S Corp Deductions: Home Office Rent

If you're self-employed and categorised as a sole proprietor, you can deduct home office expenses as a regular business expense on Schedule C. However, if you're an employee working as a one-person corporation, you have three options for home office deductions, whether you're a C Corp or an S Corp.

Firstly, you can deduct costs in the form of an unreimbursed employee expense under the Job Expenses category on Schedule A. Secondly, a corporation can issue rent for your home office. And thirdly, a corporation may pay for the costs of a home office under an accountable plan regarding employee business reimbursement that's classified as a business expense.

The third option provides the greatest tax savings and is an excellent way to get money out of your closely-held corporation tax-free. The corporation can deduct the reimbursement amount, and you don't need to report the payment on your personal income taxes.

S Corp rent payments for home offices

If you are an employee of your own S-corporation, there are a few options for handling the costs of a home office.

Option 1: S-Corp Pays Rent for Home Office

Firstly, the S-corporation can pay you rent for the home office. However, this option is not recommended as the corporation can deduct the rent paid to you, but you must report the rent as income on Schedule E. Additionally, you may only deduct a prorated share of expenses against Schedule E rental income, and you may not deduct a proportionate share of any expense in regards to the use of the dwelling. This usually includes insurance for the dwelling, including maintenance and repairs, and depreciation.

Option 2: Claim Home Office Deduction as an Employee Business Expense

The second option is to claim the home office deduction as an employee business expense. However, this option is also not recommended as these deductions are subject to 2% of your adjusted gross income, meaning you won't get the full deduction. This option was also eliminated by the Tax Cuts and Jobs Act of 2017.

Option 3: Set Up an Accountable Plan

The best option is to set up an accountable plan through which your S-corporation can reimburse you for all your home office expenses. You submit a report to your S-corp that contains the home office expenses you incurred as an employee, including depreciation deductions. The S-corporation gets the deduction, and you don't have to report any income on your individual return because this is an employee reimbursement for expenses incurred in the performance of your duties.

Home Office Qualifications

To qualify as a home office, the space must be used on a continuous basis and exclusively for your trade or business. It must be your primary place of business where you meet with customers, clients, or patients regularly, and you must have no other location where you conduct these tasks.

Calculating the Home Office Deduction

To calculate the home office deduction, you need to determine the "business use percentage" of your home office by dividing the square footage of the office area by the total square footage of your home. This percentage is then applied to eligible home expenses such as rent, mortgage interest, property tax, utilities, HOA dues, insurance, and repairs to determine the expense amount to be reimbursed.

General Guidelines for S-Corp Home Office Deductions or Reimbursements

It's important to note that deducting or being reimbursed for a home office will not affect the tax treatment when you sell your personal residence. If the home office is within the same "dwelling unit" as the residential portion of your home, you are treated as using the entire home as a principal residence for tax purposes.

Home office expenses under an accountable plan

Home office expenses can be deducted under an accountable plan, which is a reimbursement program that allows an S-Corp to pay employees and shareholders for their business expenses. This is a great way to get money out of your closely-held corporation tax-free.

There are three requirements for an accountable plan:

• Business connection: Expenses must have a tight business connection. For example, if it's mileage, it needs to be for business-related driving.
• Substantiation: You must substantiate the deduction with documented support. For example, provide receipts, expense exports, and explanations of business purpose.
• Excess reimbursement: Any excess advances over actual expenses must be promptly repaid.

• It is not required to be in writing, but it is highly recommended to make it clear and usable for the employer and employee.
• You can include a section for your home office in your monthly "Employee Expense Report" form. Calculate the "business use percentage" of your home office by dividing the square footage of the office area by the total square footage of the home.
• You can deduct a ratable (percentage of business use) portion of otherwise non-deductible home-related expenses, such as home utility bills, maintenance, repair costs, and insurance.
• You can also include an allocable amount of depreciation.
• Ratable amounts of mortgage interest and property taxes can be submitted for reimbursement.

Home office deductions for sole proprietors

As a sole proprietor, you can deduct home office expenses as a regular business expense on Schedule C. However, there are specific requirements that must be met to qualify for these deductions.

Firstly, the space in question must be used exclusively for business purposes and cannot be used for personal reasons. It must also be your primary place of business, where you meet with customers, clients, or patients, and conduct administrative tasks such as billing, bookkeeping, and setting up appointments. Additionally, you should not have any other location where you conduct these same tasks.

To calculate the deduction, you can use either the simplified method or the actual expenses method. The simplified method involves multiplying the square footage of your home office by a prescribed rate, currently $5 per square foot for up to 300 square feet. On the other hand, the actual expenses method involves measuring actual expenditures against your overall residence expenses. This includes mortgage interest, taxes, maintenance, repairs, insurance, utilities, and other expenses.

It is important to note that if you are reimbursed by your business for home office expenses, you cannot also claim these expenses as a deduction. Additionally, if you are an employee of your own S-corporation, you have the option to have the corporation pay you rent for the home office or reimburse you for the costs under an "accountable" plan. However, it is important to consult with a tax professional to ensure you are complying with all the relevant rules and regulations.

Home office space requirements

To qualify as a home office, the space must be used regularly and exclusively for your trade or business. It must be your principal place of business or a place where you physically and regularly meet with patients, clients, or customers. The space will be considered your principal place of business if it is used for performing administrative or management activities, such as billing, bookkeeping, ordering supplies, setting up appointments, and writing reports, and there is no other fixed location where you regularly perform these activities.

The home office doesn't have to be a separate room, but it must be clearly exclusive. It can be a sectioned-off part of a room, but it must be used exclusively and regularly for business. For example, parking your laptop on the kitchen table or meeting a client in your living room does not count as a home office.

If you use part of your home, such as a room or studio, as your business office, but you also regularly use that same space for personal purposes, you won't qualify for the home office deduction.

If you are a renter, payments to your landlord count as qualifying expenses. Other expenses include home maintenance, renters' insurance, electricity, security systems, heating and cooling systems, internet, and a secondary phone.

Home office calculation methods

There are two methods for calculating the home office deduction: the standard method and the simplified method.

The Standard Method

The standard method involves completing IRS Form 8829 to compute the actual amount of the deductible home office expenses.

First, calculate the square footage of your home office. If your home office is a 15-foot by 15-foot room, then its total square footage is 225 square feet (15 feet x 15 feet = 225 square feet).

Second, find out the square footage of your home. For example, your home might have a total area of 1,600 square feet.

Third, divide the area of your office by the area of your house. For our example, 225 ÷ 1,600 = 0.14 (or 14%). This decimal represents the percentage of your total home expenses that can be allocated toward the home office deduction.

After figuring out the percentage of your household expenses that can be written off, you must list all of the expenses that pertain to your entire home, such as mortgage interest, real estate taxes, insurance, utilities, and depreciation for the year under the section titled "Indirect expenses" of Form 8829.

Expenses that are incurred solely for the benefit of the office space are then listed under the "Direct expenses" section of the form. The indirect expenses are totaled and multiplied by the percentage derived earlier (14% from our example). Then, the indirect expenses total is added to the total of the direct expenses.

The Simplified Method

The simplified method involves multiplying an IRS-determined rate by the square footage of your home office. To use the simplified method, your home office cannot be larger than 300 square feet, and you won’t be able to deduct depreciation or home-related itemized deductions.

The simplified method uses a prescribed rate of $5 per square foot with a maximum of 300 square feet.

For example, if your home office measures 150 square feet, then the deduction would be $750 (150 x $5).

The simplified method can be used for taxable years beginning on or after January 1, 2013.

Frequently asked questions