Entity choice is an important for many reasons. One of the most important reasons is that it simply reduces your risk of audit. For the 2017 tax year, if you filed your business income and expenses as a sole proprietor and reported $100,000 or more in gross receipts, your chances of IRS audit were 2.4 percent. If had you reported this income as an S corporation, your chances of audit were only 0.20 percent.
Entity selection is also important because it provides a means to claim legitimate expenses without attracting the attention of the IRS. For example, you’ve probably read that the home-office deduction increases your chances of IRS audit. I’ve read that, too, but I don’t believe it. Regardless, let’s assume that you’re a little paranoid about audits. If you operate as a corporation, your home-office deduction will not show on either your personal return or your corporate return when prepared correctly.
The correct method is to simply have the corporation reimburse the office as an employee business expense.
Through the reimbursement method, the corporation claims the deduction for the expenses it reimburses to you. Typically, the corporation would enter the reimbursement into a category called “office expenses” or something similar. Thus, the home-office deduction as a title or label does not appear in the corporate return.
The additional benefit of the home office deduction is that you receive the reimbursement from the corporation as a reimbursed employee expense. There are important details required to establish this strategy, so give us a call to help you establish the plan according to IRS guidelines.