Do You Need a Home Office Lease?

If a business owner operates out of a home office, he or she may be able to take the home office deduction in order to reduce federal tax liability. In addition, two options are available to help maintain the separation between the business owner and the business entity: (1) a home office lease, under which the company pays rent to the business owner for the use of his or her home office, and (2) an accountable plan for employee business expense reimbursement, under which the company pays the business owner, as its employee, the costs of a home office. As with every choice we make, each options has its own set of advantages and disadvantages to consider. A business owner considering these options should consult with an attorney to determine which option is best and to learn the rules and best practices needed to follow to take advantage of such option.

At our firm, we often prepare home office leases for business owners. Between an accountable plan and a home office lease, we find that the home office lease is often the most straightforward option for small business owners to implement. A home office lease helps business owners with dedicated home office space maintain the structure and legal status of their business entity, whether it is a corporation, a limited liability company, or another type of business entity. A business owner who uses a home office for business without compensating the home owner could be considered to have comingled business and personal assets. Comingling is a contributing factor to a court’s decision to “pierce the veil” — meaning the business entity is invalid and the business owner’s personal assets are not protected from the liabilities of the business.

In addition, a business that uses a home office on a regular basis without any documentation may violate the state law that requires all leases of real property for more than a year to be in writing. A written lease sets forth the start date and expiration date of the lease and can provide for automatic renewals so the business owner does not have to incur additional lease preparation costs in the future.

If you determine that the home office lease is the right choice for your business, we’d be happy to assist you in putting a home office lease together.

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