If you have a business, chances are you have a home office deduction. And if you’re like thousands of other business owners you’ve been told a lot of information that is outdated and simply untrue. Here’s what you need to do to safely take the home office deduction.
There are two rules: (1) You must have exclusive use of the space for your business. It can’t be a corner of the dining room table. It can’t be a desk you put in the dining room. It could be a spare bedroom or the basement. The key is it has to be a separate space. (2) You have to regularly do business in that space. That could be something as simple as checking your email every morning before you go into your other business.
It’s not a red flag, as long as you do it right!
The home office deduction is reported on a Form 8829 if you’re filing a Sole Proprietorship or a SM-LLC (single member LLC) with default taxation. Taken this way, the deduction can’t create a loss. In other words, if you have zero net income from your Sole Proprietorship (Schedule C), and then take the home office deduction, it just rolls forward until you make enough money to get the benefit of it.
If you have an S Corporation or an LLC electing to be taxed as an S Corp, you report the expense on your regular S Corporation tax form (Form 1120-S). There isn’t any limitation this way for loss.
If you have a C Corporation, the C Corporation pays you a fair market value rent. It’s a deduction for the corporation and income for you. The income you receive is offset by a pro-rata portion of the home related costs. (The pro-rata percentage is determined by dividing your business square footage by your total square footage.)
So, that’s how you do it. Chances are all the other things you might have heard – have to have a separate entrance, can’t have any other location – are really old law that no one has bothered to update you on.
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