To properly expense a home office on their taxes, an S-Corp shareholder must adhere to specific IRS guidelines and requirements. Here's a detailed list of what needs to be done:

1. Ensure Eligibility

• Exclusive and Regular Use: The area of your home used for business must be exclusively and regularly used for conducting business activities.

• Principal Place of Business: Your home office must be your principal place of business, or a place where you regularly meet clients or patients. This includes administrative or management activities if there is no other fixed location to conduct these tasks.

2. Determine the Method of Calculation

• Simplified Option: Allows for a standard deduction of $5 per square foot of the home used for business, up to 300 square feet, totaling a maximum deduction of $1,500.

• Regular Method: Involves calculating the actual expenses of the home office. This includes direct expenses (fully deductible) and indirect expenses (based on the percentage of the home used for business). Examples include mortgage interest, insurance, utilities, repairs, and depreciation.

3. Calculate the Deductible Expenses

• Direct Expenses: Fully deductible and include costs directly related to the home office, like repairs and maintenance specifically in the office area.

• Indirect Expenses: Must be apportioned between the business use of the home and the personal use. This can include utilities, general repairs, insurance, and depreciation. The portion of these expenses that applies to the business use of the home is deductible.

4. Keep Detailed Records

• Documentation: Maintain records of all expenses claimed as deductions, including receipts, bills, and statements.

• Square Footage: Keep a clear record of the square footage of your home office and the total square footage of your home, as this is necessary for calculating the percentage of business use.

5. Payroll Considerations

• Reasonable Compensation: S-Corp shareholders must pay themselves a reasonable salary before deducting business expenses, including the home office deduction.

• Reimbursement Plan: Establish an accountable plan for reimbursing business expenses, including the home office expenses, which allows the S-Corp to deduct these expenses while not being taxable income to the shareholder.

6. Report the Deduction

• Accountable Plan: If expenses are reimbursed through an accountable plan, they are deducted directly by the S-Corp on its corporate tax return.

• Here are the key elements of an accountable plan for S-Corporation home office expense reimbursement plan:

  • Purpose: To reimburse employees for home office business expenses.

  • Scope: Applies to employees using their home for business.

  • Eligibility: Home office must be used exclusively and regularly for business.

  • Reimbursable Expenses:

    • Direct Expenses: Costs solely for the home office area.

    • Indirect Expenses: A proportion of overall home expenses, based on the office's square footage.

  • Expense Reporting:

    • Employees must submit detailed expense reports with proof.

    • Reports are reviewed for approval; excess reimbursements must be returned.

  • Compliance: The plan is designed to meet IRS regulations and can be adjusted to maintain legal compliance.

  • Acknowledgment: Employees agree to the plan's terms by participating.

Adhering to these guidelines will help ensure that S-Corp shareholders correctly expense their home office and comply with IRS requirements, maximizing their tax benefits while minimizing the risk of audits.

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