The Enhanced Home-Office Deduction for the Self-Employed

by John Anthony Castro, J.D., LL.M

Contact Castro & Co. online or by calling (833) 227-8761 for a free consultation


Executive Summary: If you own a small business and ran it from your home in 2020, you can deduct 100% of your home expenses plus groceries used to prepare meals during working hours. 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 in 2020, 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 anytime during 2020 or as a result of the pandemic, 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 in your 2020 tax return. Consider reaching out to us to learn more about how this could benefit you and your small business.

Interested in Learning More?

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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References

[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).

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