Home Office Expenses and S Corporations

Do you use a portion of your home as a Home Office where you perform some of your work? If you answered “Yes” to this question, then you may be entitled to a deduction on your income tax return.

To qualify, the space that you use for business must be “regularly and exclusively” used for business. If this is the case, then you can get a deduction for a Home Office.

There are two methods which can be used:

• Simplified Method – you measure the square footage of the space that you use and multiply that number by $5 per square foot. This is obviously the easy way of doing it but generally yields a smaller deduction.
• Actual Expense method – you measure the square footage of the space that you use and divide that by the square footage of the entire living space in your house (not your garage just living space). Then using Form 8829 Expenses for Business Use of Your Home, you can calculate the deduction.

The next question for a Home Office is, “What is the nature of your relationship to the business?”

• Employee of a business that you don’t own – use Form 2106
• Business owner who is a sole proprietorship – use Schedule C
• Real estate investor – use Schedule E
• Partner in a partnership – use Schedule E
• Employee of your own S Corporation – use monthly reimbursement

Notice that if you own a S Corporation, then you can get a tax-free reimbursement and your S Corporation gets a deduction. That means that you get reimbursed for a portion of your home expenses that you would spend under normal conditions. These include mortgage interest, property taxes, insurance, utilities and repairs and maintenance. You already get a deduction for mortgage interest and property taxes on Schedule A. If you use a portion for the Home Office deduction, then the amount that you can claim on Schedule A is reduced by the amount claimed for the Home Office deduction.

To use this method, you should set up an Accountable Reimbursement Plan. This is a company policy stating what will be reimbursed and any restrictions. This is a simple form and calculation used to account to your employer for your expenses.