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Answered by Shams Khan, CPA & CFP® with 25+ years of experience in tax and financial planning.
Answered by Shams Khan, CPA & CFP® with 25+ years of experience in tax and financial planning.
Not directly. S corporation owners can’t claim the home office deduction on their personal return, but they can reimburse themselves through an accountable plan.
Unlike sole proprietors or single-member LLCs, S corporation owners don’t have a line item on their personal tax return for a home office deduction. The proper approach is to set up an accountable plan. Under this plan, you calculate home office expenses (rent, utilities, insurance, depreciation, etc.) and reimburse yourself from the S corporation. The reimbursement is:
This method allows you to capture the benefit while remaining IRS-compliant.
For an example of an accountable plan template, click here.
No. Married couples who jointly own an unincorporated business can elect to be treated as a Qualified Joint Venture (QJV) instead of filing a partnership return.
Normally, when two or more people own and operate a business together, the IRS requires a Form 1065 partnership return. This applies whether the business is informal or organized as an LLC.
However, there’s an exception for married couples. If both spouses materially participate in the business, they may elect to be treated as a Qualified Joint Venture (QJV). Under this election:
Important considerations:
This election can simplify tax reporting while still ensuring both spouses get credit for Social Security and Medicare purposes.
No. Each business must be reported on its own separate Schedule C.
The IRS requires that each distinct business be reported separately on its own Schedule C. You cannot merge multiple businesses into one return, even if you are the sole owner of both. This is supported by Revenue Ruling 81-90 , which clarifies that separate reporting is mandatory.
The reason for this rule is to prevent taxpayers from disguising losses from one activity by combining them with profits from another. For example, if one business is consistently losing money and could be considered a hobby, combining it with a profitable venture would give a misleading impression of overall income.
If you improperly combine businesses, the IRS may assess accuracy-related penalties. These can be steep: the greater of $5,000 or 10% of the underpayment if intentional disregard or negligence is found.
Important considerations:
Keeping businesses separated on Schedule C ensures compliance, prevents penalties, and preserves clarity in your tax records.
No. Each rental property must be reported separately on Schedule E, using a different column for each property.
The IRS requires that each rental property be listed on its own column in Schedule E. You cannot combine multiple properties into one column. This rule is not just about compliance—it also helps you keep clean records.
By listing properties separately:
Combining properties may seem simpler, but it can create confusion, raise audit issues, and complicate recordkeeping. Keeping them separate ensures accuracy and long-term clarity.
No. Forming an LLC does not give you additional tax deductions. You are entitled to the same deductions whether you operate as a sole proprietorship or an LLC.
It’s a common misconception that creating an LLC unlocks more deductions. In reality, the deductions remain the same. For example:
The real differences lie in legal protection and audit exposure:
So, while deductions don’t change, an LLC can provide meaningful legal protections, reduced audit risk, and potential tax savings depending on how it’s structured.
Show consistent, reasonable profits—ideally more than $2,500 in net income—and avoid reporting losses year after year.
The IRS closely scrutinizes Schedule C filings (sole proprietorships and single-member LLCs) because of their history of underreporting. In fact, IRS statistics show billions in misreported expenses each year, making Schedule C a red flag area.
Key factors the IRS looks at include:
By maintaining profitability, keeping thorough records, and ensuring your deductions are properly documented, you significantly reduce audit risk.
The Qualified Business Income (QBI) deduction allows many business owners to deduct up to 20% of their qualified income. However, not all professions qualify equally. Professions considered Specified Service Trades or Businesses (SSTBs)—such as healthcare (including physicians), law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, and businesses where reputation or skill is the main asset—face stricter income limits.
Thresholds for QBI Deduction
Married Filing Jointly (MFJ):
Single Filers:
Since you are a physician (an SSTB) and your married income is above $415,000, you are completely phased out of the deduction.
Compliance Note
It’s important to properly classify your business. Misclassification to claim the deduction could result in accuracy-related penalties, which are the greater of $5,000 or 5% of the underpaid tax.
