Discussion:Home Office for S-Corp

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Discussion Forum Index --> Tax Questions --> Home Office for S-Corp


EL CID (talk|edits) said:

17 February 2006
Hi. If an s-corp is located out of the stockholders home, can the s-corp deduct home office expenses similar to a sole proprietor? I know a second phone line would qualify, but wondering about utilities, maintenance?

Thanks.

Warren (talk|edits) said:

17 February 2006
I would rent that portion of the home to the corp and deduct those expenses against the rent income on schedule E of 1040.

ScottCPA (talk|edits) said:

17 February 2006
Here's my understanding of it. Rent income to shareholder should be no problem. Rent deduction on S-corp and Rent income on Sch E - the 2 just offset each other. No tax savings except "disguised" wages (save fica tax). But I think it's code sec 274 that prohibits a shareholder/employee from deducting home office expenses (i.e. -just the utilities, depr, etc - "overhead"). Of course, furniture, computers, specific phone lines, supplies, etc. could be deducted by the S corp. So my Sch E just has rent income with no deductions. But I do believe the "employee", assuming he's getting a W-2 from the S-corp, could maybe deduct the "home office" deduction (utilities, depr)on Form 2106 if getting over the 2% of AGI.

Taxref (talk|edits) said:

18 February 2006
The way to gbet around the prohibition on deducting rental expenses to an employer is via an accountable plan. Set it up so that the appropriate percentage of expenses is repaid monthly to the employee, upon submission of utility bills, etc. That way it is deductible to the S corp and not reportable by the owner/shareholder.

TerryB (talk|edits) said:

19 February 2006
Can the Shareholder then loan or put it the money back into the corp as a loan or capital?

Taxref (talk|edits) said:

19 February 2006
If the proper documents were completed, yes.

Bretsharon (talk|edits) said:

20 February 2006
But what about §280A(c)(6)?? It says a rental to employer then ¶ 1 and 3 does not apply. Those are exceptions to the rule that you can't deduction home expenses. See too, PLR 200121070 and 8819009. BNA Portfolio 547-2 footnotes 631; Feldman v comm which generated c 6.

I think we might be able to take the position that as long as compensation is proper, and the rental is FMV, then maybe ok. But c 6 says nothing about those.

I think you don't get any of the deductions, because once you kick out exceptions 1 and 3, you are left with the storge use and day care services, which don't make a lot of sense, but there3 is is.

Bretsharon (talk|edits) said:

20 February 2006
Just to complicate things more, see Publication 587, the flowchart at page 4. Thus, if you are NOT an employee, but use regularly and exclsively, then you can get the deduction, but not so if are an employee. Note it says nothing about the propriety of the Rental amount.

Just for fun, look at page 19, where in a Partnership might be different!!

Bretsharon (talk|edits) said:

20 February 2006
However, what happens if there is no rentals paid, but only expense reimbursement? c 6 talks of rentals. So if there is just expense reimbursement, a lot of things go away

LJACPA (talk|edits) said:

20 February 2006
This is a bit confusing and I believe there was a previous discussion on this that made it a lot easier to apply (can't find it though). If shareholder has an office, can there be any justification for the S corp to pay rent to that shareholder? I have a new client this year that former accountant told her to pay rent to herself because she uses her 'home office' as a way to keep some confidentiality. In 2004, S corp paid her over $50,000 for rent and deducted property taxes and depreciation on Schedule E. Sound okay???

Taxref (talk|edits) said:

21 February 2006
I have seen many instances of corporations paying rent to shareholder/employees, with rental income and expenses shown on Schedule E of the shareholder/employee's 1040. However, based on my reading that treatment is actually incorrect. The accountable plan is, to my knowledge, the only correct way to do it.

LJACPA (talk|edits) said:

21 February 2006
Taxref, are you saying that there should be no rent paid, expenses and reported on 1040 as income, but only actual documented expenses can be reimbursed? If so, is this true even if the shareholder/employee has an office (not in her home)where she can do this work?

TAX2 (talk|edits) said:

21 February 2006
Taxref is correct.......must use the "reimbursement" method, ie the accountable plan. Cannot rent to employer. The reimbursements do NOT appear in the shareholder's personal return, and appear as expense items in S corp's return.

