S-Corporation Home Office Deductions, Reimbursements, and Expenses

If you are an employee of your own S corporation, you have a couple of choices for handling the costs of a qualifying home office:

  1. The S corporation can pay you rent for the home office.
  2. The S corporation can pay you for the costs of a home office under an “accountable” plan for employee business expense reimbursement. Accountable Plan for S-Corporation Deductions and Reimbursements

Being reimbursed under an accountable plan provides the greatest tax savings. It is an excellent way to get money out of your S 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.

To qualify as a home office, the space (it does not have to be an entire room) must be used regularly (on a continuous, ongoing or recurring basis) and exclusively (there can be no personal use) for your trade or business, and it must be your principal place of business or a place where you physically meet with patients, clients or customers on a regular basis. 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.

As an employee of the S corporation, the home office must be for the convenience of your employer. This means the home office is required as a condition of employment, it is necessary for the business to function, or it is necessary for you to properly perform your duties as an employee. If you do not have any other place of business, such as a rented office or storefront, your home office should qualify.

For an expense reimbursement plan to be considered “accountable,” the expenses that are reimbursed must be for actual job-related expenses and you, as the employee, must substantiate the expenses by providing your employer with receipts or other documentation.

You should create a monthly “Employee Expense Report” form for your corporation. This is a good idea whether or not you have a home office. Start out with lines for business mileage and other out-of-pocket business expenses, such as postage, office supplies, parking and tolls, meals and entertainment, etc. Staple receipts for these items to the report.

Include a Home Office section in the report. 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. List each item of expense paid during the month, such as:

  • real estate taxes
  • homeowner’s insurance
  • oil heat, gas, and electric
  • water and sewer
  • alarm or office amount, and write a check from the corporation to yourself for this amount. To be clear, this only applies if you claim the home office deduction if you have your own business and use a portion of your home for your business.

You must reduce the amount of your itemized deduction for real estate taxes and mortgage interest by the amount of reimbursement you receive from your corporation during the ye

  • security service
  • garbage disposal
  • general repairs and maintenance
  • mortgage interest (taken from the monthly mortgage billing statement or a loan amortization statement you can create online)

Multiply the total of these expenses by the business use percentage to determine the amount to be reimbursed. Total up all the business expenses listed on the form, including the homear for these items. If your real estate taxes for the year are $10,000, but in the course of the year you were reimbursed $2,000 by the corporation, you can only deduct $8,000 in real estate taxes on Schedule A.

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.

For example, if the office space was 10% of the total area of your home, you DO NOT have to pay income tax on 10% of the gain from the sale. You will be able to exclude the entire gain, up to the $250,000 or $500,000 limits, if you qualify.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.