You likely know that the home-office tax deduction provides tax savings to business owners. It turns otherwise nondeductible personal expenses into valuable business deductions.
When you operate your business as a proprietorship, you simply deduct home-office expenses on Schedule C. But when you operate your business as an S corporation, you face special rules to achieve the same benefits.
Two Methods That Fail
1. Renting Your Home Office To The Corporation
This is a method that some taxpayers mistakenly use, which produces zero tax benefit. Your corporation deducts the rent paid to you. You include the rent in your taxable income on your personal income tax return. However, the tax code does not allow you to claim tax deductions against this rental income (IRC Section 280A(c)(6)).
Conclusion: This taxpayer just moved the money from one pocket to the other with no tax benefit.
2. Employee Business Reimbursement (Form 2106)
Another method that fails to deliver. For the S Corporation owner this is a mistake because here you suffer one or more strikes:
Strike 1 – To benefit from employee expenses on Form 2106, you have to itemize deductions. If you don’t itemize you don’t benefit from the home office deduction.
Strike 2 – If you itemize, you have to claim your 2106 expenses as miscellaneous deductions that exceed 2 percent of your adjusted gross income. For most taxpayers this is a likely goodbye to the deductions.
Strike 3 – The alternative minimum tax (AMT) does not allow any miscellaneous itemized deductions. If you are paying the AMT, deducting the home office on your personal income tax return produces zero tax benefits.
The Right Way To Do It
There’s just one right way to get the full benefit of the home-office deduction for your corporation, and that’s by using the reimbursement method. The reason the reimbursement method is the one right way is simple—it’s the only way that works!
* As an employee of your corporation, you submit expense reports to your corporation for the expenses of your home office.
* The corporation reimburses you for the home office and claims 100 percent of the home-office deduction as office space on its corporate tax return.
* You receive the reimbursement as reimbursed employee business expenses. Such employee reimbursements are not taxable to you.
With the home office at the corporate level, you (the employee) need to submit expense reports that satisfy the rules for the home-office deduction. This can be tricky, and that’s where I come in. I can help you with this.
Let’s arrange a time when we can get together and go over how you create the proper expense reports for this deduction.