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The new tax bill and the in-home office

The new tax bill has eliminated “miscellaneous deductions” as a class of itemized deductions for 2018. Because miscellaneous deductions are gone, a very large class of deductions is gone too. One member of this class is the office-in-home. And even if you don’t maintain an office, you may be interested in this commentary for illustrating how a tax lawyer thinks.  

Let’s separate our taxpayers into two groups: the self-employed and the employed. If you are self-employed and report your taxes as a sole proprietor, you will still be able to deduct office-in-home from your business income. The same is true if you have an LLC or a corporation, but that gets a touch more complicated.  

But the employed have no place to deduct office in home.  There is just no line on the 2018 tax return for the deduction.  Example: Tom (not his real name) is a client who lives in Connecticut, and has always worked for the XYZ Co from his local Connecticut home. XYZ has an office in New York City and one in California. Tom’s office is 1000 square feet of his 3000 square-foot house. Twenty years ago, Tom was an independent contractor, but as the company grew and his role became central in the business, he was placed on salary. He manages eight other remote employees and a team in India. The way he works, in his own office and away from the business itself, is called “working remotely.” This is a growing trend all over the world, made possible by the internet.  

How to deduct the cost of maintaining that office, since there is no more miscellaneous deduction? I told Tom that XYZ should pay him rent for the office. The payment is includable as income on his tax return as rental income, and he can deduct from the rental income costs such as a share of mortgage interest, taxes, utilities and maintenance. The expenses are merely deducted in a different place.

Rent paid must be reasonable for the town in which he lives, or in this case $1000 a month. I instructed him to formally lease the office to XYZ, and he has done so.  

I prefer that LLCs and corporations also have a formal lease between the home owner/renter and the business. The law requires it in certain circumstances. The rent must also be actually paid, with a check, and then the expenses paid out of the taxpayer’s personal account.  

The required lease is nothing special; a signed lease from the net is all that is required. The small business owner may be signing as both lessor and lessee.  If you are a small business owner, instead of my employee example above, it is a good idea to have the lease notarized, so that you can prove the date the lease was signed. 

So that’s how a tax lawyer thinks. When the IRS zigs, I zag. 

 

Martha Miller is a tax attorney who lives and works in Lime Rock. None of the information presented here should be seen as an endorsement of her business.