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I started a business this year and have a dedicated room in my home for this business. How do I determine the rate at which I will charge the business rent for the space?

  • 3
    It might be worth mentioning where you are as the rules differ from country to country. – Timo Geusch Jun 8 '11 at 23:03
  • He lists MA as location in profile, so I added the US tag. – bstpierre Jun 9 '11 at 14:20
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Your best approach is to assess rent levels in your local area for offices of a similar size. You need to take into account all the usuals - amenities, parking, etc, just as if your home-office was provided by a third-party. Get your $/sq ft and work out the monthly amount.

With this figure, you need to then work out what % of it you can charge. If the space is used exclusively for the business, charge 100%. If it's used about half the time, charge 50%, etc.

I would strongly advise you to do two things - 1. make sure your accountant and your attorney help you get this squared away. 2. document everything about how you arrived at the cost. Nothing fancy, but dates, realtors, addresses, $/sq foot. A simple table will do. By doing these two things, if the IRS should come around to chat, you should be covered.

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If you are talking about a home office, you don't "charge" the business anything. If the area is used exclusively as an office you pro-rate by square footage just the actual expenses.

TurboTax recent published an article "Can I Take the Home Office Deduction?" which is a must read if you don't understand the process. (Note: I authored said article.)

  • Joe, can you talk a little more about this? I know several people that, for want of a better word, charge their business rent. – gef05 Jun 8 '11 at 23:20
  • I don't believe you can rent yourself space this way, it appears like self dealing. It's also zero-sum, where the home office deduction turns certain expenses into a deduction. I'm not adamant on my position, I'm just not familiar with the circumstances that permit what you suggest. – JoeTaxpayer Jun 8 '11 at 23:37
  • Understood. I don't know how it looks on the backend, I'm just going by what I'm told. I would also add that I never did it myself (despite urging from some close to me) as it just doesn't seem to gain you anything. Regardless, the OP asked for a "how would you do it?" and that's how I responded. Thanks, – gef05 Jun 9 '11 at 0:04
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    Brian - citation, please? Specifically, when does that process become allowed vs the commonly used home office deduction? – JoeTaxpayer Jun 9 '11 at 2:29
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    @Brian Proceed with caution. This is an area rife with abuse, and the tax authorities will rake you over the coals should you not follow the rules. Make sure that you aren't taking any other questionable deductions as well -- what you are doing is a redflag for an audit. – duffbeer703 Jun 9 '11 at 12:47
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In Canada I think you'd do it as a % of square footage. For example:

  • If you live in a 2-bedroom apartment
  • If you use 1 bedroom as a home office
  • If the only thing you use that room for is business
  • If that room is 20% of the apartment's total floor area

Then you can count 20% of the cost of the of renting the apartment as a business expense.

I expect that conventions (i.e. that what's accepted rather than challenged by the tax authorities) may vary from country to country.

  • It sounds like what you are referring to is a situation in which the entire house/apartment is rented to begin with. My situation is that I own the house personally (or paying a mortgage rather). – Brian David Berman Jun 9 '11 at 3:41
  • I was, because that's the situation I'm familiar with. The situation I'm familiar with is, being self-employed, claiming an expense as a business expense instead of as a personal expense, and therefore deducting it from the 'income' subject to personal income tax. If I had owned the property then I might have claimed 20% of the cost-of-owning (e.g. mortgage and maintenance). – ChrisW Jun 9 '11 at 3:45
  • You could apply the same line of thinking but instead of the 'cost of renting' you apply the percentage to the local rental comps. But you definitely should consult with an accountant to avoid any pitfalls. – Xalorous Sep 30 '16 at 19:27
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In the UK it all comes down to what HMRC will allow you to charge without taxing you on the "rent profit" and not hitting capital gain tax when you sell the house, it may not all count as your "main home" if some is rented out. (http://www.accountingweb.co.uk/ is a good place to ask this type of questions in the uk)

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It depends on the structure of your business. Are you a sole proprietor filing Schedule C on your 1040, or an S-corp, or part of a partnership? The treatment of a home office will differ depending on business entity.

  • LLC, ownership is split 50/50 between my fiancee and me. – Brian David Berman Jun 11 '11 at 23:45
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To be confident in your solution, and get the best solution for you, consult a local accountant, preferably one who is specialized in taxes for businesses. Or muddle through the code and figure it out for yourself. The primary advantage in consulting with an accountant is that you can ask them to point out ways you can restructure your expenses, debts and income in order to minimize your tax burden. They can help you run the numbers for the various options and choose the one that is right, numerically.

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