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Executive Summary: If you own a small business and run it from your home, you can deduct 100% of your home expenses plus groceries used to prepare meals during working hours. This is what we call the Enhanced Home Office Deduction for home-based small businesses. This is separate and distinct from the standard Home Office Deduction. Read the full article to learn all of the details.
If you’re a small business owner, you’ve most likely spent the last year trying to adjust to the changes the pandemic has brought, in addition to trying to keep your head above water as the industry and market suffered.
Now that the atmosphere has begun to settle and we’ve all found some semblance of normalcy and routine once again, it’s time to consider how to address the work adjustments you’ve had to make due to remote working. If you’ve spent any time running your business out of your home, then there are a few things you need to consider before filing your taxes regarding employer-provided lodging and home office fringe benefits.
Fringe Benefits for Small Business Owners
Generally, anything of value transferred from the business to the owner is considered income, whether it be cash or assets. What you may not know, however, is that fringe benefits are the exception to this general rule. Self-employed individuals are allowed to give themselves tax-free fringe benefits.
Fringe benefits are expenses that are deductible by the business but are not considered income to you, resulting in double non-taxation. Examples of non-taxable fringe benefits can include any means of transportation provided by the Company, such as company vehicles, trains, chauffeur, and even corporate jets. In fact, the tax-free fringe benefit of using a corporate jet is what is often discussed during election years by politicians that criticize the tax system. This has come to be known as the “Corporate Jet Loophole.”
Other tax-free fringe benefits include:
- Cocktails
- Barbecues
- Picnics
- On-Premise Daily Meals
- On-Premise Drinks
- Small Birthday/Holiday Gifts
- Bodyguards
- Transit Passes
- Single Tickets to Events (Sporting Events or Stage Theater Shows. The only two clearly stated prohibitions are season passes and membership dues to country clubs.)
So, what does this mean for a small business owner?
The truth of the matter is that you are both the employer and the employee. This isn’t legal fiction or a gray area. It’s a reality, and it’s why the IRS imposes the Self-Employment Tax, which is, simply put, both the employer and employee share of social security and Medicare taxes.
For all legal purposes, you are both the employer and the employee. While that’s bad for social security tax purposes, it’s excellent for fringe benefits because now you can create the most gracious Employee Benefits Plan for the company’s most important employee: you.
If this is something you haven’t considered before or you’d like assistance putting your home office and/or fringe benefits to use for your small business, this is the perfect opportunity for you to reach out to us. We can offer you an in-depth look at the specifics of the tax law and help you move forward with your new Benefits Plan.
Employer-Provided Lodging
If you are self-employed or wholly-own a small business, then you would most likely benefit from operating the company within your personal residence, avoiding costly commercial office space, and allowing a simplified home office deduction.
By working out of your personal residence, your home/home office, for federal income tax purposes only, becomes an integral part of the business property where business activities are conducted. Because of this, the company may directly pay for or reimburse the self-employed individual for personal living expenses in order to effectively provide lodging on what would be deemed to be the business premises. This may be deducted on Schedule C of the self-employed individual’s U.S. federal income tax return in accordance with federal tax law, established case law, and even the IRS’s own guidance.
If you transitioned into a remote work or work from home situation and were classified as an independent contractor, consider the extent to which you used your personal residence as a home office. This could lead to an opportunity for a home office tax deduction on your tax return. Consider reaching out to us to learn more about how this could benefit you and your small business.
Why Your Business Should Use A Tax Attorney
A tax attorney can be helpful to a small business in a variety of ways. One reason to use a tax attorney is to ensure that the business is in compliance with all relevant tax laws and regulations. A tax attorney is trained in tax law and can help the business to understand its obligations and to structure its affairs in a tax-efficient manner. Additionally, a tax attorney can provide representation in the event that the business is audited by the Internal Revenue Service (IRS) or other tax authorities. Finally, a tax attorney can offer guidance on tax-related business decisions, such as whether to incorporate the business or how to structure business transactions in a tax-advantageous way. Overall, using a tax attorney can help a small business to avoid potential tax problems and to optimize its tax position.
Interested in Learning More?
Watch our full in-depth discussion video about Section 119 here
We could all use a little break after this past year.
If you weren’t aware of the above-listed tax benefits, then there’s a good chance that there are additional benefits, resources, and information that you’ve been missing out on. Having a free consultation to discuss your taxes with a professional can make an incredible difference, regardless of whether you’re filing for your company or for yourself as an individual. A 10-minute consultation could cut your tax bill by more than 10%.
If you’d like to discuss this upcoming tax season and how the information we’ve provided in this blog could assist you with the process, please feel free to reach out to us. You can call us directly at 833-227-8761 or use our Online Form to request a call.
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About the Author
John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English as well as International Estate Planning in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC where he earned a Master of Laws in Taxation, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Miami, Chicago, Dallas, and Washington DC. Mr. Castro has been covered in Forbes, Tax Analysts, Entrepreneur, International Business Times, Nevada Law Journal, Sydney Morning Herald, and SMSF Adviser. This International Tax Online Law Journal has been recognized by NYU Law Library as an authoritative legal source.
Keywords
The standard home office deduction is reported using Form 8829. But this article focuses on deducting the entirety of your home under the Section Enhanced Home Office Deduction, which our firm reports on Schedule C, Line 48.
Bluebook Citation: Tax Planning for Small Businesses and Self-Employed Individuals, Int’l Tax Online Law Journal (March 22, 2021).
Footnotes with Legal Authorities
[1] See Benninghoff v. C.I.R., 71 T.C. 216, aff’d, 614 F.2d 398 (5th Cir. 1980); Dole v. C.I.R., 43 T.C. 697, aff’d, 351 F.2d 308 (1st Cir. 1965) acq., 1966-2 C.B. 3. Also see Jacobs v. C.I.R., 148 T..C. No. 24 (2017) (the "business premises of the employer” can include an off-premises facility leased by the employer when its employees are traveling).
[2] See Adams v. U.S., 218 Ct. Cl. 322 (1978); Rev. Rul. 75-540 (rental value of governor's mansion is excludible from gross income).
[3] See Rev. Rul. 68-579 (such amounts may not be deducted by the employee since they are personal, family, or living expenses made nondeductible by section 262 but may still be deductible by the business of the self-employed individual, which achieves the same result of nontaxation on those expenses).
[4] See Rev. Rul. 68-579.
[5] See Bob Jones University v. U.S., 229 Ct. Cl. 340 (1982); Benninghoff v. C.I.R., 71 T.C. 216 (1978), aff’d, 614 F.2d 398 (5th Cir. 1980).
[6] See Adams v. U.S., 218 Ct. Cl. 322 (1978); TAM 9404005.
[7] See Coyner v. Bingler, 344 F.2d 736 (3d Cir. 1965).