Getting the office in home deduction for your “C” corporation

Understand whether it’s deductible for you

expert tax advice

There’s an answer to help you to take advantage of the office in home deduction, some believe is lost. Unless they organize their business with one of the unlimited liability options that proprietorships and partnerships are exposed to.

The reduction of business tax liabilities is a strategy you must employ, giving your business the probability of succeeding.  The payment of taxes is an unavoidable part of both your personal and business life.  Saafenet helps you understand, most businesses don’t have a tax problem, they have a revenue problem we help resolve. The profits or losses of a Sub chapter “S” corporation, LLC or LLP  are reported on a pass through document. A Sub chapter “C” corporation is an entity completely separate from you personally. And as such has its own tax liability, separate from you.

Forming a “C” corporation requires different handling

You may not use the expenses, deductions, and credits of your “C” corporation to impact your personal tax return. Therefore, you may lose the popular tax deduction for the utilization of a portion of your home exclusively for business. Because your corporation,  would be using that space in your home, not you. There is however, a way to take advantage of that deduction.

Avoid common misconceptions

A common misconception on how one might still benefit from the tax regulations surrounding the office in home deduction would be to rent the space to your corporation. The major flaw with this method is that you would have to recognize the rental income as additional income, which can increase your marginal tax rate.

At the very least, you would be paying taxes on that rental income which would increase your liability or reduce the amount of your refund in all situations.  

The fact you might be paying taxes on that amount as ordinary income at your personal tax rate could be better or worse depending on whether or not the tax rates you pay are more or less than the corporate rate. Limited liability organizations do not have a tax liability, however, use of the method shown below will help you to increase the amount of that company’s expense, reducing its net income and the amount of its distribution to you.

The Internal Revenue Service allows owners of “C” corporations to receive the benefit of nontaxable income from their exclusive use of a portion of their home for the convenience of their employers.  This applies only to persons who both are stockholders as well as employees of their “C” corporations.  If you are solely an investor, and are not also employed by the company, gaining acceptance for this rule may be difficult if not impossible.

So what’s the answer?

You must draft a letter to you, from your company requesting use of a part of your home for its operations. Use common sense in writing the letter.  There is no right or wrong wording unless it does not spell out your company’s need.  Remember your business, if it is a “C” corporation, is a separate legal entity.  And all transactions outside the course of its normal operations must be documented.

Next,  you must have an accountable plan.  Requiring you to document your expenses for your employer (your company).   This documentation should show use of the space in your home is exclusively and regularly used for your company’s convenience. As outlined in IRS regulations. List the expenses to be reimbursed (ie: square foot costs, depreciation, a percentage of property taxes and mortgage interest, etc). Taking the time to do this right, you as the employee of your corporation will not incur any taxable income.

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