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Working from home can lead to tax benefits

Doug Mueller

July 24, 2020

Many of us are working from home and can’t itemize out-of-pocket expenses for trade or business until 2026. As a business owner, you might be working from home more than ever as well. If you decide to rent your home to your S Corporation business, Section 280A(c)(6) will require you to report the income, but allow you no deductions against that rental income. This is not an ideal outcome.

You have options!

You can implement an accountable plan. An accountable plan can discriminate and cover only select employee owners and/or select number of key employees.

Employee owners and select employees can modify their employment contracts to work from home as:

  1. A condition of employment.
  2. Convenience of the employer.

In-home offices must be:

  • For exclusive use, which means a certain area of your home cannot be combined with personal; and only for business;
  • For regular use, which in several court cases, suggest a minimum of 10 hours a week. Most of us are working more than 10 hours a week from home;
  • In a principal place of business, or include an area for administrative work. It is arguable whether the home is a principal place of business, but certainly all administrative work can be completed in the home.

Your proof of regular and administrative use requires some type of entry in a diary or appointment calendar. Keep the “timely entry” requirement in mind when making these entries. In the record-keeping chapter of IRS publication 463, the IRS states, “If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record.”

You need to gather expenses for reimbursement. The simple way to do this is to complete IRS Form 8829 as if you were going to claim the home office personally. This form and its instructions contain rules and assist with proper allocations. Once you have completed the form, submit to the corporation for reimbursement. The corporation writes the check to you for the amount on your Form 8829, and keeps the form as proof of deductions. With this reimbursement, your corporation gets the deduction and you have no taxable income.

This payment by the corporation is valuable for many reasons:

  1. Deductible by the corporation as an office expense;
  2. Accountable plans are defined in Regulation 1.62-(c)(4), which includes reimbursing costs included in Code Sections §161 – 199A. Incorporating §162 trade or business expenses, §163 interest expense, §164 taxes, and §168 depreciation. These expenses can all be reimbursed in home office form 8829;
  3. Produces a deduction and tax benefit for your home-office deduction;
  4. Allows business mileage on your vehicle for trips beginning from your home; and
  5. You can submit your expenses monthly to comply with accountable plan rules.

Let’s use the example below.

Use square footage (living space, exclude the garage) or number of rooms method. Assume 5% square footage:

With the right documentation and forms, working from home can lead to greater tax benefits. Contact your Mueller Prost advisor, and we will review your working from home situation.

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