Two Correct Ways to Deduct Your Home Office with a Partnership

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:

1. Deduct the cost as an unreimbursed partner expense (UPE),
   or
2. 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:

1. Find your deduction amount using Form 8829 (but don’t
   include it with your 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 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:

1. Find the reimbursement amount using Form 8829 (including
   depreciation).
2. Submit your reimbursement request with appropriate
   documentation within the time frames required by your partnership’s
   accountable plan policy.
3. 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).

If you are a candidate for the home-office deduction and
want to pursue this deduction, please call me on my direct line at 408-778-9651.