S Corp Home Office Deductions: Everything You Need to Know
S Corp home office deductions can be accomplished on your own however many taxpayers fear that such deductions could trigger an IRS audit.3 min read
S Corp home office deductions can be accomplished on your own. Many taxpayers have trouble with this area, and they 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.
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 S Corp.
First, you may deduct costs in the form of an unreimbursed employee expense under Job Expenses category on Schedule A. Such expenses in Schedule A are only deductible if the total surpasses two percent of your adjusted gross income.
Second, a corporation can issue rent for your home office.
Third, a corporation may pay for the costs of home offices under an accountable plan in regards to employee business reimbursement that’s classified as a business expense. In other words, you can be reimbursed under the accountable plan, and it can offer great tax savings. Also, you may dispense money out of your organization tax-free. The business may also deduct the amount of the reimbursement, and you would not have to report such a payment as income.
In addition, it is a better option than getting the business to pay rent to support the home office. The corporation may deduct the rent paid you, but you must record the rent in the form of income on Schedule E. Also, you may only deduct a pro-rated share of the following against Schedule E rental income:
- Real estate taxes
- Casualty losses
- Mortgage interest
Such expenses would otherwise be deductible in Schedule A. Also, you may not deduct a proportionate share of any expense in regards to the use of the dwelling.
This usually includes insurance for the dwelling, including maintenance and repairs, and depreciation. Also, certain indirect expenses would not include expenses pertaining to electricity costs used to power equipment and lights of the office.
Home Office Qualifications
In order to qualify your abode as a home office, you must adhere to the following:
- The space in question must be used on a continuous basis.
- The space must be exclusive, meaning the office cannot be used for personal reasons and must be relegated for business and trade only.
- 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
- Ordering supplies
- Establishing appointments
- Drafting reports
Also, you must have no other location where you conduct the same tasks.
Further, you should draft a monthly expense report on behalf of your business, and should draft a report regardless of whether you have a home office. To write a sound report, you should include lines for the following business expenses:
- Tolls and parking
- Office supplies
Further, you should attach any receipts you have to your report. Corporate reimbursement may be annual, monthly, or quarterly.
- Note: Mortgage payments or deprecation cannot be added as an expense and be reimbursed.
The deprecation would be permitted under a standard home office deduction on an individual tax return. Also, you do not need to carry forward depreciation schedules to recapture it upon selling. With that, you should include a section for your home office in your report.
Home Office Calculation
Calculate the business use percentage of the home by dividing the office square footage by the total square footage of your home. For instance, in a 1,500 square-foot home, if you have a 10x10 office room, the square footage would be 100. You would then divide 100 by 1,500. This allows you to deduct 6.7 percent of your office expenses by multiplying the percentage by the eligible home expenses in the form of the following:
- Mortgage interest
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