S-Corps CANNOT take the home office deduction. But you can do this...
- Sam Hasbrouck
- Jun 30, 2022
- 3 min read
If your business is structured as an S-Corp CONGRATS... you are saving thousands on self-employment taxes every single year! However, operating as an S-Corp is more complicated than just being a single member LLC or a sole proprietorship.
A sole proprietor or a single member LLC can take advantage of the home office deduction by using Form 8829 on their personal tax return. This deduction is a great way to lower both income taxes and self-employment taxes!
But for an S-Corp owner, it gets complicated. Grab a pen and paper, And maybe some Tylenol....
There is no tax form for the home office deduction on the S-Corp tax return (Form 1120S), and thanks to the Tax Cuts and Jobs Act (TCJA), employees who work from home are no longer able to claim home office expenses on Schedule A (Itemized Deductions).
However, shareholders of S-Corps can be reimbursed for a portion of their related expenses for their home office. These expenses include rent, mortgage interest, property taxes, insurance, utilities, repairs & maintenance, and more!
Before you go cutting that reimbursement check, there are rules that you must follow to deduct it correctly! In order for the S-Corp to properly write-off home office expenses, it must setup an accountable plan.
So what the hell is an accountable plan?
An accountable plan is essentially a formal reimbursement arrangement that allows the S-Corp to pay employees and shareholders for their business expenses. In order to set it up correctly, it must meet the following 3 requirements:
1. The expenses must be for legitimate business purposes. Sorry but you cannot reimburse yourself for your nails, or your clothes, or your family vacation. If it's a mixed use expense, like home office expenses, the reimbursement must be for the business portion only - sorry but you cannot write-off 100% of your rent/mortgage payments! The IRS does allow reasonable allocation methods like the actual business use percentage. In the case of a home office, an easy allocation method could be the square footage method. For example, if your home office is 200 square feet and your house is 2,000 square feet then you could reimburse yourself for 10% of your home office expenses.
2. You must substantiate the deduction with documented support. Receipts, expense reports and notes describing the business purpose of the expense are crucial if you were to ever get audited. Speaking of receipts... it's 2022. Stop hoarding all of your business receipts. Simply snap a picture of them and save them to a digital drive like google or iCloud. Did you know you can also take a picture of your receipts with the QuickBooks Online app? No more need to be looking like this:
3. Excess reimbursements over actual expenses must be promptly repaid. If the accountable plan allows for advances to the shareholders or employees, any excess over the actual expenses must be repaid to the S-Corp within 120 days or it becomes taxable to the shareholder/employee.
The Bottom Line
Without an accountable plan in place, you're operating with what's known as a nonaccountable plan. Tax law requires that reimbursements under a nonaccountable plan must be reported on the shareholder/employee's W2 as taxable income.
Accountable plans provide a legal way to deduct reimbursements for necessary expenses (like home office and mileage). As long as the S-Corp and the shareholders/employees follow the plan's rules, the reimbursements are deductible for the business, and tax-free to the shareholder/employee.
Need a sample accountable plan? Here's a free one just because you read this far!
Once you have your accountable plan in place, make a schedule every month to collect detailed expense reports with receipts and explanations. The S-Corp should then pay the reimbursements to the shareholders/employees. It's a win-win - the S-Corp gets to deduct the expenses and the shareholder/employee gets a tax-free reimbursement!
If your head is spinning you are not alone! We're hear and ready to help you setup and maintain your accountable plan! Just click here for a FREE CONSULTATION.
Did you know that our members all save over $10,000 in taxes every year? And on top of that, they kiss tedious tasks like bookkeeping goodbye - NOW THAT'S HOW IT'S DONE!
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