| As a self-employed sole proprietor you can deduct as | | | | providing your employer with receipts or other |
| an ordinary and necessary business expense the | | | | documentation. |
| costs of a qualifying home office on Schedule C. | | | | You should create a monthly "Employee Expense |
| If you are an employee of your own one-man | | | | Report" form for your corporation. This is a good idea |
| corporation, whether a regular "C" corporation or a | | | | even if you don't have a home office. Start out with |
| "sub-chapter S" corporation, you have three choices | | | | lines for business mileage and other out-of-pocket |
| for handling the costs of a qualifying home office. | | | | business expenses, such as postage, office supplies, |
| * You can deduct the costs as an unreimbursed | | | | parking and tolls, meals and entertainment, etc. Staple |
| "employee business expense" under "Job and Most | | | | receipts for these items to the report. |
| Other Miscellaneous Deductions" on Schedule A. | | | | Include a Home Office section in the report. Calculate |
| Expenses in this category of itemized deduction are | | | | the "business use percentage" of your home by |
| only deductible to the extent that the total exceeds | | | | dividing the square footage of the office area by the |
| 2% of your Adjusted Gross Income. | | | | total square footage of the home. List each item of |
| * The corporation can pay you rent for the home | | | | expense paid during the month, such as real estate |
| office. | | | | taxes, homeowner's insurance, oil heat, gas and |
| * The corporation can pay you for the "out-of-pocket" | | | | electric, water and sewer, alarm or security service, |
| costs of a home office under an "accountable" plan | | | | garbage disposal, general repairs and maintenance, and |
| for employee business expense reimbursement. | | | | mortgage interest (taken from the monthly mortgage |
| The third option, being reimbursed under an | | | | billing statement or a loan amortization statement you |
| accountable plan, provides the greatest tax savings. It | | | | can create online). Multiply the total of these expenses |
| is an excellent way to get money out of your | | | | by the business use percentage to determine the |
| closely-held corporation tax-free. The corporation can | | | | amount to be reimbursed. |
| deduct the amount of the reimbursement and you do | | | | While there is no question that a self-employed person |
| not have to report the payment as income. | | | | can, within limits, deduct depreciation on a home office, |
| This option is "more better" than having the corporation | | | | because depreciation is not an "out-of-pocket" |
| pay you rent for the home office. While your | | | | expense it follows that your corporation cannot |
| corporation can deduct the rent paid to you, you must | | | | reimburse you for the depreciation of your home |
| report the rent as income on Schedule E. You can only | | | | office. However, this issue is not clear. |
| deduct the pro-rated share of real estate taxes, | | | | Total up all the business expenses listed on the form, |
| mortgage interest and casualty losses against the | | | | including the home office amount, and write a check |
| rental income on Schedule E, expenses that are | | | | from the corporation to yourself for this amount. |
| otherwise deductible in full on Schedule A. You cannot | | | | You must reduce the amount of your itemized |
| deduct the proportionate share of insurance, utilities, | | | | deduction for real estate taxes and mortgage interest |
| repair and maintenance, depreciation or any other | | | | by the amount of reimbursement you receive from |
| indirect expenses. | | | | your corporation during the year for these items. If |
| To qualify as a home office, the space (it does not | | | | your real estate taxes for the year are $10,000, but in |
| have to be an entire room) must be used regularly (on | | | | the course of the year you were reimbursed $2,000 |
| a continuous, ongoing or recurring basis) and | | | | by the corporation, you can only deduct $8,000 in real |
| exclusively (there can be no personal use - take out | | | | estate taxes on Schedule A. |
| the tv) for your trade or business, and it must be your | | | | Deducting, or being reimbursed for, a home office |
| principal place of business or a place where you | | | | today will no longer turn around and bite you when you |
| physically meet with patients, clients or customers on a | | | | sell your personal residence, as had been the case in |
| regular basis. The space will be considered your | | | | the past. If the home office is within the same "dwelling |
| principal place of business if it is used for performing | | | | unit" as the residential portion of your home, you are |
| administrative or management activities, such as billing, | | | | treated as using the entire home as a principal |
| bookkeeping, ordering supplies, setting up appointments | | | | residence. |
| and writing reports, and there is no other fixed location | | | | If the office space was 10% of the total area of your |
| where you regularly perform these activities. | | | | home, you DO NOT have to pay income tax on 10% |
| As an employee the home office must be for the | | | | of the gain from the sale. You will be able to exclude |
| convenience of your employer. This means the home | | | | the entire gain, up to the $250,000 and $500,000 limits, |
| office is required as a condition of employment, it is | | | | if you qualify, less any "post-May 6, 1997" depreciation. |
| necessary for the business to function, or it is | | | | You must report any depreciation you deducted on |
| necessary for you to properly perform your duties as | | | | the home office after May 6, 1997 as "unrecaptured |
| an employee. If you do not have any other place of | | | | Section 1250 gain", which will be taxed at the capital |
| business, such as a rented office or storefront, your | | | | gains rates up to a maximum of 25%. |
| home office should qualify. | | | | You are married and you sell your personal residence, |
| I used to rent an office for my tax practice. Even | | | | which you owned and lived in for the past 4 years and |
| though I did administrative work in a "regular and | | | | in which you had a qualified home office that was 15% |
| exclusive" space at home, and on rare occasions met | | | | of the total area, for a net gain of $300,000. During the |
| with clients there, I could not claim a home office | | | | 4 years you lived in the home you were able to |
| deduction or be reimbursed for home office expenses. | | | | deduct $5,000 in depreciation on the home office |
| I have since given up the rented office and work | | | | portion. You can exclude $295,000 of the gain, and |
| exclusively out of my home. I now have a qualified | | | | you will pay tax on only $5,000.00. |
| home office. | | | | If you were not able to deduct depreciation on your |
| For an expense reimbursement plan to be considered | | | | home office, or were not reimbursed by your |
| "accountable", the expenses that are reimbursed must | | | | corporation for depreciation, there is no income to |
| be for actual job-related expenses (you cannot | | | | report and 100% of the gain, up to the limits, will be |
| reimburse personal expenses) and you, as the | | | | tax-free. |
| employee, must substantiate the expenses by | | | | |