Partnership & Home Office

June,

My wife and I started an independent consultant business last year in Fairfax, VA. We file partnership returns and have a home office. In doing our taxes, we were told that home office expenses are supposed to be captured in Schedule E and attached to Form 1040.

However, another advisor also said that we can reimburse home office expenses throughout the tax year through our income distributions and then capture them as other deductions on Form 1065 (the partnership return). This would be easier since we wouldn't have to fill out Schedule E so that is what we did.

Did we do the right thing?

Thanks, Matt


Wrong thing, Matt. A basic, really basic, piece of info on tax prep: If there is income from a partnership you must include that income on a Federal Schedule E. This is another example of why I think indies should not prepare their own tax returns.


Since a partnership is the least tax advantageous entity for a husband and wife business you might want to read some posts here payroll -- spouse as employee or here husband-wife business to learn more.

Partnerships have very specific rules on deductions. If you want to deduct the costs of a home office, although not required, I would suggest writing into the partnership agreement that home office use is expected. Deductions for a home office may be taken on Schedule E only. This will reduce a partner's self-employment income and self-employment tax liability.

You may not take home office expenses on the partnership return. And, do not rent to your partnership. That's a real kettle of worms and maggots!

Best,
June