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Posted on December 6, 2018

small business taxes

If your company has people working from home offices, many of their business expenses are reimbursable. However, a corporation must reimburse these expenses the right way, or the IRS could consider the reimbursements improper and trigger an audit with financial penalties. Let’s look at the two main methods of seeking home office reimbursements – the actual expense method and the safe harbor method. For a corporation, one option is clearly better than the other.

What is the Actual Expense Method?

The actual expense method directly reflects the amount of business expenses a home-based worker is experiencing. The employee would submit receipts and other proof for reimbursement from the company. If the expense comes from a house-wide cost, its reimbursement will be calculated as a percentage of the total household cost. This percentage is usually found by determining how many square feet of the home is used for business use only, then using that percentage as the guide. So, if their home office is 15% of the total home space, they should never be requesting reimbursement for any amount above 15% of an expense that applies to the entire home.

What is the Safe Harbor Method?

The safe harbor method is also for work-from-home taxpayers who have business expenses. It gives them a certain level of safety in claiming business expenses up to a threshold amount. However, there are still many limitations and requirements to consider. In general, the maximum amount a taxpayer can deduct annually under the safe harbor method is $1,500. Consult a tax attorney to ensure you qualify for safe harbor before using it.

Why Does the Safe Harbor Method Exist?

The IRS introduced the safe harbor method to help taxpayers affected by changing laws. Lawmakers working on the 2010 economic stimulus package inadvertently penalized taxpayers who were simply trying to claim legitimate business deductions. In response, the IRS introduced the safe harbor method, also called the safe harbor escape, to give these taxpayers another choice. If people feel too uneasy about claiming business deductions for fear of triggering an IRS audit, they could seek the safe harbor option.

Can a Corporation Use the Safe Harbor Method?

No. Corporations should not use the safe harbor method. A corporation should use the actual expense method for reimbursements. This means that any request for reimbursement coming from an employee or employee-shareholder should be based on their actual expense, with proof in the form of receipts and other paperwork. For more information about handling reimbursements properly, reach out to your corporation’s tax attorney.

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The Dutton Legal Group helps the people and businesses of Indiana navigate ever-changing State and Federal tax codes. Our goal as experienced tax attorneys is to assist you in finding an immediate, cost-effective answer to your tax challenges. We provide a variety of tax services from balance resolution and return preparation to wage garnishment relief and audit assistance. Make Dutton Legal Group your next call at 1-800-334-0255 or send an email to request a free consultation. Trustworthy and affordable, for over 15 years.