Renting Your Home Office Back to Your Corporation
Managing Your Home Office Expenses
There are several things you need to know before you decide how to manage home office expenses. Whether the business you own is incorporated or you simply work for a corporation, you are considered an employee. Your expenses must reflect that.
If You Own the Corporation Try Thinking Of This As a Person With Two Hats On!
One hat is the corporation, who has an employee and the corporation wants that employee to have an office to perform duties and that office can be in the employee’s home. And the corporation/employer states what the required expense reimbursement documentation must contain.
Your second hat is the employee. As an employee, you must receive a letter from the employer-corporation stating you, the employee is to obtain an office and that the office can be in the employee’s home. And the employee receives instructions on what form to submit detailing the expenses for this rental.
So, if you maintain an office in your home, whether it is your main office or a secondary workspace, there are clear IRS guidelines about how to designate any expenses related to that office.
4 Steps to Consider For a Full Deduction
If you are hoping to achieve a full deduction for use of your home office, keep in mind the following steps:
1 – Do not rent your home office to your corporation. (You read that correctly, but don’t panic.)
2 – Request a letter from the corporation stating that you must find office space. Be sure the letter is on company letterhead, includes a statement that the office space may be in your home, and is signed by the President.
3 – As an employee, complete the IRS form 8829to detail your home office expenses for the year. Do not file this form with your individual tax return. Instead, you must, as an employee, give the form to your corporation as the basis for your corporation to provide you with a reimbursement for the expenses your incurred for that office use.
4 – Do not report reimbursed employee expenses as taxable income.
The importance of the letter becomes clear when you consider that it is proof to an auditor that the need for you to secure an office came from your corporation. Keep a record of expenses incurred for that office space. In addition, take photos that show the office is used and is set-up specifically for office space. It should not be a shared space with a bed in the corner or a sewing or pool table next to your desk.
Though this might seem a bit picky, keep a logbook, for at least a portion of the year, that documents use of the office for a minimum of 10 hours a week.
On the corporate side, once the reimbursement is made, the corporation can claim the deduction as a reimbursed employee expense. They might categorize it as an office expense, or something similar. It is not necessary for the deduction to be labeled as a home office expense by the corporation. In this way, you abide by the law and the corporation does as well. The home office, as a name or title of an expense does not appear on the corporate return. Since you do not claim the reimbursed expense on your return it does not appear on either return.
Future Tax Ramifications
Keep in mind, when you sell your home (assuming you are not renting) you will need to treat it as though you had taken the home office as a personal deduction. This is based on the fact that your corporation reimbursed you which translates to reimbursement for depreciation. Since that depreciation is subject to the recapture tax, you must consider the depreciation in whatever strategy you use to sell your home.
3 Rules to Remember
The only way your corporation is allowed to reimburse expenses is with sufficient proof of those expenses.
A simple exercise is to think like an IRS auditor. That person’s job is to ensure that the expenses meet the letter of the law and are backed up by documentation. Failure to provide adequate proof would mean your corporation would be forced to include the expense reimbursement in your W-2 income.
If you still have questions about how to manage a home office deduction, or other tax planning concerns, call our Corte Madera office today at (415) 924-6240.