This came about many years ago......can't cite ref now.....but as I recall it turns on the definition of rent.

ScottCPA (talk|edits) said:

22 February 2006
Ignoring the concept of trying to deduct the utilities, etc., but just the scenario where s corp pays and deducts rent to shareholder for home offc and shareholder picks up the rent as income without deducting any expenses against it. Therefore no change to shareholder's net income, but a justifiable way to make payments to shareholder without calling it wages (fica taxes!). Am I hearing there is a problem with this?

Bretsharon (talk|edits) said:

22 February 2006
On the rental aspect, I believe everyone is ignoring §280A(c)(6) which states thata rental of a dwelling unit by the taxpayer to his employer during any period in which the taxpayer uses the dwelling unit, then ¶1 and ¶3 can't be used to allow office-in-home expenses. ¶1 is the "principal place of busienss; used by patients, clients and the separate structure. ¶3 is the dwelling unit exception.

Hence, the only exception to the general rule about not allowing deductions for the office-in-the-home is for storage use and day care services.

The case is Feldman which caused the (c)(6) rule. See the commitee reports on the tax reform act of 1986. CCh reference is ¶14,850.02

I think the accountable plan is the only way to go.

Natalie (talk|edits) said:

19 March 2006
Would the accountable plan work for a taxpayer who rents a home and has a home office for the s-corp? Are there any issues with owner-employees? I have a client in this situation who is a 100% owner-employee.

If the accountable plan works in this situation as well, would you recommend the plan be drawn up by an attorney? Or are there self-service forms available online?

ArchCPA (talk|edits) said:

19 March 2006
I've a S Corp client (plumber) who uses his a part of his home for business. The client takes the home office deduction in his personal return (1040).

Nola999 (talk|edits) said:

19 March 2006
That's my understanding of the rules too. A corp can't rent home office space from a shareholder.

Accountable plan or Form 2106 Unreimbursed Employee Expenses.

JR1 (talk|edits) said:

20 March 2006
Sorry Nola, you cannot claim unreimbursed expenses from your own corp. They must be reimbursed.

JDACPA (talk|edits) said:

20 March 2006
Agree the shareholder cannot deduct the operating expenses of the S corp home office, that has been my understanding for years. I have shown rental income with no expenses. The accountable plan angle I have not explored.

Natalie (talk|edits) said:

20 March 2006
I read the accountable plan rules, and it seems like all three tests could be met for home office reimbursement by the employer. Here are the facts: Owner-employee of S-corp rents a home. Submits reimbursement request to employer on a monthly basis for home office expenses (% of rent, utilities). Plan is in place that meets IRS requirements for returning excess advances, etc.

Is anyone aware of any court cases that do not support this scenario or any specific code that disallows it? Client in this case only incorporated to get the best health insurance plan. There is no doubt about being able to substantiate the business use of the home. If the S-corp is unable to deduct the home office expenses, it will add significant cost to doing business as an S-corp. (We are working on changing the law so that busines owners have equal health care insurance options whether they operate as a corporation or sole proprietorship.)

JR1 (talk|edits) said:

20 March 2006
You have it right, Natalie. This is what we've been trying to say, but folks don't get it. Yes, the corp. can reimburse for all those expenses, and that's all that it can do, so the net effect is the same as you had before.

ScottCPA (talk|edits) said:

21 March 2006
Since the rent paid to an owner of an S-corp for the use of a portion of his house as an office is such an arbitrary number to come with in the first place, is reimbursing the owner for 10% (or whatever %) of his utilities and insurance even worth bothering with? That's the way I look at it - I just set a decent rent amount and forget the utilities.

Klesher (talk|edits) said:

21 March 2006
Agree with Scott, That is the way I have been doing it. Saves on Fica expense more so than the piddley 10% or so on reimbursement of utilites.

Natalie (talk|edits) said:

23 March 2006
Just for clarification Scott, the owner of the S-corp in my case rents (not owns) the home, so there is no arbitrary number to come up with. Let's say the office occupies 20% of the total home, monthly rent paid to the landlord is $2,500 and utilities are $200. The owner-employee will submit monthly reimbursement requests for a total of $540 ($500 rent and $40 utilities). The result is that the home office expenses will be deducted on the S-corp return via the reimbursements, and no rental income needs to be picked up by the owner-employee.


