How to Deduct Home Office Expenses in an S Corporation

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A large number of small S corporations use the home office of one of the shareholders (or the sole shareholder) as their principal business office, which is used exclusively and regularly for corporation business.

The costs related to this home office can be handled for tax purposes in a number of different ways, but generally the easiest method and the one that results in the most favorable tax treatment for the corporation/shareholder is for the corporation to reimburse the shareholder under an accountable expense reimbursement plan. Under this arrangement, the corporation will reimburse the shareholder for the home office costs on a monthly or other agreed upon basis. The amount the corporation pays is a deductible business expense, and, because the reimbursement is under an accountable plan, the reimbursement is not included in the taxable income of the shareholder.

As an accountable expense reimbursement, the shareholder must keep track of the actual expenses of maintaining the office. First, the percentage of the square footage that the office represents to the entire square footage of the home must be determined. Then, the various office expenses must be calculated or tracked. These expenses will generally include depreciation, homeowner’s insurance, utilities, mortgage interest, real estate taxes, and maintenance.

The pro rata portion of these expenses should then be submitted as an expense reimbursement by the shareholder to the S corporation, and a check should be drawn payable to the shareholder in reimbursement.

In QuickBooks, the memo section of the “check” should clearly indicate the nature of the expense, and the reimbursement request should contain the support for the amount and be filed similar to all other check support.

On his/her own personal tax return, the deductions on Schedule A for mortgage interest and real estate taxes should be reduced by the amount of the reimbursement for these items during the year.

If you are a shareholder of an S Corporation and use your home office as your principal place of business and need help setting up an accountable plan give us a call at 417-882-9000.

Follow us on Twitter, Facebook and LinkedIn for updates, visit our website at https://arndtcpas.com or give us a call at (417) 882-9000.

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