April 18, 2020
Understanding Business Use of Home
There are a few ways in which your single-person S-Corp can offset housing costs when you use your home as your business location:
- You can deduct a portion of certain home expenses based on the area in your home that is dedicated to your business activity. This can be a room, a portion of a room, or a separate building on your property.
- Your S-Corporation can help pay your rent for the home office
- Your S-Corporation can pay you for the costs of a home office under an "accountable" plan for employee business expense reimbursement.
So, which one is the best method for deducting your home office expenses? The accepted best practice here is to use the accountable plan for the deductions because it doesn't create additional tax reporting needs the other methods need.
For instance, if you pay yourself rent from the S-Corp, then it creates a need to report that income as a Schedule E rental income, thus negating much of the tax savings. Same with the first option; that would require you to fill out a Schedule C on your 1040.
But under an accountable reimbursement plan, you get to record the expenses as such on the business, lowering your net income and repaying yourself for the expenses you pay personally for your home without also creating further tax liabilities from those payments, provided you don't also claim that amount on your personal tax return as deductible expenses.
There are qualifications that must be met to take the expense:
- The space (doesn't have to be a room necessarily) has to be used regularly and exclusively for your business
- The space has to be your primary place of business; it's fine to have a temporary meeting space for some interaction with other businesses and clients like WeWork or Thinkspace, but it cannot be the place you work from regularly. If you rent an office space it will disallow the expense for the business.
- The reimbursements have to be for specific types of expenses, such as:
- Real estate taxes
- Homeowner’s insurance
- Oil heat, gas, and electric
- Water and sewer
- Alarm or security services
- Garbage services
- General repairs and maintenance
- Mortgage interest
To calculate the expense reimbursement, take the square footage of your office space in your home and divide that by the total square footage of your home; this gives you the percentage to apply to each expense on an ongoing basis. Then you take that percentage and reimburse it to yourself as the employee of the company.
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