I generally recommend my clients take all of the deductions they are allowed to in the S-corp. In this case, for example, the client saves about 11% on payroll taxes (FICA, state unemployment, federal unemployment, medicare, TDI). Then there's the savings on the federal and state income taxes on the 1040 as well as potential savings on workers' compensation premiums paid by the S-corp. When you add all of that up, you could be looking at a savings of 40% - 50%, not just the 6.2% of FICA.

PDXCPA (talk|edits) said:

23 March 2006
Kind of confused here... We're talking about an S Corp whose wages to a shareholder should be comparable to marketable wages regardless of expenses. So I don't quite correlate this to how one accounts for home-office/rent expense. I'm probably missing something here.

Also, under an accountable plan is depreciation of the home-office portion reimbursed?

Natalie (talk|edits) said:

24 March 2006
The original question was whether an s-corp could deduct home office expenses similar to a sole proprietor. Wages come into play when you consider the tax savings that can result from deducting the expenses related to a home office on the corporate return as opposed to unreimbursed employee expenses on the 1040 (subject to the 2% of AGI limit and even whether or not itemized deductions are taken). Wages are only required to be reasonable in the circumstances, which may not always be comparable to prevailing wages. As far as depreciation goes, how would you claim it as a reimbursement under an accountable plan? I don't think that would be allowed.

HLCPA (talk|edits) said:

15 December 2006
I am new to participating on this site. But came across this thread. Any new ideas on how the S-corp can deduct the office expenses. This whole thing seems unfair to just S-corps, as any other entity, like Sch C, could take % of costs. But it does seem Sec 280A, prohibits much of Home Office for shareholder of S-corp.

I am particularly interested in knowing about how you treat a home that is owned. Is there a way to deduct a % of interest expense onthe corp. What if the mortgage is over $1.1 Million?

It seemed from the March, 2006 postings, an accountable plan is the only way to go. (If so, could the corp reimburse, lets say $10,000 for mortage interest (50,000 x 20%) and then just have owner put $40,000 on Sch A?

Any other ideas would be very appreciated. Harlan

Rgtaxservice (talk|edits) said:

15 December 2006
I would think if the S Corp deducts the rent, rthe shareholder/homeowner would need to declare that rent as income and file on a ScH E.

My S Corp leases the office from me personally. The lease is for rent only...utilities are included. The S Corp can claim the monthly rent deduction.

On the flip side, I personally claim the rental income on a Sch E. I then deduct a portion of the utilities (excluding water), taxes, mortgage, and depreciation.

You need to think of it in terms of how the rental would be handled if the S Corp actually rented office space from a third party. For someone to deduct the expense, someone claims the income.

Although not a separate structure, this office is used regularly and exclusively for business purposes.

Will (talk|edits) said:

15 December 2006
RG,

In order to beat 280(a) I think the office has to be the principal place of business, not just regularly and exclusively.

Will

Rgtaxservice (talk|edits) said:

15 December 2006
Will,

You are right. I didn't mention it because I thought it was a given.

Death&Taxes (talk|edits) said:

15 December 2006
RG: Read Sec. 280A(6) You are fine on taxes and interest but not the other expenses. This is why JR among others push for the accountable plan.

Rgtaxservice (talk|edits) said:

15 December 2006
D & T

I loathe reading Code. I always have to drawn a map to 'see' the double negatives and the cancellations.

Anyway, I read 280A(6) and I understand its meaning, but couldn't the 'etc.' in 280A(b) be taken to include utilities? I tried to find reference to the deductiblity of utilities but I got 'lost' with my map.

280A(b) "Exception for interest, taxes, casualty losses, etc."

Rick

Death&Taxes (talk|edits) said:

15 December 2006
I prefer editorial comment too! Code is what insurance men throw at you when they sit with you and your client and are trying to sell your client something. You know the drill, "as you know, Section 280A(c)(6)" and, of course, you have no idea what he is talking about without getting out a book. So in my 2007 RIA Federal Tax Handbook, Paragraph 1657 on page 191 it says "No home office deduction is allowed for expenses attributable to the rental by an employee of all or part of his home to his employer if the employee uses the rented portion to perform services as an employee of the employer." Interest, tax and casualty loss are deductible anyway, so that is why they are permitted.

