How Corporations Can Benefit
If your business is a sole proprietorship that files a Schedule C, taking a home office deduction is relatively easy. But if your business is incorporated, the corporation and the taxpayer are classified as separate and distinct, and that means that the tax advantage of deducting home office expenses has to be sacrificed. The good news is that there are a few different options that can be used to take this deduction.
The first option is available when the owner of the corporation is also considered an employee. In this case they are able to use Schedule A and list the home office deduction as a miscellaneous itemized deduction available to a corporation’s employees.
The second option involves the corporation making a rental payment to the owners for the use of their home. The corporation is then able to deduct the cost of the rent. It is important to remember that the rent must be reported by the owners on their Form 1040, Schedule E, and that the owner is able to do so without showing a gain or a loss, and simply setting the rental amount as what they determine the associated expenses are. By doing this they are able to generate income. This may be particularly helpful because in this scenario they are not able to deduct expenses for depreciation.
Finally, a third option allows the owner to be paid by the corporation for their out-of-pocket expenses for the office in their home. In order to do this, a plan needs to be in place and the expenses that are remitted need to be substantiated with receipts in order to confirm that they are job related.
These three options can all provide significant tax benefits, making the record keeping that is required worthwhile.
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