Discussion:Office in Home Deduction for S Corp Employee
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| 8 September 2006 | |
| I am preparing a tax return for a computer consultant. He is the 100% shareholder of a S Corporation of which he is an employee. He operates his computer consulting business out of his home. It is a 20% Office in the home. He pays himself rent (or reimbursement) out of his corporation to pay for the 20% of his homes interest, taxes, utilities, insurance etc.
My question is - how is this reported on the S Corp and individual tax return. Does the S Corp show this as a rent deduction or as a "office in the home deduction" under Other deductions. And how is the income reported by the shareholder? On Schedule E as rent income? Is the proper place to report the office in home deduction on the individual return? Is this money he recieves non-taxable because it is an under a accountable reimbursment plan? Is form 8829 used on the corporate or individual tax return? And are there limitations on the office in home deduction for a stockholder employee? Thanks for your help. | |
| 8 September 2006 | |
| Home office deduction for incorporated business is somewhat problematic and one area where the Sch C beats the corp. See the following PLR. Some will argue that you can obtain some home office benefits by establishing an accountable reimbursement plan and reimburse the shareholder-employee for the corporations share of utilities, homeowners ins, etc. I don't know if this has survived scrutiny, however, so advise the client of the risk before proceeding down this path.
PLR 8819009 Section 280A -- Business Use of Home Dear * * * This is in reply to your letter of February 10, 1987, and subsequent correspondence in which you request a ruling as to the deductibility of certain expenses incurred in connection with the business use of your home. The facts and representations made are that you and your wife are the sole shareholders in Corporation, which provides engineering and technical consulting services to both private industry and government. The business is highly successful and you devote your full time efforts to the enterprise. You have a part-time employee and engage several independent contractors on an as-needed basis. You recently moved into a new personal residence which consists of approximately x square feet, of which 40 percent is leased to Corporation. The space so leased is used exclusively and on a regular basis by Corporation and is also Corporation's exclusive place of business. Corporation pays you y dollars per year as rental, an amount which includes utilities, maintenance and insurance. You represent that the rental paid is a reasonable amount and is less than Corporation would pay for an equivalent commercial space. Section 280A(a) of the Internal Revenue Code provides that, in the case of a taxpayer who is an individual or an S Corporation, no deduction otherwise allowable shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence. Section 280A(c)(1) of the Code provides that subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis -- (A) as the principal place of business for any trade or business of the taxpayer, (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or (C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business. In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. Section 280A(c)(3) of the Code provides that subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof. Section 280A(c)(8) of the Code, as added by the Tax Reform Act of 1988, states that paragraphs (1) and (3) shall not apply to any item which is attributable to the rental of the dwelling unit (or any portion thereof) by the taxpayer to his employer during any period in which the taxpayer uses the dwelling unit (or portion) in performing services as an employee of the employer. In Senate Report No. 99-313, 1986-3 C.B. Vol. 3, 84, the Committee on Finance in its explanation of the provisions of section 143(b) of the Tax Reform Act of 1988 states: The bill provides that no home office deduction is allowable by reason of business use where an employee leases a portion of his or her home to the employer. For this purpose, an individual who is an independent contractor is treated as an employee, and the party for whom such individual is performing services is treated as an employer. In the case of a lease that is subject to this rule, no home office deductions are allowed except to the extent that they would be allowable in the absence of any business use (e.g., home mortgage interest expense and real property taxes). Accordingly, on the basis of the explicit language contained in section 280A(c)(6) of the Code, we conclude that you may not deduct any business expenses that are attributable to the rental of a portion of your home to Corporation during any period in which you use the dwelling unit in performing services as an employee of Corporation. Except as ruled above, no opinion is expressed regarding the federal income tax consequences of this transaction under any provision of the Internal Revenue Code. This ruling is directed only to the taxpayer who requested it. Section 6100(j)(3) of the Code provides that it may not be used or cited as precedent. Temporary or final regulations pertaining to one or more of the issues addressed in the ruling have not as yet been adopted. Therefore, this ruling will be modified or revoked by adoption of temporary or final regulations, to the extent the regulations are inconsistent with any conclusion in the ruling. See section 16.04 of Rev. Proc. 87-1 I.R.B. 7, 17, dated January 5, 1987. However, when the criteria in section 16.05 of Rev. Proc. 87-1 are satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual circumstances. | |
Death&Taxes (talk|edits) said: | 8 September 2006 |
