How to Claim the Home Office Deduction as an S Corp Owner
If you run your business as an S Corporation and work from home, you might think claiming a home office deduction is as simple as filling out Form 8829 at tax time. However, because you are legally an employee of your own corporation, the standard home office deduction rules do not apply to you.
To safely write off your home office expenses without triggering an IRS audit, your S Corporation needs to implement an accountable plan. Here is a breakdown of how an accountable plan works and how you can use it to maximize your tax savings.
The S Corp Dilemma: Why You Can’t Use Schedule C
For sole proprietors and LLC owners, claiming a home office deduction is straightforward. They calculate their business use percentage and deduct those expenses directly on Schedule C.
As an S Corp shareholder-employee, you cannot do this. Furthermore, under current tax law, employee business expenses are not deductible on your personal tax return. If you pay for your home office out of your own pocket, you completely lose the tax benefit.
The solution is to have your S Corporation reimburse you for using your personal home for business purposes.
Enter the Accountable Plan
An accountable plan is a formal internal policy established by your corporation to reimburse employees for business expenses. When structured correctly, these reimbursements are a win-win:
For the S Corp: The reimbursement is a fully deductible business expense, reducing the corporation's net income.
For You (The Employee): The reimbursement is entirely tax-free. It does not count as wages, so you do not pay income or payroll taxes on it.
IRS Requirements for an Accountable Plan
To satisfy the IRS and ensure your reimbursements remain tax-free, your accountable plan must meet three strict criteria:
Business Connection: The expenses must be directly related to your work as an employee of the S Corporation. The home office must be used regularly and exclusively for administrative or operational business activities.
Substantiation: You must provide documentary evidence (receipts, utility bills, mortgage statements, or rent agreements) to prove the actual cost of operating your home office.
Return of Excess Funds: If the corporation accidentally advances you more money than you actually spent, you must return the excess within a reasonable timeframe.
How to Calculate and Claim Your Reimbursement
Instead of using the IRS simplified method (the standard $5 per square foot), an S Corp accountable plan requires you to calculate your actual expenses.
First, determine your home office percentage by dividing the square footage of your dedicated office space by the total square footage of your home.
Next, apply that percentage to your allowable household expenses, which include:
Rent or mortgage interest
Homeowners or renters insurance
Utilities (electricity, gas, internet)
Property taxes
General home maintenance and repairs
Once you have the total, submit an expense report to your S Corporation along with copies of the bills. The corporation will write you a check or transfer the funds to your personal account. On the corporate tax return (Form 1120-S), this is typically deducted under "Other Deductions" as employee reimbursements.
Let Us Help You Get Started
If you are a member of an S Corp and would like to deduct your home office expenses, let's talk. You can reach us by setting up a consultation through our contact form. Or give us a call at 571-445-0201.
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