If an S-Corp is located in the stockholders home can the S-Corp deduct home office expenses?

I know that a sole proprietor can but was wondering if anything is different for an S-Corp?

If so, is there anything else that qualifies such as maintenance, utilities, etc?

asked 09 Oct '09, 21:58

TaxQueries's gravatar image

TaxQueries ♦♦
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The home office is a little more complex with an S-Corp due to rules about employees leasing home offices to employers.

The most common way to handle this is to have the S-Corporation pay rent to the shareholder for home office space and have the shareholder claim the income on their individual return on Schedule E. So far, the net effect to shareholder is zero because we have rent expense on the Corporation and rental income on the Schedule E. Next you would pick up a percentage of mortgage interest and property tax on the Schedule E; however, that is already deductible on the Schedule A, so really our only real benefit would be other expenses like insurance, utilities, repairs, and maintenance.

The problem is that 280A(c)(6) stops us from being able to claim anything but mortgage interest and property tax on the Schedule E in this situation, so you use a common work around to get the deduction - set up an accountable plan and have the S-Corp reimburse the shareholder monthly for the portion of utilities and other expenses for the rented home office. That way the reimbursed expenses are claimed on the S-Corp return and no longer blocked by 280A(c)(6).

One important thing to understand is recharacterization. The rental income from the S-Corporation is ordinary income and not passive. This is only important if the shareholder has passive activities generating losses. In other words, you cannot use the net rental income from the home office to free up unallowed passive losses on the shareholders "rental" that loses money every year.

More Info: http://pdxcpa.wordpress.com/2009/03/08/self-rental-recharacterization/

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answered 16 Oct '09, 08:55

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The potential benefit from moving mortgage interest and real estate taxes from Schedule A (itemized deductions) are with regards to what State the individual is in and/or if the person itemizes.

If the State starts with Federal Adjusted Gross Income in computation of State Taxable Income, then no deduction is gained from mortgage interest or real estate taxes.

However, Maryland is an example of a State that allows itemized deductions that include mortgage interest and real estate taxes.

(18 Oct '09, 18:17) Brent Berkman

Brent only described in some detail the state tax benefit of recharacterization. The benefit for federal tax purposes is when the taxpayer itemizes deductions on schedule A and has phased out deductions due to income limitations, or if the taxpayer is subject to the AMT, that the portion attributed to the home office becomes fully deductible.

(21 Oct '09, 08:52) Josh

Also, if you have a seperate office or place of work, the home office deduction is disallowed.

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answered 16 Oct '09, 17:19

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SandySea
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Unless there is a substantial reasonable business purpose for lease of the home office.

(18 Oct '09, 18:19) Brent Berkman

Not if you have a separate office, IRS disallows home office if you already have an office. Then would be an employee situation and can take it as unreimbursed employee business expense on schedule A but ONLY if it is for the benefit of the employer. Obviously if you already have an office outside, then having a home office benefits YOU and not the corporation. IRS will disallow this I am certain but only if you get caught :)

(18 Oct '09, 19:04) SandySea

IRC Section 280A(c)(6) prevents the deduction of anything but mortgage interest and rent in the OP's situation. Unless the taxpayer is NOT itemizing, there is no increased tax benefit. See also page 6 of IRS Publication 587, Business Use of Your Home.

If the S-corp is a non-passive activity for the taxpayer, the rental activity is also non-passive. Thus other passive losses cannot be offset against the rental activity profit.

The best way to handle this is for the employee owned employer to creat an accountable reimbursement plan and then reimburse the employee for the costs of the home office. The employee still has to have a qualified home office (including the exclusive use requirement). The benefit of the employer test is easy; the corporate entity requires the employee to provide his/her own office.

Note: The employee's basis is reduced by depreciation reimbursed by the employer which could create taxable gain at the time the residence is sold.

Using an accountable reimbursement plan means the S-corp employee reports NOTHING on his/her individual tax return and the employer gets a 100% deduction of home office costs (which flow through to the owner on Schedule K-1).

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answered 17 Aug '12, 11:33

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Bill Brown
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Asked: 09 Oct '09, 21:58

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Last updated: 17 Aug '12, 11:33