S-Corp Home Office Deduction: How It Works

Did you know that owners of S Corporations can claim an S-Corp home office deduction? You can write off expenses related to the business use of your home and potentially save money on taxes.

Unfortunately, many S Corporation owners don't take advantage of the home office deduction because the rules for claiming it can be confusing - at least at first glance. This guide will walk you through the ins and outs of the S-Corp home office deduction so you can maximize your tax benefits.

What Is a Home Office Deduction?

The home office deduction allows you to write off certain expenses related to the business use of your home. These expenses can include:

• Office supplies

• Office equipment

• Furniture

• Repairs and maintenance

• Mortgage interest or rent

• Utilities

• Homeowner's or renter's insurance

• Property taxes

• Internet bill

This is not an exhaustive list. You may be able to deduct other home office expenses as well. Here are a few ideas for creative tax deductions.

To qualify for the home office deduction, you must exclusively and regularly use a part of your home for business activities.

Houses, apartments, condominiums, mobile homes, and even boats can qualify as an office space. Your home office must also be your principal place of business where you conduct business as well as administrative or management activities.

S-Corps vs. Other Business Entities

For sole proprietors and single-member LLCs, claiming the home office deduction is pretty easy. They can report it directly on their personal tax returns using the Form 8829.

For S-Corp owners, the process is a little more complicated because the S-Corp is a separate legal entity from its owners.

Claiming home office deductions may come with extra steps for S-Corp owners, but don't get discouraged. There's still a way to do it and keep more of your hard-earned dollars.

So, How Can an S-Corp Claim a Home Office Deduction?

Reimbursement Arrangement

S-Corp owners can't deduct home office expenses on their personal tax return. But they can set up an accountable plan that allows the S-Corp to reimburse them for their home office expenses.

An accountable plan is a formal reimbursement arrangement that complies with IRS regulations.

It's a perfectly legal way to get an S-Corp home office deduction. Learn about other smart tax loopholes for small businesses.

Accountable Plan

To establish an accountable plan, the S-Corp needs to create a written plan that outlines the reimbursement procedure. The plan should include:

• Business Connection: All the business expenses must be incurred while you're performing services as an employee of your S-Corp.

• Substantiation: The employee (you) must substantiate expenses within a reasonable period. You can provide receipts, invoices, or other documents that prove your expenses.

• Return of Excess Amounts: If the S-Corp reimburses more than the actual expenses, the employee must return the excess amount.

A tax professional can help you set up your plan for employee business expense reimbursement.

Calculating Home Office Expenses

To determine the reimbursable amount, S-Corp owners should calculate the home office expenses based on the percentage of the home used exclusively for business. Qualifying home office expenses include mortgage interest or rent, real estate taxes, utilities, and more.

How to Take Home Office Deduction for S-Corp

1. Establish an Accountable Plan

Draft a written accountable plan and get it approved by your S-Corporation. Make sure that the plan complies with IRS regulations and clearly outlines the reimbursement procedures for your home office expenses.

2. Calculate Home Office Percentage

Determine the percentage of your home that you use exclusively for business. You can typically calculate this by dividing the square footage of your home office by the total square footage of your home.

For example, if your home office is 200 square feet and your home is 2,000 square feet, your home office percentage is 10%. 

3. Track Home Office Expenses

Keep detailed records of all home office expenses. Save receipts, invoices, and bills.

For utilities and other shared expenses, calculate the portion that can be claimed as a home office expense based on your home office percentage. For example, if your percentage is 10%, then you can deduct 10% off your utilities bill or mortgage interest.

4. Submit Expense Reports

Regularly submit expense reports to your S-Corp for reimbursement. Make sure to attach all relevant receipts and invoices and submit your claim within a reasonable timeframe (as specified by your accountable plan).

If you're running your business solo, this may feel silly because you're submitting expense reports basically to yourself, but this is important to stay in good standing with the IRS.

5. S-Corp Reimbursement

Have your S-Corp reimburse you for the home office expenses. The reimbursement is not considered taxable income, and your S-Corp can deduct the reimbursed amount as a business expense.

6. Tax Reporting

You don't need to report the reimbursed home office expenses on your personal tax return. However, your S-Corps needs to report the deduction on its corporate tax return (Form 1120S).

Benefits of the S-Corp Home Office Deduction

The most obvious benefit of the S-Corp home office deduction is the tax savings. It helps your S-Corp reduce its taxable income and lowers your overall tax liability. You'd be surprised how much you can save on taxes. Recently, Desi Tax® helped a realtor save $9,811!

Common Mistakes

S-Corp owners sometimes jeopardize their home office deductions by making these mistakes:

• Not Keeping Records: One of the most common mistakes is not keeping records of your home office expenses. If you don't keep receipts and invoices that confirm your expenses, your S-Corp can't substantiate them.

• Personal Use of Home Office: You must use your home office exclusively for business purposes. Using it for personal activities - even only sometimes - can disqualify the home office deduction.

• Not Following Your Accountable Plan: Submitting your expense reports late or giving excess reimbursements can disqualify your deductions.

• Incorrect Calculations: Make sure to accurately calculate your home office expenses based on the percentage of the home you use for business. Don't overestimate your expenses or include non-deductible items.

When used correctly, the S-Corp home office deduction helps you reduce your taxable income and save money.

FAQs

Can I Write Off My Internet Bill If I Work from Home?

Yes, you can write off a portion of your internet bill if you work from home, but the deduction is limited to the percentage of internet usage that is directly related to your business. For example, if 30% of your internet use is for business purposes, you can deduct 30% of your internet bill. Make sure to keep records of your internet usage so you can demonstrate that the portion being deducted is used exclusively for your business activities.

Can I Write Off My Garage as a Business Expense?

If you use your garage exclusively and regularly as a home office, you may be able to claim it as a deductible expense. Make sure to keep clear records and documentation to substantiate the business use of your garage. If you want to write off your garage as a business expense, you can't use it for both personal and business purposes.

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