The deductibility of Home Office expenses are complicated enough for a self employed, sole proprietor, however, if you are an employee and not a sole proprietor, the codes and regulations get even more complicated.
Before you start thinking you are not an employee, you are self employed, let me clear up an issue. If you are a small business owner, whether you are an S corporation or an LLC that chose to be taxed as an S corporation, you are not self employed. In this situation you wear two hats. You are an owner and you are an employee. Tax codes will generally guide you to being treated as an employee first and then as an employer. For example, tax laws regarding withdrawals from your S corporation would first ask, are you, as the employee, getting paid a “reasonable compensation” for your work as an employee? If so, and only until you are, you may be able to take non-taxable distributions from your S corporation.
Examining the tax codes regarding Home Office expenses, you are also first considered an employee before you are the employer or owner.
Corporate Office in Home
Now let’s look at Home Office expenses when your company’s office is in your principal residence. I have been asked several times, “can’t I just have my S corporation pay me rent”? Examining what the IRS Codes say, Section 280A(c) basically explains that certain business use rental expenses are not deductible which are attributable to the rental of the dwelling unit (your house) by the taxpayer (you as the employee) 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. However, code section 162(a)(3) states your corporation can deduct the rental payments made to you as the employee.
This basically states that if you rent your Home Office to your S Corporation you, as the employee cannot deduct any expenses attributable to that rent, or that portion of the house, to offset the rental income. Therefore, you would be lowering your S corporation income and increasing your personal income. There generally is no benefit to this transaction, especially considering the State of Florida will want their seven percent sales tax on the rental of commercial property. There may be areas that it could be beneficial to transact business in such a matter, however, that would be based on individual situations and would need to be discussed one on one.
So what can you do?
The goal now is to qualify the expenses of your Home Office as a “Working condition fringe”. Section 132(d) defines a working condition fringe as property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under Section 162 or 167. Other stipulations would require the employer to have an “accountable plan” established by the corporation to reimburse certain expenses paid by your employees (another discussion).
How does this work?
This would generally mean your corporation can reimburse your employee (you) for certain expenses directly related to the Home Office and paid by you as the employee. These expenses would generally include repairs and supplies. Another form of deduction would include certain expenses related to the portion of your house that is used for the business, such as utilities and insurance.
If your S corporation pays you, the employee, a reasonable salary, establishes an accountable plan to reimburse employees for deductible business expenses paid by the employee, your S corporation may be able to deduct Home Office expenses reimbursed to you. Since these payments are a reimbursement of business expenses you personally paid, the payments to you are not included as income on your personal return. Therefore, the corporation benefits from the rental expenses and you are able to pull out non-taxable income from your corporation. Remember, you must also qualify your Home Office for legitimate business purposes for any of this to work.