| Thanks for bringing this letter ruling to light. I have always had qualms about the 'accountable plan' because unlike a hotel receipt or an accounting of mileage, the use of utilities is based on an estimate. Assume 400 of 2,000 square feet are used for the office, without a separate meter how can one say with any accuracy that 20% of the heat and electric were used for that space. In fact most clients will say, "the room sucks up the heat, and the computers and lights are always on so I think 20% is too little." The same goes for house maintenance, but not homeowners. I realize that this method is approved for filling out Form 8829, but what I am saying is an accountable plan is just that, a listing of expenses for which the employee has given the employer receipts or contemporaneous records, but home office figures are estimates. If my client truly uses a part of the home for business and has an S Corporation, I would recommend running a separate service into the office, billable to the company, and carrying separate insurance on its contents, plus liability insurance. I won't even get into depreciation! | |
| September 8, 2006 | |
| You cannot indeed merely pay rent from the S and deduct it as that. You can only reimburse expenses to the shareholder. That's the short of what's likely in that PLR. | |
| 8 September 2006 | |
| While not specifically addressed in the PLR, the accountable plan is the way to go in these cases. The PLR is specific that no deductions are available to the individual. By using an accountable plan the deductions are transferred to the corporation. | |
| 8 September 2006 | |
| JR, I think it is an incorrect reading of 280A and the PLR to say the corp cannot get a deduction for the rent payment to the employee. The corp certainly can get a rent deduction, and the employee will pick up the rent income. But once the EE recognizes the rent income, he is not allowed a Sch E deduction for anything other than mortgage interest and R/E taxes against that income, which effectively negates any home office advantage to him (other than what minimal benefit might be obtained by moving those two deduction from below the line on Sch A to above the line on Sch E.) 280A(c)(6) precludes the deduction by the taxpayer/employee of expenses relative to rental of a dwelling unit to his employer (i.e. the corp), it does not preclude the deduction of the rent expense to the corporation. | |
| September 8, 2006 | |
| Thanks, JD, maybe that's right. I just seem to recall that we can't do it, that there was some ruling about it a few years back. Maybe it was just more practical as you suggest. All my S's, we just deduct the HO%'s off the S corp return and leave it at that. In the older days, we could charge rent, and use that to get money out of the corp. free of SS taxes. I still think there was something saying that we couldn't do this, but no time to look for it now...it's in one of those GearUp binders... | |
| 8 September 2006 | |
| I think the corporation deducts the payments as rent expense on the corporate return and the S shareholder reports the rent as income on Schedule E of Form 1040 with not deductions reported on Schedule E; only mortgage interest and real estate taxes reported on Schedule A. Real benefit to employee/shareholder is getting money out of the business that is not subject to social security and medicare taxes. | |
Mtmckeecpa (talk|edits) said: | 10 September 2006 |
| I really don't recommend rent to a shareholder in Florida bacause I look at this as commerical rent.
In Florida, commercial rent is subject to a minimum of 6% sales tax, in Orange County, the rate is 6.5%. If you collect & remit sales tax, that is one of the first places the auditors go (rent expense) to determine whether or not you are compliant. Can be a hefty number if you screw up... Anyway, if you use an accountable plan, what would you seek for reimbursement? Utilities (Less initial amount for personal use items), hazard insurance, RE taxes, mortgage interest, security, specific repairs, anything else out there? | |
| 5 May 2007 | |
| I had a client today tell me that she was concerned about including mortgage interest and property taxes as part of her expense reporting to her S Corporation as it relates to her home office and accountable plan. Her concern is that, in the event of a lawsuit, that if she is recording and getting reimbursed by the Corporation for these expenses, that the person suing could somehow pierce the protection of the S Corporation and take her home. Has anyone else heard of such an objection? I plan to check with my attorney but thought some of you may have heard or run into this. | |
| 5 May 2007 | |
| So if I am understanding the consensus of opinion when it comes to this very touchy subject; S/H submits bills to S corp for the home office expenses, the S corp pays them directly to the S/H, but they are not going to be reportable ANYWHERE on the 1040...no 1099 for the "rent" and no Sch E expenses.
Some of my S corps are better off being sole proprietors I think. I know if I terminate the corporation then they can not elect again for 5 years, but because they are so in need of babysitting all the time, they would be better served to be an LLC as disregarded or just a Schedule C.... | |
| 29 February 2008 | |
| Should the S corp reimburse the shareholder monthly for expenses incur in the business use of home such as reimburse for rental of the office, utilities, repair and maintenace, HOA, phone, and at the end of the year, report the rental income on client's Schedule E and just deduct the interest and property tax. Or what is the best way to handle businss use of home
Another questions: I have a client who operate his real estate business in a office. He also want to claim the business use of home. I don't think he would qualify seems he has a office. Anyone agreed? What kind of questions should I ask the client to determine if he qualify? | |
| February 29, 2008 | |
| As to the first, the requirement is that the corp can deduct, and the s/h reports nothing, reimbursement for expenses. How often you do them matters not. But no, you don't have a rent/Sch. E entry.
