If you maintain an office in your home for your small business, you may be entitled to a special tax break on your commuting costs. For most people, the cost of daily travel between home and a regular work location is a nondeductible commuting expense. However, taxpayers who have an office at home can deduct the daily costs of travel between home and another work location in the same business, regardless of distance and regardless of whether the other location is regular or temporary.
Note that you get this break only if your home is your principal place of business. In other words, you must meet the tests for deducting expenses of an office at home.
You may deduct your home office expenses if you meet any of the following three tests: 1) the principal place of business test, 2) the place for meeting patients, clients or customers test, or 3) the separate structure test. Here’s a quick reminder on the home office test:
- Principal place of business. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. (What “exclusively and on a regular basis” means is not entirely self-evident. We can help you figure out whether your home office satisfies this make-or-break requirement.) Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.
- Home office used for meeting patients, clients, or customers. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the home office.
- Separate structures. You’re entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that’s located in a separate unattached structure on the same property as your home—for example, an unattached garage, artist’s studio, workshop, or office building.
Now back to the commuting expense. Once you qualify for the home office, you still must be able to substantiate the auto expenses that you claim through adequate records, such as a log or diary. You can either use the standard mileage rate or deduct your actual expenses.
If you have an S-Corporation, you can treat the auto expenses as an employer reimbursement for travel and you needn’t report the reimbursements as income. Make sure you maintain a so-called “accountable plan.” An accountable plan is one that reimburses only deductible business expenses, requires you to substantiate your expenses, and requires you to return amounts in excess of your substantiated expenses. If the plan is not an accountable plan, the reimbursement must be reported as income, and your deductible expenses must be claimed as employee business expenses.
If your office at home isn’t your principal place of business, the costs of travel between your home and the first and last business stops of the day are nondeductible commuting expenses. However, the costs of going between home and a temporary work location are deductible, if you have a regular work location away from home. Generally speaking, employment at a work location is temporary if it is realistically expected to last (and does in fact last) for no more than a year.
Bottom line our office wants to make sure ALL of our clients are maximizing their auto and travel expenses. If this topic seems complicated, just make sure to track you mileage and we’ll break it down at tax time and take the most advantageous write-off.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.