Question FIrst...why a C corp if an office in the home? Sounds like a S/H owned corporation....S corporation.

If they failed to elect the S election for a prior year, then I would essentially forego the home office and have the Employee of the Corp take the home office deduction on Sch A if applicable.

WHY OH WHY would they be a C? If a foreign person makes the S election not possible, there are some other remedies

I usually have my clients with corporations in home offices pay rent to themselves from the corporation and then they can report the rental income on Schedule E of their personal tax return, along with a pro-rata share of interest, taxes, depreciation, and other expenses as deductions against that rent income. It would be good to make sure the rent is reasonable, that the arrangement is documented in some sort of written agreement, and that a 1099 is prepared at the end of the year.

You typically have three choices with a C Corp:

1) Create an accountable plan that reimburses employees for out-of-pocket expenses related to business use of home expenses. IRS might take the position that this is a disguised rental.

2) Have the employee charge the C Corporation rent. The rent must be "fair market value." Deduct the rent on the C Corporation. Include the rent as income on Schedule E of the employee's Form 1040. Due to 280A(c)(6), there are limitations to the deductions you can take on Schedule E against the rental income as the C Corporation is renting to an employee. The expenses are limited to the pro-rata share of real estate taxes, mortgage interest, and casualty losses (if applicable) (probably would include eligible mortgage insurance premiums as well). These are the expenses that are normally deductible on Schedule A. 280A(c)(6) only allows you to deduct expenses allowable in the absence of business use.

3) Deduct the business use of home expenses as unreimbursed employee business expenses on Form 1040 Schedule A, subject to the 2% adjusted gross income haircut. See IRS Publication 587 for eligibility.

Jamy asked if you could allocate expenses to a C corporation similar to home office expenses on Schedule C. The answer is no. For a C corporation, I agree with Stephen Ashby's advice to pay rent from the corporation. I would also add that the shareholder should be taking reasonable compensation or risk potential reclassification of rent as disguised compensation by IRS.

The examples cited by Rick may apply if the entity is an S corporation and if the employee does NOT receive rental income (i.e. employee receives a reasonable salary and wants to take home office deductions, but no rent is paid.) If no rental income is involved, the employee would have to prove she meets the general rules of IRC 280A and the particular requirements of 280A(c) (1) (A) or (c) (1) (B). Specifically, she must show home office is exclusive and regularly used as either her principal place of business as an employee, or as a place where she meets or deals with customers or clients. In addition, she must show that exclusive use of home office is for convenience of employer.

However, if rental income is paid by the employer to the employee, you can't use the examples in Publication 587 because no deduction is allowed for home office space leased to your employer under IRC Sec 280A(c)(6). Anyone who is both renting to his employer and using rented portion of home to perform services as an employee falls into section 280A(c)(6). Section 280A(c) (6) also bars deducting otherwise allowable sec 162 trade or business expenses, business casualty losses and section 167 depreciation. An S corporation shareholder is an employee.

If the entity were an S corporation, the home office would be considered self-rented property. Net rental income would be recharacterized as nonpassive. Net losses are considered passive and, if eligible, entitled to the $25,000 rental real estate allowance for active participation.

It might be more beneficial to have the C corp pay rent and include rental income on the personal return.

This could be beneficial for 2 reasons: 1) It's a good way to get cash out of the C corp with out double taxation 2) Tax rates can be lower at personal level.

With that said, an S election should be filed by March 15th, 2011, so that the 2011 tax return will be filed as an S corporation.