S-Corp Home Office Deduction

Taking the home office deduction is fairly simple when you’re a self-employed individual and file Schedule C.  In those instances, you simply indicate on Form 8829 the percentage of your home that is used for work, the costs to maintain your space, and that amount will go on your Schedule C as a deduction.

If you are a member of a partnership or multimemeber LLC, then you use a similar calculation to the one listed above (see the worksheet on page 27).  However, you deduct the expenses as unreimbursed partnership expenses on Schedule E.

But what if you’re a member of a S-Corp?  Well, if you still want that home office deduction, just be prepared to do a few workarounds to get it.

25 years ago Congress enacted a law prohibiting the deduction of expenses related to the rental of a portion of one’s home to their employer.  The law was enacted in response to a Supreme Court decision [Feldman v. Commissioner].  The rental arrangement involved was viewed as an attempt to circumvent the purpose of Internal Revenue Code Section 280A, which limits deduction of expenses allocable to the business use of one’s home.

Given that office-in-the-home expenses are not allowable if the office is rented to one’s employer, an S Corporation shareholder-employee “could” deduct office-in-the-home expenses as miscellaneous itemized deductions.  But these deductions are of little or no value because of the 2% income floor imposed on Schedule A, and the add back of such deductions in computing alternative minimum taxable income.

Based on the above, the old workaround that was often used was:

  • create a rental property on Schedule E of the individuals return, and include a portion of all expenses (rent, mortgage interest, property tax, insurance, utilities, etc). You would then report an amount of income that’s equal to;
  • rent expense that you report on your S-Corp tax return. Those two amounts will offset (the rent deduction on your S-corp return and the rent income on your individual return); and you will be left with the home office deduction.

Well,  the IRS got tired of sifting through fake rental properties and instead recommends that the employee submit an expense report as part of what’s called an “accountable plan.”

So based on this guidance, here is the new way of deducting home office expenses if you are a member of a S-Corp:

  • Draft an accountable plan agreement for your company.  It will outline what expenses are eligible for reimbursement, how they will be paid, etc.  A sample plan can be found here, or you can create your own.
  • Calculate the percentage of your home that is used exclusively for business purposes.  Divide the square footage used for business by the total square footage of the home and multiply by 100.
  • Calculate the total amount of eligible reimbursable expenses (see Form 8829 above).  Multiply each amount by the percentage of business use calculated in the step above and enter the results on the expense form that you use for your accountable plan.
  • Prepare expense reports as the employee and turn them in to your company on a regular basis.  Attach receipts or other documentation to the form to substantiate them.
  • Cut the check from the business account and deposit it into your personal account. Attach a copy of the check to the form as documentation that these were paid.
  • Enter the amount of the payment into your S corporation’s records as a reimbursement for employee expenses. Post each expense claimed to the appropriate expense account so that these expenses may be deducted from the corporation’s income on its tax return.

And there you have it.  You have now created a tax-deductible business expense for the S-corp, and you don’t have to report the reimbursement as income.