S-Corporation Owner Reimbursement for Home Office Expenses

Owners of S-Corporations that own more than 2% of the stock issued are prohibited from deducting business expenses on their personal tax return.    The Home Office deduction is a prime example of what is not allowed.

Here’s the correct way for owners to take advantage of this great deduction.

First, we need to follow the rules that are provided for the Home Office deduction.

The designated office area needs to be used exclusively for business.  This is typically a den or spare room with a desk and office equipment.

The business owner then calculates the amount of monthly expenses incurred and submits an expense reimbursement form to the corporation.

Given this is a reimbursement of expenses it is not considered additional income.

The next step is to calculate the amount to be reimbursed.  Expenses are separated into direct and indirect categories.

Direct expenses can be reimbursed in full and include items such as a second phone line, high-speed internet connection, office supplies and office equipment.

Indirect expenses are deducted based on the percentage of business area in the home which is determined by dividing the business area square footage by the entire home square footage. 

This percentage is applied to expenses such as rent, insurance, utilities, and maintenance.  Note that mortgage payments are not included as the deduction of mortgage interest addressed in a different section of the individual tax return.

I recommend the reimbursement process be handled in a professional manner with proper documentation and paid periodically, preferably monthly or quarterly.

Following this procedure will move the deduction to the corporation which in turn will flow through to the S-Corporation owner in the form of lower taxable income.

We assist our S-Corporation owners with this process.  If you’re not taking advantage of this opportunity give us a call at 714-998-9244