How does a Home Office Deduction Work?
In order to get a home office deduction, you must either a) exclusively use a portion of your dwelling unit on a regular basis as a principal place of business for any trade or business b) use your residence as a place of business that is for clients, customers, or patients to meet you in the normal course of the trade or business c) have a separate structure that is not attached to the dwelling in connection with the trade or business, or d) use part of the home for storage of inventory or product samples if you sell products at wholesale or retail as your trade or business. The home needs to be the only fixed location of the trade or business and the storage space needs to be used on a regular basis separately identifiable.
Typically, the rent to a property (in which a business has no title or equity) can be deducted as a trade or business expense. The rent has to be in connection with the company’s trade or business. It has to be ordinary and necessary and has to be incurred during the taxable year. It is important to note that only the portion that is used for business is deductible as a business expense if the property is used for both business and personal purposes. The space must be the principal place of business for the company and be used solely for business purposes on a regular basis if the company leases office space at the residence of an officer or director of that company. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible under the new option.
Who else can claim the Home Office Deduction?
A member of a limited liability company or shareholder of a corporation may want to claim the home office deduction. Some deductible expenses include rent, utilities, insurance, depreciation, repairs and real estate taxes. It should be noted that if you are not an employee of the company, you may claim the home office deduction. If you are an employee leasing a part of your home to your employer’s business, you will not be able to claim the home office deduction; rather, the company reimburses you for the residential space that meets the home office requirements and for expenses for property and services provided so the employee can perform their job, such as office equipment maintenance, supplies, utilities and other such expenses. The rent paid by the company may then be considered a business expense and a tax deduction for the company.
Do I Need a Home Office Lease?
It is extremely important to get a well-drafted home office lease from an experienced attorney; as it is a legally binding agreement. In general, state law requires all leases of real property for more than a stated period to be in writing. The home office lease provides the business with a framework for a business deduction for the amount paid to the officer, independent contractor, shareholder, employee, or director. It expressly documents the term of the lease agreement and allows for automatic renewals to avoid any misunderstanding, ambiguities, and future costs for lease preparation. It allows for reimbursement of business expenses to employees and provides a member of a limited liability company or shareholder of a corporation who allows the company to use an area of their home as storage, a work place, or even a garage for the company vehicle a way of creating a home office deduction. Retaining the right attorney is imperative since a well-drafted home office lease that meets all the elements may be useful for unexpected IRS audits and potential misunderstandings and conflicts between parties of the company using such a home office. Investing in the right legal instruments now for your home office is always a good business decision that may prevent the headache and financial burden later needed to rectify such matters.
Disclaimer: This article is not intended to be legal advice. Legal advice depends on each and every person's particular circumstance. This article is for informational purposes only and must not be used for avoiding any penalties that may be imposed under the Internal Revenue Code. Arora Law Firm and Radhika Arora, Esq. specifically disclaim any responsibility for positions taken by readers in their individual cases or for any misunderstanding on the part of readers of this article.
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