entity type for a home business

[stevens744]

Am planning on starting a consulting type home business.
Was leaning towards S-corp status (am concerned that C-Corp could be PSC). Initially, will have a home office. The room will be 100% dedicated to the business. Was under the impression that rent in this situation was deductible as an expense. However, a recent post said that it would represent income on 1040 --essentially canceling deduction. Do I need to be a sole proprietor to get this deduction? Or would a single member LLC (disregarded entity) also be eligible?

Thanks

[Evan]

A single member LLC means you're filling out the 1040 anyways. If you're doing consulting or some other type of business that could be classified as a PSC, you would end up being considered it with a C-Corp. That's the extent I can help you with, some of the more knowledgable members can help you with your main question.

[OldJack]

Originally Posted by stevens744

Initially, will have a home office. The room will be 100% dedicated to the business.

Rent is a no no, reimbursement for expenses is ok regardless of type of entity.
Use form 8829 and attach to 1040 Sch-C or worksheet that is the same as 8829 for others.

Everything you want to know about the requirements and how to calculate the deduction is in the IRS Publication 587, "Business Use of Your Home":
http://www.irs.gov/pub/irs-pdf/p587.pdf
If you are taking the deduction on your 1040 Sch-C you use the form 8829 shown in the pub.

If you are using your home for a corp or other than Sch-C you use the worksheet on page 24 (actually the same as the form) and have the business reimburse you for the amount calculated on the worksheet. The business then has a deduction on its tax return and you have no 1040 taxable income resulting as it is a tax-free reimbursement.

[dyun1dyun1]

Just curious, why is rent a no no? When would home office (rent) be allowable? I have a friend who converted his basement to a 3 cubicle office.

thanks

Originally Posted by OldJack

Rent is a no no, reimbursement for expenses is ok regardless of type of entity.
Use form 8829 and attach to 1040 Sch-C or worksheet that is the same as 8829 for others.

Everything you want to know about the requirements and how to calculate the deduction is in the IRS Publication 587, "Business Use of Your Home":
http://www.irs.gov/pub/irs-pdf/p587.pdf
If you are taking the deduction on your 1040 Sch-C you use the form 8829 shown in the pub.

If you are using your home for a corp or other than Sch-C you use the worksheet on page 24 (actually the same as the form) and have the business reimburse you for the amount calculated on the worksheet. The business then has a deduction on its tax return and you have no 1040 taxable income resulting as it is a tax-free reimbursement.

[OldJack]

Originally Posted by Code §280A(c)(6)

An employee may not deduct expenses for business use of the home if the business use is attributable to rent paid by the employer. Code §280A(c)(6) The employer may deduct the rent paid, but a corresponding deduction by the employee is not allowed.

Originally Posted by Pub 587,”Business Use of Your Home, page 18

Rental to employer. If you rent part of your home to your
employer and you use the rented part in performing serv-
ices for your employer as an employee, your deduction for
the business use of your home is limited. You can deduct
mortgage interest, real estate taxes, and personal casualty
losses for the rented part, subject to any limitations. How-
ever, you cannot deduct otherwise allowable trade or busi-
ness expenses, business casualty losses, or depreciation
related to the use of your home in performing services for
your employer.

Your friend may only deduct what is allowed by the form 8829 or the worksheet on page 24 of http://irs.gov/pub/irs-pdf/p587.pdf

Rent is allowable business expense if not in the home.

[dyun1dyun1]

Thanks Jack!

[OldJack]

You are welcome dyun1dyun1. Best of luck in the new year.