S-Corp Strategy: Home Office Tax Write-Offs

S-Corps, or S-Corporations, are entities that are taxed under Subchapter S of the Internal Revenue Code. They are similar to single-member LLCs or partnerships in terms of taxation but have management advantages, rigid formalities, and wage payment structures akin to C-Corporations. S-Corps can be a great way to save on taxes, but it's important to understand the nuances of the associated rules and regulations. One area that often raises questions is the ability to write off a home office.

The good news is that S-Corp owners can indeed deduct home office expenses, but it's a bit more complicated than it is for single-member LLCs or sole proprietors. Here's what you need to know.

Firstly, to take advantage of the home office deduction, you must have a dedicated work-only area. This means no kitchen tables, couches, or beds. The space must be used regularly and exclusively for business and should be your principal place of business. If you rent an office space and also have a home office, the deduction usually doesn't apply.

Secondly, as an S-Corp owner, you can't simply fill out a tax form for the home office deduction like you would with a single-member LLC. Instead, it gets a bit more intricate. Shareholders can be reimbursed for an allocated portion of their home expenses related to their home office, including rent, mortgage interest, property taxes, home insurance, utilities, repairs, and maintenance. It's important to note that if you benefit from itemized deductions, any mortgage interest and property taxes reimbursed by the S-Corp must be excluded from your Schedule A.

To deduct home office expenses, the S-Corp must set up what's called an accountable plan. This is a formal reimbursement arrangement that allows the corporation to pay employees and shareholders for their business expenses. The accountable plan must meet specific IRS requirements, including having a tight business connection, substantiating deductions with documented support, and ensuring that any excess reimbursements over actual expenses are promptly repaid.

In summary, while it's a bit more complex, S-Corp owners can indeed write off their home office expenses by setting up an accountable plan and ensuring they meet the necessary criteria.

S-Corp home office deductions can be done independently, but taxpayers fear triggering an IRS audit

S-Corp Home Office Deductions: Can Be Done Independently, But Taxpayers Fear Triggering an IRS Audit

S-Corp home office deductions can be done independently, but many taxpayers fear that such deductions could trigger an IRS audit. For business owners who restructured their businesses as an S-Corp, a home office deduction can get complicated, and many avoid doing so entirely.

Deduction Alternatives

If you are a self-employed person classified as a sole proprietor, you may deduct as a regular business expense on Schedule C. If you are an employee working as a one-person corporation, you have three options when it comes to home office deductions, regardless of whether you are a C-Corp or an S-Corp.

Firstly, you may deduct costs in the form of an unreimbursed employee expense under Job Expenses on Schedule A. Such expenses in Schedule A are only deductible if the total surpasses two percent of your adjusted gross income. Secondly, a corporation can issue rent for your home office. Thirdly, a corporation may pay for the costs of home offices under an accountable plan regarding employee business reimbursement that is classified as a business expense.

Home Office Qualifications

To qualify your abode as a home office, you must adhere to the following: the space in question must be used continuously; the space must be exclusive, meaning it cannot be used for personal reasons and must be used for business and trade only; and the location must be your primary place of business where you meet with customers, clients, or patients physically, and the meetings must occur regularly. In addition, the place must be a primary place where you engage in administrative tasks and establishing appointments. You should also have no other location where you conduct the same tasks.

Accountable Plan

The third option, being reimbursed under an accountable plan, provides the greatest tax savings. It is an excellent way to get money out of your closely-held corporation tax-free. The corporation can deduct the amount of the reimbursement, and you do not have to report the payment on your personal income taxes. This option is better than having the corporation pay you rent for the home office. While your corporation can deduct the rent paid to you, you must report the rent as income on Schedule E.

General Guidelines for S-Corp Home Office Deductions or Reimbursements

Deducting, or being reimbursed for, a home office today will no longer turn around and bite you when you sell your personal residence, as had been the case in the past. 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.

Self-employed people classified as sole proprietors can deduct home office expenses as regular business expenses on Schedule C

The home office deduction can be calculated using two methods: the simplified method and the actual expenses method. The simplified method multiplies the square footage of the home office by a prescribed rate, up to a maximum of 300 square feet. The actual expenses method measures actual expenditures against overall residence expenses. This method allows for the deduction of mortgage interest, taxes, maintenance, repairs, insurance, utilities, and other expenses.

It is important to note that the home office deduction is only available to self-employed people and not employees. Additionally, the deduction may impact the ability to avoid capital gains tax on home sales. It is recommended to consult with a tax advisor or use appropriate online tax software to ensure compliance with the rules and optimize deductions.

S-Corps can pay rent for the home office

S-Corps can pay rent for a home office, but there are a few things to keep in mind.

Firstly, the home office space must be used regularly and exclusively for business purposes. This means that the space cannot be used for personal reasons and must be dedicated solely to business activities. Additionally, the home office should be the principal place of business, where administrative or management activities such as billing, bookkeeping, ordering supplies, and setting up appointments are conducted.

Another important consideration is that the S-Corp must have a separate "Accountable Plan" to reimburse employees for home office expenses. This plan allows the corporation to deduct the reimbursement amount from its taxes and ensures that the employee does not have to report the payment as income on their personal tax return. The accountable plan must meet specific requirements, including that the expenses have a clear business connection and are supported by documentation such as receipts.

It is worth noting that reimbursing employees for home office expenses through an accountable plan is often considered a better option than having the S-Corp pay rent for the home office. While the corporation can deduct the rent paid, the employee must report it as income on Schedule E. By using an accountable plan, employees can avoid this additional income and still take advantage of tax savings.

S-Corps can pay for the costs of a home office under an accountable plan for employee business expense reimbursement

The accountable plan must meet three requirements to meet the IRS's standard:

• The expense must have a tight business connection. For example, if it's mileage, it needs to be for business-related driving.
• You must substantiate the deduction with documented support. Receipts, expense exports, and explanations of business purpose are key to substantiating these deductions.
• Excess reimbursements over actual expenses must be promptly repaid. If the accountable plan allows for advances to the shareholder, any excess over the actual expenses must be repaid by the shareholder to the S-Corp within 120 days.

Shareholders can be reimbursed for an allocated portion of their related home expenses for their home office, including rent, mortgage interest, property taxes, home interest, home insurance, utilities, repairs, and maintenance.

The home office space must be used regularly and exclusively for business and should be the principal place of business. This means that the space must be used only for business purposes, with no personal use, and there must be no other fixed location where the same tasks are conducted.

To calculate the reimbursement amount, determine the "business use percentage" of the home office by dividing the square footage of the office area by the total square footage of the home. This percentage is then applied to the home expenses, such as homeowner's insurance, utilities, mortgage interest, and repairs, to determine the amount to be reimbursed.

The accountable plan provides a structured and legal way to deduct reimbursements for necessary expenses, such as home office use, that would not typically be deductible by shareholders and/or employees on their personal tax returns due to changes in the tax code. As long as the S-Corp and the shareholder/employees follow the accountable plan's rules, the reimbursements are counted as valid business deductions, and the reimbursements are tax-free to the shareholder/employee.

To qualify as a home office, the space must be used regularly and exclusively for trade or business

The space must be your principal place of business, meaning it should be where you spend most of your business activity time and where you perform your most important business activities. It should be the primary location of your business or a place where you physically meet with patients, clients, or customers on a regular basis.

If you are an employee of your own S-corporation, you can deduct the costs of a home office if you are filing a Schedule C. The S-corporation can also pay you rent for the home office or pay for the costs under an "accountable plan" for employee business expense reimbursement.

Frequently asked questions