With the COVID-19 experience, you and your partners may be doing a lot of work from home or even working from home primarily. Is the home-office deduction in the mix?
If you operate your business as a partnership, you have two ways to correctly deduct your home-office expenses.
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.
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).
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.