Accountability Plans – Maximize your Tax Deductions, Minimize Your Audit Risks

How an Accountability Plan can assist you with Tax Deductions like the Home Office Deduction

With more people working from home, you may be wondering if and how the home office deduction applies to you.

What is the Home Office Deduction?

The home office deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. To claim the home office deduction, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business. There is no requirement that you own the property.

Note: Claiming the home office deduction will affect your itemized deductions and taking the home office deduction can limit the tax-free gain on the future sale of your home.

Who is eligible for the Home Office Deduction?

Beginning in 2018, generally, the home office deduction is a tax deduction only for those who are self-employed, independent contractors or gig workers; i.e., not w-2 employees, even if you are a W2 employee working solely from home. However, S-corp shareholders, multi-member partnerships should take special notice of this article as there may be options available to you.

Sole Proprietorships & Single Member LLC and the Home Office Deduction

Self-employed individuals whose businesses are set up as sole proprietorships or single member LLCs routinely use the home-office deduction for expenses related to the business use of their homes. The deduction is available to those who use a portion of their homes regularly and exclusively for conducting business and for whom the home is their principal place of business.

S-Corp and Multi Member LLCs and the Home Office Deduction

For shareholders of an S corporation or members of a partnership or multi-member LLC, while the calculation of the dollar amount is pretty much the same as the sole proprietorship, how it is treated on the shareholders’ or members’ personal tax returns differs.

An S corporation shareholder-employee, partnership, or multi-member LLC could adopt an Accountability Plan and have the entity reimburse the expenses properly allocable to the business use of the home.

An accountable plan must meet three requirements to pass IRS muster:

  1. The expenses must have a business connection. The expenses must be incurred while the employee is performing work for the company and must be ordinary and necessary expenses. These can include mileage for business-related driving, meals with clients and out-of-pocket travel expenses. They can also include a portion of mixed-use expenses – that is, those with a personal and business component, such as home office expenses, cell phones and home internet.
  2. There must be substantiation to support the deduction. This can be easily accomplished by submitting a detailed monthly or quarterly expense report syncing it with your bookkeeping.
  3. Any excess reimbursements over actual expenses must be repaid promptly. If the S corporation provides an advance to the shareholder for travel expenses, any excess over actual expenses must be repaid within 120 days.

Without an accountable plan in place, these reimbursements are taxable income to the shareholder or member and should be reported on their W-2.

When performing your entity formalities, be sure to review your accountability plan to support your tax deductions. Contact Moskowitz LLP for more information or to discuss your formalities.