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S-corporations and the Home Office Deduction

When you are a shareholder of an S-corp but also work for the company you are considered an employee.  Having employee status means that any home office deductions must be reported on Schedule A which requires that the deduction be greater than 2% of your adjusted gross income in order to have any tax benefit. This is generally not the case.  However there is another way to get a business deduction for the cost of your home office.   If you are not aware if you are eligible for the home office deduction please see our article “Work from Home? A Possible Deduction…

For S-Corp owners that are eligible for the home office deduction, the IRS allows the S-Corp to reimburse the owner and employees for ordinary and necessary business expenses including expenses directly related to keeping an office in their home as a "working condition fringe benefit."

The following steps must be followed to take advantage of this reimbursement plan and business deduction:

  1. The employer must adopt an accountable plan for business expense reimbursements and follow the substantiation rules.  Example
  2. The employee must provide an accounting (expense report with supporting documents) of the following expenses and apply a business use percentage based on the square footage of the area used exclusively for business to the entire home.

The following expenses are allowed (subject to the business use "square footage" percentage):

  1. Utilities
  2. Insurance
  3. Repairs and maintenance

The following "direct" expenses are allowed 100%:

  1. Office supplies
  2. Computer equipment
  3. Cell phone charges

The following expenses are NOT allowed for reimbursement:

  1. Depreciation of home
  2. Mortgage interest
  3. Property taxes

Mortgage interest and property taxes may be deductible elsewhere on your personal tax return so they do not qualify for reimbursement by the employer.  If you rent your home, you may also be able to deduct the business percentage of the rent paid as well.  Please contact your tax advisor if you have any questions and to discuss your specific situation.

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