Two Correct Ways to Deduct Your Home Office with a Partnership
If you work from home, deducting your home-office expenses can save you thousands of dollars each year.
But here’s the catch: you need to do it correctly.
If you operate your business as a partnership, you have two ways to correctly deduct your home-office expenses.
We’ll show you how each way works, whether you qualify, and how each way impacts your bottom line.
Home-Office Review
To qualify for a tax-deductible home office, you’ll need to use a space in your residence regularly and exclusively
as a principal place of business (odd, but 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 business if your office space is in a separate structure not attached to your dwelling.
A “principal place of business” can be either:
where the cash register rings (generally referred to as the Soliman rule), or
a place used by you for administrative or management activities if there is no other fixed location where you conduct substantial administrative or management activities.
Take a look at the following articles for more information on qualifying your space as a tax-deductible principal office—the best kind (even when you have an office downtown):
Two Ways as a Partner
If you have a tax-deductible home office and operate as a partner in a partnership, you have two ways to get a tax benefit from the home office:
Deduct the cost as an unreimbursed partner expense (UPE), or
Get reimbursement from your partnership via an accountable plan (think expense report).
Unreimbursed Partner Expense
As a partner in a partnership, you generally can’t deduct any of the partnership expenses on your individual tax return—the partnership should pay for and deduct its own business expenses.
But if your partnership agreement or business policy forces you to pay for the expense out of pocket with no reimbursement available, then you can deduct the business expense in full on your individual tax return as a UPE.
Because the UPE is a trade or business expense, it also reduces your self-employment tax.
Deducting UPE is even better than taking a typical Schedule C home-office deduction because you can deduct your full home-office expense even when the partnership has a tax loss for the year.
Here are the two steps to claiming your UPE deduction:
Find your deduction amount using Form 8829 (but don’t include it with your tax return).
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 option for realizing your home-office deduction is to have your partnership reimburse you for your home-office expenses under an accountable plan.
When your partnership does this, the reimbursement is
tax-free to you, the partner, and
tax deductible to the partnership, which reduces your share of the taxable net income from the partnership.
Here are the three steps to obtaining the reimbursement:
Find the reimbursement amount using Form 8829 (including depreciation).
Submit your reimbursement request with appropriate documentation within the time frames required by your partnership’s accountable plan policy.
Receive a reimbursement check from your partnership.
We show you step-by-step how to implement an accountable plan for your business in TCJA Creates New Reasons for Accountable Plan Expense Reimbursements.
Important note. The accountable plan regulations apply to employees, and partners aren’t employees of their partnerships. But since tax law considers partners to be employees for purposes of working condition fringe benefits, reimbursements likely aren’t an issue for you as a partner.
Avoid Two Land Mines
You’ll end up with a tax bill instead of tax savings if you do one of these two things to reimburse your home-office expenses:
If you reimburse the amounts under a nonaccountable plan (i.e., you don’t follow the rules in the linked article above), then you’ll pay both income tax and self-employment tax on the reimbursements, as the reimbursements are guaranteed payments to you.
If the partnership pays rent to you, then you won’t be able to deduct any expenses against the rent, similar to the rules applicable to employees who receive rent from their employers.
Why Reimbursement Is Best—Example
John is a 20 percent partner in Rainbow, LLC, which is a partnership for federal tax purposes. He’s in the 24 percent federal tax bracket (for this example, we’ll ignore the self-employment tax).
Let’s assume John uses 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).
But if John receives 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 income (24 percent of $800, which is 20 percent of the $4,000 partnership expense).
Takeaways
When you own a business as a partnership, you can still reduce your tax bill by deducting your home-office expenses.
There are two ways you can take this deduction:
Deduct your expenses directly on your individual tax return as a UPE, or
Shift the deduction to your partnership by getting a tax-free reimbursement from an accountable reimbursement plan.
Both methods work, but the reimbursement method creates the best cash results for you, as you saw in the example above.
Make sure to avoid the two land mines of either reimbursing your expenses via a nonaccountable plan or paying yourself rent from the partnership. You don’t find any savings with the land-mine methods.