Rgtaxservice (talk|edits) said:

15 December 2006
D&T

At least I learn something new everyday. :)


Now, to add a spin to this. If the shareholder doesn't take a salary or distribution, then technically, the shareholder/employee isn't an employee. Does that nullify 280(6)?

Death&Taxes (talk|edits) said:

16 December 2006
You hit the bullseye, RG. And it is not just home office. Years ago I had a cow when clients bought disability insurance and were not taking wages; insurance companies do not pay on dividends.

Lhhesscpa (talk|edits) said:

16 December 2006
Rick: I disagree with your statement that the uncompensated shareholder who performs services for the corporation is technically not an employee. In general, whether the someone is an employee is primarily a function of their relationship with the recipient of their service, not the amount, type or name of their compensation. --Larry Hess, CPA | Albuquerque, NM - Talk to me

Kluskey (talk|edits) said:

16 December 2006
Here we sometimes see S corporations signing net lease arrangements with the the owner of the home office. The S corp pays rent, plus the office % of utilities, insurance, property tax, and maintenance. The rental schedule on the owner's 1040 just shows rent income and interest expense. This gets around section 280A problem. Net leases are customary for arms length lease arrangements for office space in this area.

A written lease agreement is executed and form 1099-Misc is issued.

Albundy (talk|edits) said:

20 December 2006
This is related. S. Corp previously had main office in home of Member/Employee who was reimbursed for that business use. During 2006, Member/Employee was required to be out of town & S-Corp reimbursed him for expenses, including travel. This temporary work assignment is now indefinite. S. Corp wants to rent an apartment for use as office in the other city & allow part of it to be used for the Member/Employee to live in while away from home. Apartment is cheaper than commercial office space. Will that work? If necessary, I can have Member/Employee reimburse S-Corp for personal portion of expenses. Also can make this the S-Corp's main office if necessary.

Pegoo (talk|edits) said:

18 January 2007
That would make it the principle place of business. I think that will work but I'm still a newb.

Death&Taxes (talk|edits) said:

18 January 2007
Combine these forty points with Discussion: Business Use of Home - S Corporation

JeffreyRopp (talk|edits) said:

28 November 2007
I'm confused about one aspect.

In a situation where the sole employee rents the home, it seems that rental expenses not reimbursed would be returned anyway as shareholder distributions. In either case, there would be no payroll tax implications, but the income taxes would be the same. If that's correct, what's the point?

Natalie (above) seems to suggest that this reimbursement does not need to be claimed on Schedule E. If that's correct, then it would make sense to reimburse the employee who rents the home.

Can someone offer a clarification? Thanks!

Johnhuddleston (talk|edits) said:

28 November 2007
I don't think this works when the space is used by an employee of the S Corp. 280A(a) general rule is no deduction for the dwelling. 280A(c)(1) provides an exception when exclusive use, principal place blah blah blah. 280A(c)(3), however, says the exception of 280A(c)(1) does not apply "to any item which is attributable to the rental of the dwelling unit . . . by the taxpayer to his employer . . . in performing services as an employee to the employer.

Thus, renting a portion of the dwelling unit to the S Corp doesn't work if you are just going to use it to work as an employee. John Huddleston

Natalie (talk|edits) said:

November 28, 2007
Okay John, but if the home office is the principal place of business, clients are met there, it's the only office for the business, etc., then the exception applies, right?

LAEsquire (talk|edits) said:

26 January 2008
For C corporation, rent is OK?

What about if one office is used for Sked C and for S corp activities by a shareholder/employee, who also has other sole proprietorship business ventures. Instead of Sked E, then, could one have the S corp deduct the accountable plan 'rent'/expenses, then report these on Sked C as other income, then take the home office deduction on Sked C?

DZCPA (talk|edits) said:

26 January 2008
You are a Lawyer. Do you prepare your own tax returns?

Licea (talk|edits) said:

15 April 2008
I'm obviously late to the discussion but I've just stumbled upon this thread and read it with great interest. Has anyone advised a client to do the reverse? i.e. not rent to the S-Corp, but have the S-Corp sublet a portion to you? Wouldn't that side-step much of the headache described above?

