The number of business owners that have built their companies working from their home office has gone through the roof. Access to cloud-based software allows businesses to run seamlessly entirely online. As a result, working from your home office has become the new normal in a post-COVID world in 2021.
We’ve been bringing up hidden tax strategies with our online business clients for years. One of those strategies, the home office deduction, ensures they are not leaving money on the table with the IRS.
Deducting the home office requires you to adhere to a very strict process in your business, so you’ll want to pay attention to the next steps to ensure you are applying the rules to your business correctly.
Step 1: Start a Business With a Home Office
Look, the tax rules don’t allow you to deduct your home office unless you have a business. To make sure your home office is deductible, you’ll need a real business that you’re operating for profit to maximize your deduction. Working as a remote employee does not allow you to take a deduction for your home office because of the changes to the unreimbursed employee expense itemized deduction.
Step 2: Agree With Your Partners
This step really only applies to multi-member companies where you have a business partner. If you own your business 100%, move on to step 3.
If your jointly-owned business is going to reimburse you for your home office, you’ll literally be paid back for a portion of your housing expenses. It’s really important that your other equity members are on board with this because they will be sharing the cost.
The issue in multimember companies is a matter of economics. If the business reimburses your home office, it becomes a deductible expense to the business which turns into a deduction to the members based on their ownership. All the members will be sharing in this expense and it directly affects their share of business profits.
Everyone should agree to this in writing through documented board minutes before moving on.
Step 3: Get Your Documentation Right
If your business is an S-corporation, you need an accountable reimbursement plan to deduct your home office.
The accountable reimbursement plan is a company internal document outlining the process for an employee to receive reimbursement for business expenses. Ordinarily, employees request reimbursement for travel, meals, or office supplies. This accountable plan could extend to your home office too.
This is the secret sauce to getting a deduction with an S-corporation. You need this signed, dated, and saved because, without it, all of your employees’ reimbursements will be taxable – including your home office.
BONUS: Don’t have an accountable plan? Get our accountable reimbursement plan template with detailed instructions on how to set it up here!
If you have a partnership, you don’t need an accountable reimbursement plan for yourself. However, it’s still required for you to reimburse your employees’ tax-free. You do need to make sure your operating agreement explicitly states that your company will NOT reimburse you for your home office.
If you need legal assistance, our friends at Coppaken Law can help you create or amend your operating agreement to reflect this.
Step 4: Calculate Your Home Office Deduction
First, calculate your allocation ratio. You need to measure out the square footage of your home office dimensions. Then, you need to measure out the square footage of your entire home.
Divide the square footage of your home office over your entire interior square footage, and this is your allocation ratio.
BONUS: Need a template to calculate your home office? Get our reimbursement template here!
Next, you’ll need to tabulate all of your home-related expenses. This includes mortgage interest, property taxes, utilities, maintenance costs that you incur every month. Calculate this total, and multiply it by your allocation ratio. This is your home office expense for the month.
Step 5: Reimburse Yourself
The final step to deducting your home office is to reimburse yourself for the expense. This means you need to transfer money from your business bank account to your personal bank account. The easiest way to do this is by setting up reimbursement in your payroll software which you should be using to pay your officer salary every month.
BONUS: Don’t have a payroll platform? Sign up for Gusto today and get a free $100!
Congratulations, after completing step 5, you could be saving thousands on your home office.