Home office deductions are one of the most misunderstood deductions. Many accountants still feel that taking a home office deduction is a big red flag to the IRS, that you cannot have both a home office and another office, and that there isn't a great benefit to the home office deduction since you get the real estate tax and home mortgage interest deduction on Schedule A even without a home office deduction. These ideas are all false.

Home office deductions are great. They are specifically allowed in the Internal Revenue Code and can provide significant benefits to the business owner. They can be confusing. One of our clients, Melissa, asks the following question about Home Office deductions:

Q: I’ve had to cover some business expenses on personal credit cards other than my appointed business credit card, and I’m doing routine expense reimbursements in order to properly care and feed my LLC. So ? – You and I talked about my carrying 20 percent of home/office expenses for my home office deduction. Do I ALSO reimburse myself for the 20 percent of those expenses? Or are they ONLY designated for the deduction come tax time?

A: Let me make sure I understand the question and perhaps there are two questions here. The first is related to reimbursement by the business for personal funds used to pay for business expenses. Any time you use personal funds for your business, this should be treated as a loan to your business. I recommend you have a line of credit between you and the business that includes regular interest payments and eventual principal payments.

The second is whether you reimburse yourself for home office expenses. My recommendation is that you do reimburse for home office expenses. If your LLC is a single member LLC and you are reporting the income on Schedule C of your personal return, there really is no need to reimburse yourself. You can take care of this all at tax time.

If you are treating your LLC either as a partnership (filing a Form 1065 partnership return) or as an S corporation (filing form 1120S), then I suggest you reimburse yourself for the home office expenses. In fact, the IRS say you MUST reimburse yourself if your company is an S corporation. If you company is a partnership, it depends on the partnership/operating agreement. To be safe, I suggest even in a partnership that you reimburse yourself before the end of the year.

Thanks for this question, Melissa. A lot of people get this rule wrong only to find their home office expenses nondeductible at tax time. For more about how to best handle your home office deductions, see our course on Home Office Deductions at http://www.wealthstrategyuproducts.com/Tax.html

Warmest regards,

Tom