Writing Off Home Office Space
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?
Posted by Guy Fraser on February 11, 2009 at 09:38 PM MST #
Posted by Antony stubbs on February 11, 2009 at 10:10 PM MST #
Hey Matt,
These are good posts.. excellent subject. This year, I converted from an LLC to an S Corp. I should have done it a couple years ago. The extra paper work is a pain in a@#, but it's worth the effort.
As far as the home office deduction is concerned. I'm surprised your accountant didn't mention taking a depreciation deduction. In the past I rented out rooms in my house and the depreciation deduction was much more significant than deductions for utilities. I'm hoping to do the same thing with renting the office to my S Corp. I'm still looking into that.
Posted by Ben Ellingson on February 11, 2009 at 10:27 PM MST #
Posted by Adam Gent on February 12, 2009 at 07:24 AM MST #
I don't write off the home office per se but I DO have the company pay for any and all equipment that is used in the office (furniture, printer, laptop, office supplies and occasionally coffee). I have a dedicated room in the house where I work every day and I work from home about 90% of the tiime.
I've done the math; I'd get about a 10% deduction of household expenses. So, considering that my home mortgage interest is already fully deductible (and you can't write it off twice) I'd only be able to deduct 10% of the mortgage principal. I don't have a landline (my cell phone is completely paid for by the company as I use it as my primary business line) and my utility bills aren't that high. When you add it all up, there are maybe a couple thousand in expenses of which I can deduct 10%. It adds up to a deduction of less than $500. Since it is a DEDUCTION and not a tax credit, the tax savings to me are only about $150-200. Not a whole lot for a whole lot of record keeping. Just doesn't seem worth the effort.
Posted by Charles on February 12, 2009 at 10:34 AM MST #
IANAL, YMMV, Caveat Emptor.
Posted by Mark on February 12, 2009 at 11:56 AM MST #
Hey Matt,
I also have an S-corp and do take the home office rental expense for the company. I think it is a good idea because it allows me to take a lower salary w/ less of a chance of raising an IRS flag because of salary-to-distributions ratio. Even though it is "technically" a wash on your personal income, you still don't have to pay SS/Medicare tax (13%) on it, just like a distribution, but it is reported as a business expense. So, if you paid yourself $50K and $50K distributions normally.....you could now pay yourself $10K rent, $50K salary, but only $40K distributions. So, the ratio looks better. (that's my theory anyway ;) ). Also, you get to write off a portion of your utilities.
As a slight correction, before 2002 you had to worry about the personal vs business sale stuff.....but the IRS changed all that in 2002. Now as long as the office is "part of your home", you don't need to worry about it. You can read IRS pub 523 (Business Use or Rental of Home section) for the details.
http://www.irs.gov/publications/p523/index.html
Anyway, this has been a great set of posts and I have enjoyed reading them!
Posted by Jason A on February 13, 2009 at 10:44 PM MST #