When a business owner incorporates as an S corporation, the home office deduction is not available to the corporation without some workarounds. An S corporation can pay rent to a homeowner (including a shareholder in the corporation) and deduct it as an expense, but the homeowner must claim these payments as taxable income on his personal tax return. The homeowner can claim employee business expenses for use of the home, but only on the amount that exceeds 2 percent of his adjusted gross income. An S corporation may be able to claim the entire amount of allowable home office deductions using an expense reimbursement plan.
1. Establish an "accountable plan." As an employee, the S corporation may elect to reimburse you for allowable business-related expenses, including a home office that it requires you to maintain as a condition of employment. Under an accountable plan, you must account for all of your expenses to your employer within a reasonable time, for example, monthly. You must provide receipts for all reimbursable expenses.
2. 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. You may do the same calculation using the number of rooms in your home.
3. Calculate the total amount of eligible, reimbursable expenses for business use of your home, including mortgage interest or rent, property taxes, utilities and maintenance. Multiply each amount by the percentage of business use and enter the results on the expense form that you use for your accountable plan. Attach receipts or other documentation to the form to verify these expenses.
4. Write a check from the corporation's checking account to reimburse yourself for these expenses. 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.
- Create an employee expense reimbursement form for use in your corporation. Include other expenses, such as vehicle and postal expenses on this form. Create a separate section for home office expenses and indicate the percentage of the home that is a home office in this area. Have a written policy on employee expense reimbursement to validate the plan.
- The expense reimbursement is tax-free income to the employee, but you cannot deduct mortgage interest or real estate taxes reimbursed by an employer.
- Tax laws change often. Consult a professional or research tax laws regularly to ensure that you are compliant with all IRS requirements. A home office is only deductible if it meets certain tests, including exclusive business use.
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