Realtors official office is the only one that's on their tax return: their own home office, usually, unless they are the broker. Otherwise, that other office is the broker's office. They are independent realtors. See Solimon case. | |
| 29 February 2008 | |
| JR1,
Don't the client have to report the rental income on his personal tax return of schedule E since the corporation charge him rent as well as allocate portion of the mortgage interest and propert tax to offset the rent. or can the corporation just reimbursement the client for interest and property tax base on square footage of the home so he does not need to report on schedue E. and does not charge rent to the corp. To my second questions, so will he be able to claim the home office if he already has a office elsewhere. I'm not understand your answer. Thanks | |
| 29 February 2008 | |
| Sun,
IMHO the concept of having an "accountable plan" to reimburse the s/h for a pro rata portion of the expense of the house would not fly if challenged. Any amounts paid to or on behalf of the s/h by the corp should be shown as rental income on the s/h's return, rent expense on the corporate return. No expenses are allowed against the rent income except RE taxes and interest (those expenses which would otherwise be deductible on Sch A anyway). As to the second question, your client who has a RE business at an office away from home cannot MAY also claim a home office IF he meets the requirements of either 280A(c)((1)(B) or (C). (He will flunk 280A(c)(1)(A) presumeably because the other office is his primary place of business. Therefore, if the home office is used to meet clients on a regular basis, it might be allowed. But if he meets the client at the away from home office and uses the home office solely to do market research, admin, etc, it will not be allowed. | |
| 15 April 2008 | |
| I am encountering a variation to the fact pattern presented by the original poster. Would appreciate your thoughts on the following:
Employee rents apartment for $1000 as personal dwelling and sub-leases one room (25% of square footage of apartment) for S Corp storage of inventory. Employee is not a shareholder of S Corp. S Corp reimburses Employee for storage rental expense of $250 plus 25% of the monthly utilities pursuant to established accountable reimbursement plan. From my reading of the regulations, Employee is not required to report the expense reimbursement as income per IRS topic 514 since it was issued under S Corp's accountable plan. S Corp is permitted to take deduction of rental expense under the exception in Section 280A(c)(2) on 1120s because the room is used for S Corp storage (even if room is part of dwelling). However, by subletting the room for S Corp storage, does Employee need to report $250 rental income on 1040 (on Schedule E)? If yes, can Employee deduct $250 rental cost as an expense? How about the utilities reimbursement - is that "income"? It seems that denial of deductions to the Employee under Section 280A(c)(6) does not cover Section 280(A)(c)(2) for storage use. Would very much appreciate your analysis of the above. | |
| 18 July 2008 | |
| I have read every thread of S-Corp and home office on this site and 280A and am starting to understand but still foggy on part of this.
100% SH and an employee of S-Corp run their entire business out of a portion of their home. Their employee works from this location also... Can they rent the sq footage, based on FMV, to their S-Corp? I understand that the SH can only deduct interest and real estate taxes not utilities. With this plan they report the income on E with only interest and taxes as a deduction .... correct? Under the Accountable Plan .... the S-Corp reimburses for actual usage and SH doesn't pick up any income? Is there anyone that has a definitive answer? | |
| July 18, 2008 | |
| No. They basically submit an expense report to the S for the expenses incurred, based on the square footage, and the corp pays that to them. So the corp deducts the expenses, nothing goes to the 1040. And that IS definitive. Cites are above. | |
| 18 July 2008 | |
| I am still confused by this whole scenario....my problem with it is this:
Say you don't do the corp books...you only do the 1120S and the 1040; they do books with either a bookkeeper, in house, etc. Ok...they take "rent" expenses on the corp books. Paid to them in the form of money in their pockets and fully deducted by the corporation for a part of mortgage interest, property taxes, etc. etc. etc. Now...come tax return time. If they have already taken the mortgage interest, property taxes, etc. on the corporate books (lets say 20%) of the total, and you have NO idea what the "rent" was for, then you double dip and take the full amount of the interest and taxes on the personal return. Sounds like a nightmare to me. There MUST be something that IRS has devised to keep this from happening short of auditing a return. How then do you determine how much of the mortgage interest and property taxes are deductible on Schedule A? | |
| July 18, 2008 | |
| Ask about the rent? A good reason to not do the returns without reviewing the books/file. | |
| 18 July 2008 | |
| Yeah, JR makes total sense....
But in actuality, I bet it happens all the time. And JR? The corp can't deduct any portion of the utilities, etc? Guess if they have separate power meters, etc. they can, but they lose the entire deduction even if their business uses the majority of water/gas/etc. for the business? Maybe the tax law needs to be rewritten again...hehehehe | |
