We’ve seen a few startups rent a 4 bedroom house under the name of their startup as opposed to their personal names, believing that they could deduct the entire cost through the startup, hence allowing the whole team to save thousands in personal rent. It does not work like that. The IRS cares a lot about these types of arrangements because it can miss out on significant payroll tax revenue because the employees are receiving a free fringe benefit.

For tax purposes, you can only deduct the pro rata percentage of your live/work space that is used both regularly and exclusively for work purposes.

The Qualifications: your live workspace must be….

• Exclusively used for business. Not just workspace by day, living room by night.
• Regularly used for business. Not just on the weekends.
• Principal Place of business. This is where you regularly work, regularly meet up with clients, etc. The IRS spells out more on the details here.

The Math:

• If you have a 5,000 sq ft live / work space, you must measure the exact amount of space that used exclusively, regularly, and as your principal place of business. Let's say that you use the “man cave” as your office, and that room measures 1000 sq ft. If you’re paying $10,0000/mo for the whole live / work space, then you may only count 1/5th of the total cost as your office space = $2,000
• In a perfect world, the employees/tenants would pay $8,000 of their personal money and the startup would pay $2,000 to the landlord. Few landlords are keen to accept two checks, so you’ll have to write one. If the company is reimbursing the employees or vice versa, you now have highly sensitive accounting acrobatics to keep track of every month. Not fun.

The Hidden Costs:

• No Privacy: your startup coworkers are going to know all about you… and your hygiene habits, and your dating life, and any other detail big and small.
• Groupthink: if all the employees at the startup are spending 23 hours a day together, there’s a tremendous incentive to keep the peace. That means that when someone doesn’t agree with a new idea at work, they’re more likely to keep quiet on their opinions so as not to rock the boat. Not productive for a startup that needs to stay fluid and open.
• Homogeneous experiences: if you’re living and working with your team all the time, chances are that you’re all having the same experiences. Some of the best innovations happen after hours - when you see things from a new perspective - as you’re socializing with people outside your industry. Give yourself and your startup team that mental break to experience new ideas.
• Potential HR issues: heaven forbid two of your teammates to become, ahem, intimate. Super awkward.

Bottom line: don’t do it. You are not saving money by opting for a live / work space. Save your sanity and go for WeWork office where you can get work done, mingle with other offices, then go home to a work-free sanctuary.