Deduct Your Home Office with a Partnership- 2 Correct Ways

But here’s the catch: you need to do it properly.

If you operate your business as a partnership, you have 2 methods to correctly deduct your home-office expenses.

We’ll show you how each method works, whether you qualify, and how each method impacts your bottom line.

 

Home Office Review

To qualify for a tax-deductible home office, you’ll need to utilize space in your home routinely and exclusively

•  as a principal place of business (odd, however, you can have more than one), or
• as a place of business used by your customers for meeting or dealing with you, or
• in connection with your company if your workplace is in a separate structure not attached to your house.

A “principal place of business” can be either:

• where the cash register rings (generally described as the Soliman guideline), or
• a place used by you for administrative or management activities if there is no other fixed area where you conduct significant administrative or management activities.
  

Two Ways as a Partner To Claim Partnership Home Office

If you have a tax-deductible home office and operate as a partner in a partnership, you have two methods to get a tax benefit from the home office:

1. Deduct the expense as an unreimbursed partner cost (UPE), or
2. Get reimbursement from your collaboration through an accountable reimbursement plan (think expense report).

Unreimbursed Partner Expense

As a partner in a partnership, you generally can’t deduct any of the partnership costs on your individual tax return– the partnership must spend for and subtract its own business expenses.

However if your partnership agreement or business policy forces you to spend for the expenditure expense without any reimbursement offered, then you can deduct the business expense in full on your individual tax return as a UPE.

Due to the fact that the UPE is a trade or business expense, it likewise decreases your self-employment tax.

Subtracting UPE is even better than taking a normal Schedule C home-office deduction because you can subtract your full home-office expense even when the partnership has a tax loss for the year.

Here are the two steps to declaring your UPE deduction:

1.  Find your deduction amount utilizing Form 8829 (but don’t include it with your income tax return).
2. On a separate line on Schedule E, line 28, enter “UPE” in column (a) and the expense amount in column (i).

Accountable Reimbursement Plan

The other alternative for recognizing your home-office deduction is to have your partnership repay you for your home-office costs under an accountable reimbursement plan

When your partnership does this, the reimbursement is

• tax-free to you, the partner, and
• tax-deductible to the partnership, which minimizes your share of the taxable earnings from the partnership.

Here are the 3 steps to obtaining the repayment:

1. Find the reimbursement amount utilizing Form 8829 (consisting of depreciation).
2. Send your repayment demand with suitable documents within the time frames needed by your partnership’s responsible strategy policy.
3. Get a reimbursement check from your collaboration.

Crucial note.

The accountable plan regulations apply to employees, and partners aren’t employees of their partnerships. However considering that tax law considers partners to be employees for purposes of working condition fringe benefits, reimbursements most likely aren’t a concern for you as a partner.

Prevent Two Land Mines

You’ll wind up with a tax bill instead of tax savings if you do one of these 2 things to reimburse your home-office costs:

• If you reimburse the amounts under a nonaccountable plan, then you’ll pay both income tax and self-employment tax on the reimbursements, as the repayments are guaranteed payments to you.
• If the partnership pays rent to you, then you won’t be able to deduct any costs against the rent, comparable to the rules appropriate to employees who receive rent from their employers.

Why Reimbursement Is Best– Example

John is a 20 percent partner in Happy Day, LLC, which is a partnership for federal tax purposes. He’s in the 24 percent federal tax bracket (for this example, we’ll disregard the self-employment tax).

Let’s assume John utilizes Form 8829 and calculates his home-office deduction as $4,000.

If John deducts the $4,000 as UPE, it puts $960 in his pocket (24 percent of $4,000).

However, if John gets an accountable plan reimbursement from the partnership, it puts $4,192 in his pocket:

• $4,000 as a tax-free reimbursement, and
• $192 from reduced pass-through earnings (24 percent of $800, which is 20 percent of the $4,000 partnership expenditure). 

Takeaways

When you own a business as a partnership, you can still decrease your tax expenses by subtracting your home-office costs.

There are two methods you can take this deduction:

1. Deduct your expenditures straight on your individual income tax return as a UPE, or
2. Shift the deduction to your partnership by getting a tax-free reimbursement from an accountable reimbursement plan.

Both approaches work, but the reimbursement approach develops the very best cash results for you, as you saw in the example above.

Make certain to prevent the two land mines from either reimbursing your expenses through a nonaccountable plan or paying yourself rent from the partnership. You don’t receive any cost savings with the land-mine techniques.

If you have questions or need us to develop an Accountable Reimbursement Plan for your partnership, give me a call at 509-543-7600 or send a request HERE.

April 2022

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