From my reading, Section 280A(c)(6)'s nullification of the 280A(c)(1) and (3) deduction allowances only apply if the employee rents to the employer, not if the employer rents to the employee. So the S Corp will deduct the full rent paid as a business expense, but will report the rent received from the employee as income. The net effect in terms of cash flow would seem to be the same as when the employee rents the location and sublets a portion to the S Corp for its office.

Can anyone spot a downside to having the S Corp do the renting and then subletting a portion to the employee/shareholder for personal living quarters (as opposed to the employee renting and subletting a portion to the S Corp for its office)?

Dub2131 (talk|edits) said:

20 November 2008
I would like to confirm my understanding of 280A with respect to various entities types. In my scenario, taxpayer is SMLLC that checked the stupid box to be taxed as a corporation, but of course never filed the 2553. Business is a restaurant, and the owner's primary residence is part of the same building. Are the following interpretations correct:
  1. As a C-Corp: Corp is allowed to pay rent to owner and deduct; Owner reports rent income on 1040 Sch E and takes all expenses (including utilities, insurance, depreciation) as 280A doesn't apply to a C Corp.
  2. As an S-Corp: Corp is allowed to pay rent to owner and deduct; Owner reports rent income on Sch E but deductions are limited to mortgage interest and real estate taxes.
  3. As a partnership/MMLLC: same as C-Corp?
  4. As a sole prop/SMLLC: doesn't matter - no rent would change hands and individual would take all on 8829 flowing through to Sch C.

To date the corp has shown a net overall loss, so the thought is it may be an ideal time to liquidate and start over, but I want to have a firm grasp on the rental treatment since it will be a controlling factor in the decision.

Thanks in advance.

Death&Taxes (talk|edits) said:

20 November 2008
#1, Corporation can certainly pay and deduct rent, but the 280A test is at individual level Sec. 280A(c)(6)

.#2 is correct and see #1 for #3

Dub2131 (talk|edits) said:

20 November 2008
So, long story short, the only way to get the "other expenses" (utilities, etc...) in this scenario is as a SMLLC?

Why does 280A(a) even bother to state "...in the case of any individual or S Corporation...as a residence" if the threshold is at the individual level?

Wait - isn't having "S Corporation" in there at all a waste anyway - an S Corp can't have a "residence" right?

Death&Taxes (talk|edits) said:

20 November 2008
My phrase 'at an individual level' was imprecise. What I meant was that since the section deals with business use of the home, it only looks at matters from the viewpoint of the homeowner. There is a lot of chaff in this discussion, but you might also check out the other referenced here and check out the reimbursing the officer/shareholder for the costs....JR and others swear by this.

JoSavvy (talk|edits) said:

21 November 2008
Ok, Joining in here real late.

I'd like to complement Licea on her outside of the box thinking. I've been thinking about using that method myself, and wondering about the effects it may lead to. Another method I'd like to ask about is, what if the S corp paid the entire amount on utilities, and insurance, but deducted only the appropriate amount as expenses, and categorized the remaining amount as a distribution to the owner/employee?

Natalie (talk|edits) said:

November 21, 2008
My understanding is that paying any personal expenses out of the corporation allows the possibility for someone to pierce the corporate veil. I wouldn't recommend it.

Dub2131 (talk|edits) said:

24 November 2008
I believe Licea's plan wouldn't work unless the S-Corp owned the real estate. Otherwise you can't sublet something you don't own. I guess if it was a rental, the S-Corp could go on the lease though, if the lessor allowed it. In that case, Natalie has a valid point.

I believe JR is the resident expert on real estate in an S-Corp. Good times.

Smokeytax (talk|edits) said:

24 November 2008
I don't see any downside to Licea's idea.

I think that it's unusual to have an S corporation rent a residence to the owner because if the S corporation owned the real estate, then there would never be any section 121 benefit (plus there would be malpractice by the tax preparer).

But, if the S corporation leases, rather than owns the real estate, why not rent the residential part of it to the owner?

As with any rent arrangement, you would want to execute a lease at market value. The landlord can either pay the utilities or pass them along to the tenant, depending on the terms of the lease. Presumably in the second case, the market value of the rent would be lower.

Stacpa17 (talk|edits) said:

28 November 2008
I just went to a CPE seminar and this was a question that was brought up. THe answer was yes, you can pay yourself a rent, pick it up on schedule e BUT YOU CAN ONLY deduct a percentage of the real estate taxes and mortgage interest period.

