When you create a corporation as the successor to your proprietorship business, there are many steps in the transition. One of the important changes is that you become an employee of the corporation. You’re responsible for managing the business as a separate entity.
As a proprietor, you might have used your home as the location for your business. When the business is a corporation, you are providing your home to your employer. You can still claim a home office deduction under the rules that apply to employees. The corporation may reimburse you for the portion of your home expenses related to business use. This is not rental income for you if reimbursement is for actual expense that you document to the corporation.
To determine your actual home office expense, measure the area used for business. Determine that area’s percentage of the total area of your home. Your home office expenses are that percentage of your home’s total costs for utilities, homeowner’s insurance, mortgage interest, property taxes, homeowners’ association dues, and maintenance.
To claim a home office expense, you must use an area of your home exclusively and regularly for business. “Exclusive use” is an area of the home used only for business purposes. “Regular use” means the area is used regularly for business instead of incidentally or occasionally.
If your corporation has a different primary location, you might also be able to deduct a home office expense. An area of your home that is not the principal place of business must be used to meet or deal with clients, customers, or patients in the normal course of business. This can be an area where you regularly review files and contact customers.
A home office deduction is also permitted for a separate structure that’s not attached to your home and has an exclusive and regular connection to your corporation. The corporate connection for a separate structure doesn’t have to involve dealing with customers. In addition, storage area is only required to have regular business use but not necessarily exclusive business use.
A corporation can only reimburse and deduct expense for an employee’s home office if the location is provided for the convenience of the employer. That should be easy to prove when your home is the only business location. But if your business has another location, be prepared to demonstrate that your home office provides convenience to the corporation.