Have you ever looked at your tax return and wondered how you could get more deductions? I think we all have! I was working with a client who had started a small business working out of her home. She kept good records of all her business expenditures and related receipts, which made it easy to deliver to me prior to the deadline. When I compiled her tax returns, everything had been accounted for – except one thing: her home office!  The Internal Revenue Code provides for additional deductions, even when a taxpayer did not directly pay for something as a business expense – but you have to know what they are (obviously). One tool to have in your toolkit is the home office deduction.

What is a Home Office?

If you use a part of your home for business, you may qualify to be able to take a home office deduction. The IRS has placed rules on what qualified as a home office:

1. Regular and exclusive use
2. Principal place of your business

To meet the regular and exclusive use test, you must use the part of your home solely for conducting business. It cannot have a dual function (i.e. workspace and playroom). To meet the principal place of your business test, you must show that,

You use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.

For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.

You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.

Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. There is also a simplified method which allows you to deduct $5 per square foot up to $1,500.

If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

What is an Accountable Plan?

Accountable plans are tools that allow employers to reimburse employees for business expenses and not report the reimbursement as taxable income on a W-2. This treatment creates a tax deduction for the business without additional employer taxes as would be the case when paying a wage.

IRS Publication 463 outlines the rules under an accountable plan to reimburse expenses.

“To be an accountable plan, your employer’s reimbursement or allowance arrangement must include all of the following rules. 1. Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. 2. You must adequately account to your employer for these expenses within a reasonable period of time. 3. You must return any excess reimbursement or allowance within a reasonable period of time.”

To establish an accountable plan, all you need is to have documentation specifying that you are establishing an expense reimbursement policy pursuant to Reg. 1.62-2. Sample accountable plans are available online.

Accountable Plan for Home Office

If you own an S corporation, you are not considered self-employed and thus not allowed a home office deduction. Utilizing an accountable plan, however, can allow shareholders of an S-Corp to be reimbursed for an allocation of their home expenses and claim a corresponding tax deduction. Potential expenses include mortgage interest, maintenance, repairs, property tax, insurance, etc. For expenses like a cell phone and internet, the IRS allows for a “reasonable” allocation method for these expenses (i.e. actual business use percentage).

Without an accountable plan, reimbursements for these expenses would be required to be reported as taxable wages on Form W-2.

Conclusion

Utilizing an accountable plan can allow businesses to take additional deductions and pay employees non-taxable reimbursements. An accountable plan should be documented, and related reimbursements need to be kept and recorded timely to support the tax-free treatment for employees. To learn more or to receive a template to track your qualifying expenses, please consult with your CPA at DrillDown Solution.

Sources

https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

https://proconnect.intuit.com/taxprocenter/wp-content/uploads/2017/09/a21e5-accountableplanagreement.pdf

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