Can My S Corp Pay Me Rent? How Do I Take the Home Office Deduction in an S Corp?Business Taxes
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It’s very common for sole proprietors to form an entity and elect S corporation status on it to mitigate the self-employment tax burden.
A natural follow-up question that many ask is, “Well, now that I am an S corporation shareholder-employee, can I still take the home office deduction? I used to report it directly on Schedule C, but now what? Does my S corporation just pay me rent for the space?”
Well, you have three options here to take some kind of deduction with respect to the S corporation’s use of your home.
But you really only have one option, because two of the three options are really crappy and semi-useless.
Option 1 (Fail): Have Your S Corporation Pay You Rent.
This is the “old school” way of doing things.
Your S corporation simply gets a deduction for the rent paid to you, but you have to recognize this rent as rental income on Schedule E.
Keep in mind, though, that this is an area of increased IRS scrutiny, so make sure you formalize everything in a lease and that you have established a fair market rent.
And here’s the catch. IRC §280A(c)(6) disallows home office deductions on rentals by employees to their employers, so you don’t even get those cool home office-y deductions like homeowner’s or renter’s insurance, HOA dues, repairs, utilities, etc.
You can still report a portion of your mortgage interest and property taxes on Schedule E.
The only potential benefits of doing this are reducing your S corporation’s income (which may let you take a lower FICA-subject salary), the ability to report a portion of your mortgage interest and property taxes on Schedule E if you take the standard deduction, and if you itemize taking a portion of your mortgage interest and property taxes as above-the-line-deductions.
But again, you don’t get to take any home office deductions, so this is basically a fail.
Option 2 (Fail): Claim the Home Office Deduction as an Employee Business Expense. Under this option, you claim the home office deduction as an employee business expense. Now, as you know, the employee business expense deduction is a miscellaneous itemized deduction on Schedule A. But these deductions are subject to 2% of your adjusted gross income, meaning that you won’t even get the full deduction. Fail much?
Option 2 was eliminated by the Tax Cuts and Jobs Act of 2017.
Option 3 (Heck Ya): Set Up an Accountable Plan.
We’ve shown that neither the S corporation-renting-to-employee-shareholder method nor taking the home office as an employee business expense make sense.
So what does make sense?
The solution is to set up an accountable plan under Treas. Reg. §1.62-2(d)(1) through which your S corporation can reimburse you for all of your home office expenses.
You submit a report to your S corp that contains the home office expenses you incurred as an employee of your S corporation (including depreciation deductions).
The S corporation gets the deduction, and you report no income on your individual return because this is an employee reimbursement for expenses incurred in the performance of your duties for the convenience of your employer, i.e., your S corporation.
Now, there are some hoops to jump through if you want to set up an accountable plan in a manner that the IRS will respect.
But they’re nothing that a qualified tax pro can’t help you with.
If you want to get the conversation going, consider booking a call with a Visor CPA!
Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.