2018 Home Office Deduction
You Need to Understand 2018 Tax Law Changes
The legal entity of the taxpayer is a determining factor when looking at the home office deduction.
Employees: The 2017 Tax Cuts and Jobs Act (TCJA) eliminated the 2% miscellaneous itemized deductions on Schedule A as a tax deduction. Accordingly, since this is where an employee in 2017 and earlier years would have deducted their home office expenses, employees may no longer deduct unreimbursed expenses for a home office beginning with the 2018 tax year.
Self-Employed Individuals: Self-employed individuals (Sch. C and single-member LLC owners) may be entitled to claim the home office (H/O) deduction. To qualify for the H/O deduction, the office must qualify as the business owner’s principal place of business. The business owner must meet clients/customers at the home office on a regular basis (incidental meetings do not qualify) OR the office is used exclusively and regularly for administrative or management activities of your business. Examples of qualifying activities include keeping books and records, appointment setting, invoicing clients, and writing reports to name some examples. Where a taxpayer has more than one place of business (e.g., a realtor who has office space at the broker’s office), the burden of proof is on the taxpayer to prove that the predominant amount of time is spent at the home office and not at a secondary office location. This will require that the taxpayer maintain detailed time sheets showing daily activities, time spent on each activity, and where that activity is spent.
C Corporation Shareholders: IRC Sec. 280A(c)(6) precludes a shareholder in a C Corp. from claiming a H/O deduction. Taxpayers sometimes believe that the employee can rent space to the corporation to save taxes. However, that may not result in any tax savings and may in fact create additional taxes. For example, if the C Corp. pays the shareholder $10,000 rent, the shareholder has $10,000 of rental income. Looking at the 2018 income tax rates, the shareholder could have $10,000 of rental income taxed at 25% and the C Corp. has a tax deduction at the 21% bracket. Not a desirable result! Plus, if the shareholder wants to get the $10,000 out of the C Corp. in the future, it would likely be taxed as dividend income to the shareholder.
S Corporation Shareholders: IRC Sec. 280A(c)(6) precludes a shareholder in an S Corp. from claiming a H/O deduction. Since an S Corp. is a pass-through tax entity (the corporation does not pay any taxes since the income and losses of the corporation are passed through to the shareholder), the S Corp. paying rent to the shareholder results in no tax savings. The shareholder has $10,000 of rental income (using the example above) and the S Corp. has a $10,000 deduction that flows through to the shareholder – resulting in a wash.
Accountable Reimbursement Plan: Corporations can adopt an accountable reimbursement plan which would allow the shareholder to file an expense report with the corporation for certain eligible home office expenses, the corporation reimburses the shareholder and receives a tax deduction of $10,000 (using the same dollar amount for consistency purposes only) and the shareholder receives the $10,000 reimbursement tax-free from the corporation. When an S Corp. uses such a plan, the result is a net tax deduction to the shareholder of $10,000 and the cash paid to the corporation is not “trapped” in the corporation as it would if a C Corp. is used.
IRS Publication 587 discusses various aspects when individual taxpayers claim a home office, such as types of expenses that can be claimed, tax implications of selling a home that was used partly for business, records taxpayers need to maintain, the regular versus simplified H/O deduction, and Form 8829.
Prior discussions on this topic can be found on our blog posts dated August 1, 2018, June 7, 2018, May 16, 2017, March 17, 2015 (PA DOR rules) and January 29, 2013 (safe harbor rules).
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