Kevinh5 (talk|edits) said:

28 November 2008
that doesn't mean that the instructor was correct

Natalie (talk|edits) said:

November 28, 2008
Kevin, that is quite a monkey wrench you just threw. When I go to a CPE course, I expect to be able to rely on the information the presenter provides.

Kevinh5 (talk|edits) said:

28 November 2008
Exactly, and the material he/she teaches from the text is generally correct. But when someone from the audience throws him a 'I have a client who..." question and expects an answer, the answer is always from the instructor's memory. What reference sources did the instructor have on hand to double-check his answer from? none.

As an experienced instructor, I can tell you that the questions from the floor are often from some topic OTHER than the text. I am always prepared for the text questions. I can't prepare at all for the 'I have a client who...' question.

Death&Taxes (talk|edits) said:

29 November 2008
And those poor slobs standing at the lectern don't have people like Riley, Kevin, and others to shoot them down when they give answers to queries from the audience.

[The term 'poor slobs' does not represent the views of this station and certainly doesn't refer to Kevin].

Kevinh5 (talk|edits) said:

29 November 2008
Thanks, DT. I often don't speak up in a CPE class, however, when an instructor gives the wrong answer, because it begins to look like an 'I'm smarter than you' contest. I would hate someone to do that to me if I were the instructor. The best thing for the instructor to say is "I am prepared to teach the material in the text. I don't have any personal experience with the question you asked, so I'd rather not guess. Let's stay on topic and move to page 28."

Death&Taxes (talk|edits) said:

29 November 2008
From my short story, The Seminar:

"During the first part of the talk, Julie had learned to size up her audience. She hoped there would be several people to provide a dialogue, people with deep knowledge who might add to the discussion, but she was aware that there was a fine line between such a group and an argumentative class. She dreaded those sessions in which one person thought he or she knew it all, and took pleasure in trying to humble the instructor. Most times the rest of the group would reach the point where they would drown out the wise guy, but dealing with such classes was difficult. Yet, at least those events were not packed with ‘zombies,’ where comments and questions were far between."

ReadMyLips (talk|edits) said:

29 November 2008
See this article

Home_Office_Expenses_of_a_One-Man_Corporation

SteveO (talk|edits) said:

15 December 2008
Depending on state and, in some cases, local law, rental of a residence OR PORTION THEREOF will void homestead exemption and is subject to sales tax.

That could be a very expensive payment from a corporation.

Ragtop (talk|edits) said:

16 December 2008
My client keeps on insisting he should be able to get the home office deduction for his S corp. This thread has been of great assitance in citing the law behind my advise that he cannot.

I think an accountable plan for the insurance, etc. effectively puts the S corporation shareholder in the same place as the sole proprietor. It's just a little more work.

Thanks for the info

JR1 (talk|edits) said:

December 16, 2008
Not really, Rag. All you have to do is the same thing you'd do for a Sch. C HO, but instead of an HO form, you make a journal entry to book the corp expense against a S/H note.

Ragtop (talk|edits) said:

16 December 2008
I think the extra work applies more to the client than to the accountant. If done right, the client should have a written plan along with board approval in the minutes. The shareholder should submit periodic reports with copies of the expenses, etc.

Face facts, most sole proprietor clients give us a number based on last year or some guess for utilities, insurance etc.

JR1 (talk|edits) said:

December 16, 2008
I think you're setting the bar too high. None of that is required that I'm aware of. The client can summarize utilities, insurance, repairs, etc. as usual, give you the square footage, and create an expense reimbursement out of it. No need to make it hard.

SoCalEA (talk|edits) said:

25 March 2009
Pardon the revival of this old thread, but I was hoping to get some clarification. I have just finished browsing through the dozen or so threads on this subject and want to make sure that I have come to the correct conclusions.

1) Per 280A(c)(1), if the S corp operates out of the shareholder/employee's residence but this is the only place of business for the S corp (principal place of business), then the shareholder may deduct insurance, utilities, etc... as a home office deduction.

Would this be reported on 2106 or on Sch E as an unreimbursed expense? If on a 2106, can the interest and property tax be reported separately so not be limited by the 2% rule?

