your regular office:
The key factor is that the use of a home office needs to be for the convenience of the employer, not the convenience or preference of the employee. These scenarios could all potentially qualify, but they depend heavily on the facts and circumstances that constitute convenience for the corporation.
In Hamacher, the court noted that the convenience-of-the-employer test was satisfied in the following circumstances:
Eight More Possible Reasons
Create the Letter
You want your corporation to create a letter requiring you, the employee, to maintain a home office for the convenience of the employer. Keep the letter in your corporate tax file—the permanent file.
Sure, we know, you are likely writing the letter as the president of the corporation to you, the employee. Seems silly. But do it. Documentation is key here.
You don’t need a big long letter, but you do need reasons why this is for the benefit of the corporation and not for your personal benefit or convenience. Try to create as many good reasons as possible. Write the letter on corporate letterhead.
It’s also a good idea to incorporate the letter into the corporate minutes from, say, the annual meeting.
When you operate your business as a corporation, you and your corporation can benefit if you, as the employee, can qualify for a home-office deduction that’s classified by the tax code as a principal office and for which the corporation reimburses your office to you as an employee business expense. Here are the benefits:
If the office in your home that you use regularly and exclusively for the corporate business is the only office of the corporation, it automatically is a principal office under the tax law.
If you have an office in your home and a corporate office outside the home, you could have two principal offices. Sure, that’s not logical, but it’s true—after all, this is tax law. To qualify the office in the home as a principal office, you need to
July 07, 2023 | DWHuff Consulting
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