The QBI deduction is limited. To claim the full 20%, your business must meet certain wage and property requirements. Without enough wages paid or qualified assets, your deduction will be reduced.
The QBI deduction is generally calculated as the lesser of:
Example:
Suppose your business has $100,000 net income. 20% of that is $20,000 (theoretical QBI deduction).
To claim the full $20,000, you need at least $40,000 in wages paid (since 50% = $20,000). If you only paid $30,000 in wages, then 50% is $15,000, so your QBI deduction would be limited to $15,000—not the full $20,000.
For rental or real estate businesses: you may also use property basis. Example: if you own $1,000,000 in real estate assets, 2.5% of $1,000,000 = $25,000. Even with lower wages, this $25,000 can help you qualify for the full deduction.
Planning Opportunity
We often see taxpayers lose thousands by not planning wages properly. Increasing owner or employee wages before year-end—or leveraging property basis in real estate—can maximize the deduction.
In 2022, taxpayers claimed more than $92 billion in QBI deductions. Proper planning ensures you don’t miss out.
To qualify, the space must be used exclusively and regularly for administrative or management activities of your trade or business, and you must not have another fixed location where substantial administrative or management activities are performed.
The IRS applies a “principal place of business” test with two main requirements:
If you work from your living room or bedroom, it usually does not qualify because the space is not used exclusively for business.
If you are a physician with a clinic that only has exam rooms and no administrative area, you may still claim a home office deduction if you perform your administrative tasks at home, since you have no other fixed place to do so.
The key: Your home office must be the primary place for substantial administrative or management activities, and it must meet both the exclusive-use and no-other-location tests.
Yes. You may claim up to $1,500 using the simplified method, without keeping detailed records of home office expenses.
Under Revenue Procedure 2013-13, the IRS allows an election to use a simplified method for the home office deduction. Instead of tracking mortgage interest, real estate taxes, utilities, depreciation, and other expenses, you can claim a flat $5 per square foot, up to a maximum of 300 square feet. This results in a maximum deduction of $1,500 per year.
If your qualified home office is 200 square feet, you may deduct 200 × $5 = $1,000. If it is 300 square feet or larger, you may deduct the maximum $1,500.
This simplified method is straightforward but may result in a smaller deduction than the actual-expense method if your home office costs are high.
No. As a single-member LLC owner, you cannot pay yourself a W-2 salary.
A single-member LLC is considered a disregarded entity by the IRS. This means the LLC is not treated as a separate entity for tax purposes, and all business income and expenses are reported on Schedule C of your personal Form 1040.
Because of this classification, you cannot pay yourself a W-2 salary as the owner. Instead, your compensation is the net profit of the business, which is subject to both income tax and self-employment tax.
No, as a partner in a partnership you cannot be on payroll.
Partnerships file Form 1065. Partners are not employees and cannot receive W-2 wages. Instead, partners are compensated through guaranteed payments or distributions.
Guaranteed payments act like a salary substitute but are not processed through payroll. They are always subject to self-employment tax.
Distributions depend on your role:
You can run payroll for your employees, but not for yourself as a partner. If you want a W-2 salary, you need to elect S-corporation status. This allows owners to be treated as employees and receive wages legally.
⚠️ If you have been paying yourself via payroll as a partner, you should stop and correct this going forward.
No. Distributions have no effect on taxation. You pay tax on your share of the business income regardless of whether you withdraw it.
The IRS taxes you on your share of the profit, not on the money you physically take out. For example, if your business generates $100,000 in profit and you own 50%, your taxable income is $50,000. Even if you only withdraw $10,000 and leave $40,000 in the business, you will still pay tax on the full $50,000.
This applies across entity types:
Distributions are generally just movements of cash and do not create or reduce taxable income. Many owners leave cash in the business for liquidity and to protect against risks.
✅ Best practice: Try to align your distributions with your taxable income so you have enough cash to pay the related tax liability.