Can I take the home office deduction as a digital nomad or RV Entrepreneur?
I get this question all the time.
If you live in an RV full-time, then my initial response is no.
Let’s understand why I say this. Once you understand my reasoning you can decide if you qualify for this deduction or not.
Home Office Deduction
There are two basic requirements for your home to qualify as a deduction:
- Regular and exclusive use.
- Principal place of your business.
Think of the first requirement as 100% for business use. You most likely qualify for the second requirement because you’re operating your business from your home (aka RV).
If you live tiny, can you really say any space is 100% dedicated to an office?
Probably not, right?
There are a couple of exceptions including a toy hauler and bunkhouse where the extra garage or bunk room can be dedicated office space. These qualify because they have four walls and a door that can be dedicated to business use.
Methods for Home Office Deduction
There are two methods to take the home office deduction:
- Simplified method
- Regular method
The simplified method allows for $5 per foot as a home office deduction of up to $1500 or 300 square feet.
The regular method takes into account all the expenses to upkeep the home including mortgage interest, insurance, utilities, depreciation, etc. You factor in the percent of the home office space and take that percentage for all the home expenses.
The regular method allows for depreciation on your home. That’s actually the downside to this option. Because when you go to sell the home, you most likely will have to do some depreciation recapture. Not fun and many times a surprise.
With the simplified method, there’s no depreciation recapture to factor in. Yay!
While the simplified option might be less of a deduction upfront, I think you’ll be thankful to not owe depreciation recapture later on.
Let’s say you decide you qualify for the home office deduction.
Home Office Deduction on a Schedule C
The home office deduction can be taken as part of a Schedule C business (sole proprietor, single-member LLC).
Option 1. Simplified Method:
If you use the simplified method, determine the square feet of your home office space. Then multiply by 5 and you have your deduction.
You’ll find this deduction on Line 30 of your Schedule C.
Option 2. Actual Expenses Method:
If you want to use the actual expense method, it will be a little more complicated. You’ll need to track every expense related to your home throughout the year. You’ll also need to determine the square footage of the home office.
If your home office is 10×10, the total square footage of it would be 100. If your entire home is 1,500 square feet, you would divide 100 by 1,500. In this case, you would get to deduct 6.7% of your home office expenses by multiplying that percentage by eligible home expenses like mortgage interest or monthly rent, utilities, interest, and repairs.
Use Form 8829 to help with this calculation. You’ll need to file this form along with your Schedule C and Form 1040.
Home Office Deduction as an S Corp
What if your business is treated as an S Corp for tax purposes?
No problem. I got you covered there as well.
Unfortunately, it’s not quite as simple as taking it on your Schedule C.
Follow these 6 simple steps to take the home office deduction as an S Corp.
- You must complete an accountable plan. This plan will outline which expenses will be eligible for reimbursement, and how they will be paid. You may download a sample accountable plan below.
- Calculate the percentage of your home that is used exclusively for business purposes. To calculate this percentage, divide the home office square footage by the total square footage of your home. So, if your home office was a 10×10 room, the square footage of would be 100. If your entire home was 1,500 square feet, you would divide 100 by 1,500. In this case, you would get to deduct 6.7% of your home office expenses by multiplying that percentage by eligible home expenses like mortgage interest or monthly rent, utilities, interest, and repairs.
- Calculate the total amount of eligible reimbursable expenses. Use the IRS Form 8829 to assist with this calculation. Multiply each amount by the percentage of business use calculated in step 2 and enter the results on the expense form that you use for your accountable plan.
- As an employee of the S Corp, you must prepare expense reports and submit them to your company on a regular basis. Be sure to keep all receipts or other documentation associated with the expense.
- To reimburse yourself for the expense, cut a check (or schedule an electronic transfer) from the business account and deposit it into your personal account. Attach a copy of the check/transaction to the expense form as documentation that these were paid.
- Enter the amount of the payment into your S Corp’s records as reimbursement for employee expenses. Assign each expense claimed to the appropriate expense account category so that these expenses may be deducted from the S Corp’s income on its tax return.
Download the S Corp Accountable Plan Reimbursement Worksheet!
While this does take a little effort to get started, once you have your accountable plan and reimbursement process in place the rest of the process is easy! If you need a little assistance or reassurance with your calculations, feel free to contact me.
If you want to dive deeper into the S Corp and all the obligations, my course has a whole module on the subject.