Owners of S Corporations with qualifying home offices often deduct costs as unreimbursed employee business expenses, found on Form 2106. Form 2106 can be a little tricky and your expenses on the form are deductible only to the extent that total expense exceeds two percent of AGI. This is generally a decent option, but it is less favorable than others. Today, we will take a look at those other options for a shareholder home office.
The first option is that the corporation can pay you rent for the home office. In general, if the S Corporation pays rent to the shareholder for the use of real estate, the rent is deductible by the corporation and is income for the shareholder. In most rental situations, the shareholder will claim normal expenses against this rental income, but if the rent is paid for use of part of the shareholder’s personal residence, the shareholder is not permitted to claim expenses against this income, other than mortgage interest and real estate taxes.
The other option that could result in minimization of taxes is the corporation’s payment for your costs of the home office under an accountable plan for employee business expense reimbursement. For an expense reimbursement plan to be considered accountable, reimbursed expenses have to have a business connection, meaning that you, the employee, incurred the expenses in connection with the performance of services as an employee of the employer.
Other requirements of an accountable plan are adequate substantiation of expenses by accounting to the employer for them in a reasonable amount of time, and return of any excess reimbursement to the employer, also in a reasonable amount of time.
Though many believe that deduction of home office costs is the best route to take, this may not always be the case. It’s a given that every situation is different and knowing that you have other options for your S Corporation is very important. You must maintain solid records and provide evidence of your business expenses. Before making any final decision on how you are handling these expenses you should discuss it with your tax preparer to see what is best for your situation.
The Wassman CPA Services website and blog is meant to offer general information to our readers. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service. You should contact Wassman CPA Services for advice concerning specific matters prior to making any decisions.