Before writing yesterday's post on How To Setup Your Own Software Development Company, I sent my Accountant the following e-mail.
I'm writing up a blog post on how to setup a Software Development Company for consultants. I remember talking to you a few years ago about writing off my home office space. At that time, you recommended I didn't because it'd end up on my personal taxes (or something like that). Do you remember that conversation and reasoning? I'd like to post a 2-3 sentence explanation of why this is not a good idea to readers of my blog.
Below is her response:
It's not that it is a bad idea, it just doesn't always result in a big tax savings. There are a lot of factors to consider, but I would not post something that says it's a bad idea. There are types of entities and situations where it is beneficial. Everyone's circumstances are different, so I would not suggest that you make a blanket statement stating that it is not a good idea.
In your particular case, you are an S Corp, which is a pass thru entity...meaning the S Corp does not pay taxes. So, if you want to take a home office deduction you would have your business pay rent to you. In return you would have to claim rental income on that money. So, you could take the deduction on the business side but have to claim it on the personal side...making it a wash. However, where you would get the tax savings, is that you can write off a portion of your utilities against the rental income of the office. It is usually small, like around 10% or so, but it is something.
The only issue is that when you sell your house, you are supposed to treat the sale as two different things...a personal sale and a business sale (for the office). You can often exclude the gain on the personal sale, but can not exclude the gain on the office. So, if the house goes up significantly in value, you could find yourself paying tax on a large gain.
Do you have your own company and write-off your home office space? If so, what kind of company do you have and does it save you a lot of money?