Home Office Deductions (S-Corp)

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Understanding the Home Office Tax Deduction

What is a Home Office Tax Deduction?

The home office tax deduction allows business owners to deduct expenses related to the business use of a space in their home. By writing off a portion of your home expenses on your taxes, you can reduce your taxable income. The "home office" can be an entire room, a section of a room, or even a small area in your kitchen, as long as it is used exclusively for business purposes. This deduction is currently available only to business owners, as the Trump Tax Reform removed this benefit for W-2 employees until at least 2025.

Who can Claim this Deduction?

Sole proprietors, LLC members, multi-member LLC owners, and partners in partnerships can easily claim this deduction. However, if you own a corporation (C Corp or S Corp), the process is different since you are considered an employee. In such cases, the corporation should reimburse you for these expenses.

• Sole proprietors and single-member LLCs: Calculate this amount using IRS Form 8829 and claim the deduction on your Schedule C.‍
• Owners of multi-member LLCs or partnerships: Claim the home office expense as an unreimbursed partner expense.

How is the Home Office Deduction Calculated?

There are two methods to calculate your home office deduction:

1. Simplified Method: This method allows you to deduct $5 per square foot of your home office space, up to a maximum of 300 square feet. For example, if your home office is 100 square feet, your deduction would be 100 square feet x $5 = $500.

2. Actual Expense Method: This method involves a more detailed calculation. Here's how it works:

• Measure the square footage of your office space and your entire home.
• Calculate the percentage of your home dedicated to the office. For example, if your office is 100 square feet and your home is 1,000 square feet, your office space is 10% of your home.
• Gather all your home-related expenses, such as rent, utilities, and internet. Multiply the total monthly expenses by the percentage of your home used for business to find your monthly deduction. For instance, if your total monthly expenses are $2,300, you would multiply this by 10% to get a $230 monthly deduction.

If you own your home, the calculation is slightly different because it involves mortgage interest, property taxes, utilities, internet, and depreciation (excluding the principal). Use IRS Form 8829 to complete these calculations.

Home Office Calculation for a Home Addition

When you build an addition or finish a basement, you increase your home's finished square footage. This affects your home office deduction calculation. You'll need to include the new finished square footage in the denominator of your percentage calculation, which may lower your deduction. However, if the addition is solely for business use, it will increase both the numerator and denominator, potentially increasing your deduction.

Claiming Unfinished Space in your Office Deduction

If you use part of your garage, shed, or an external building for business, you can include it as part of your "home office" space. Ensure you include all of these areas' square footage in your denominator when calculating your home office deduction.

Need Assistance?

If you need help determining your home office deduction and preparing your taxes, contact us at www.nguyencpas.com or support@nguyencpas.com to schedule a complimentary consultation with one of our advisors.