2) If this is just a home office used by the shareholder/employee, but not the primary place of business, then no home office deduction is taken by the shareholder other than the usual mortgage interest/property taxes reported on schedule A. (Sec. 280A(b))

3) Shareholder/employee could charge rent for the home office, which would be deducted on form 1120s and claimed on 1040. No expenses may offset this rental income except for mortgage interest/property taxes. This is more or less a way for the shareholder to pull cash from the s corp without paying FICA and Medicare.

However if this was the principal place of business for the S corp, then utilities, insurance, etc... could be expensed against rental income?

4) Setup an accountable plan, reimburse the employee/shareholder for all expenses related to the home office based on % of business use and leave it at that. Expenses deducted on 1120s, nothing reported on 1040, and all is right with the world.

I am having a hard time finding case law for accountable plan and home office deduction for employee/shareholder in s corp.

Does this all sound about right?

Wwtaxes (talk|edits) said:

26 March 2009
That's not how I read it, especially #3. However, the ref above from ReadMyLips has a nice summary of it all.

Taxsub (talk|edits) said:

15 May 2009
'My client is a single shareholder S corp. He plans to add an extension (basically add a room)to his home which he will use as a place to meet his clients and which will be his office for the S corp. It will have a separate entrance too from outside for clients to come directly into his office. Can this addition be capitalized as a business asset and depreciated in the S corp books? Any assistance with this matter is appreciated.

Taxsub (talk|edits) said:

18 May 2009
I did update my profile and so I am posting this question again.My client is a single shareholder S corp. He plans to add an extension (basically add a room)to his home which he will use as a place to meet his clients and which will be his office for the S corp. It will have a separate entrance too from outside for clients to come directly into his office. Can this addition be capitalized as a business asset and depreciated in the S corp books? Any assistance with this matter is appreciated.

Powerpuffjenn (talk|edits) said:

21 September 2009
i have a client that is having to amend their 2007 taxes because they were able to secure S-Corp status retrospectively. the client is the only owner/only officer in the corporation and in 2007 was not an employee of the company (no wages paid because back in 2007, she was a sold prop). now i'm wondering how we can deduct the home office portion of the utilities, etc. since the company did not pay the owner any kind of rent.

is a 2106 at all relevant here? no FICA/Medicare/Unemployment taxes were paid on this officer, so are they able to use the 2106? We'd like everything to be on the 1120S that we now have to submit, but I'm unsure what is accurate. Thank you in advance.

Kevinh5 (talk|edits) said:

21 September 2009
did the company pay/reimburse for its share of utilities, etc?

Blrgcpa (talk|edits) said:

21 September 2009
Were there drawings as a sole prop? Are you going to retroactively issue a W-2 and pay the p/r tax? Are you also amending the 1040?

2106 is for employee expenses. If there is no employee, how can you have employee expenses?

Kevinh5 (talk|edits) said:

21 September 2009
just a few sketches, and a few watercolors. Nothing of artistic collectible value though.

Vezna31 (talk|edits) said:

31 March 2010
I hate to revive an old thread, but I recently took on a new client who has an S Corp. When I looked over the personal return from 2008, I was able to tie out all the K-1 numbers to the 1120 S with the exception of 1 line on the Sch E page 2. Carrying over along with the net income was a deduction titled Unreimbursed Expenses and it was for $15k.

I had the client call the previous tax preparer in my presence and she unwillingly (since she found out she was being fired) emailed over a worksheet showing percentage of business and applying that percentage to mortgage interest, RE taxes and all utilities.

So, my question is...is this the example of how the accountable plan is shown? On Schedule E part 2 as a nonpassive loss from K-1? I just have not seen it reported this way before and am hesitant until I know this is correct.

  • Adding a few posts from a discussion that is about to be archived, in case people search on this court case, or find it helpful for this topic:

Solomon (talk|edits) said:

17 January 2007
See Craft vs Commissioner August 15,2005. Expenses delineated in a corporate resolution are deductible - not voluntarily paid, however. Home office included but shareholder had to deduct them on Sch A Misc.

Death&Taxes (talk|edits) said:

18 January 2007
"Deductions are a matter of legislative grace." How many lost taxpayer cases contain that phrase? Craft is not totally on point, for there is no discussion of the accountable plan, but it does show that if the Board of Directors authorizes such, the percentage of personal expenses for use of home can shift to the corporation.

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