If you have been claiming a home
office deduction as a sole proprietor and are considering incorporating you
business, be aware that you could lose the benefits of your home office
deductions. The IRS rules limit the home
office deduction for shareholders of a corporation even if you rent the office
to your corporation.
As an employee of the
corporation, if the office is maintained for the convenience of the employer
and is a requirement of employment because the corporation provides no office,
then generally the home office deductions are claimed on Schedule A as a
Miscellaneous Itemized Deduction subject to the 2% floor on Adjusted Gross
Income. For example, if your adjusted
gross income is $200,000 and your home office deductions total $5,000 you would
only be able to claim a $1,000 deduction for the amount that exceeds 2% of
$200,000. Even worse, if you are subject
to the Alternative Minimum Tax, you would get no benefit since Miscellaneous
Itemized Deductions are not allowed for purposes of the Alternative Minimum
Tax.
As a planning technique, you can
have the corporation adopt what is called an “Accountable Reimbursement Plan”
that meets certain IRS qualifications.
Basically, it requires employees to submit expense reports and get
reimbursed by the corporation on a dollar for dollar basis for IRS deductible
business expenses, including home office deductions that meet the IRS requirements
of a home office. When an accountable
plan is used, the employee does not have to pick up the reimbursements as
income on their W-2 wage statements, and the employer gets to deduct the
expenses as if they were the expenses of the employer. Accordingly, the expenses are moved from the
personal tax return to the corporation tax return as reimbursed employee
business expenses rather than expenses of a corporate office rented from the
shareholder.
So far this technique has not
been challenged by the IRS and I recently successfully defended it on an IRS audit. This is good news when it comes time for your tax return preparation. If you have concerns about losing the
benefits of your home office, please contact me for a consultation at
650-400-2539 or email me at peter.diaz@diazconsulting.com for more
information. Visit www.diazconsulting.com.
2 comments:
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