If you have structured your business as an S-Corporation, home office deductions can be a bit tricky to navigate around. While other businesses can simply file with the IRS through a form to report a home office deduction. S-Corps have a few more steps required in order for them to take advantage of home office deductions.
What Is a Home Office Deduction?
The IRS describes a home office deduction as a way for taxpayers to deduct certain home expenses when they file taxes. For a deduction to qualify as a home office expense, the proposed expense must be used only for business purposes, with documentation.
This means that not every expense can be written off as a home office deduction. While you may use some of your home as a way to operate your business, there needs to be documentation as proof that the expense had a direct connection with your business during its operations.
Some common home office deductions include.
- Home or Renters insurance
- Repairs
- Internet
- Utilities
- Rent
- Mortgage Interest
- Property Taxes
FORM 8829
While most businesses can use Form 8829 to file certain expenses as a home office deduction, S-Corps cannot use this form. However, this does not mean that S-Corps can’t deduct expenses as a home office deduction. Instead, an S-Corp relies on a different method in order to report its home office deductions.
How Can an S-Corp Take Advantage of a Home Office Deduction?
Instead of using Form 8829, S-Corps can use an accountable plan in order to report an expense as a home office deduction.
What is an Accountable Plan?
An accountable plan allows your business to reimburse you for certain home business operations. The reimbursement can then be done through payroll. Similar to other businesses, documentation needs to be provided in order for the expense to be recognized as a business office deduction.
While this is not as straightforward an approach compared to other business structures, this still allows S-Corp owners to take advantage of the tax benefits that come from home office deductions.
What Are the Accountable Plan Requirements?
While S-Corps don’t use Form 8829, this does not mean that they can choose to write off any expense as a home office deduction. To make sure that you avoid any tax issues, we recommend you follow the requirements below.
Direct Connection With the Business
You are only able to reimburse yourself for the business-related costs. Again, these are costs that contribute towards your business operations.
Documentation of the Expense
To make sure that the expense can be recorded as a home office deduction, documentation, such as a receipt, needs to be shown. The documentation should be able to show the expense amount and how it was able to contribute to your business operations.
Also, it is recommended that you prepare a reimbursement report each month and keep it with the payroll report.
Return any excess reimbursement
To avoid any unnecessary tax issues, make sure that you return any excess money from your reimbursement. This can happen if you reimburse yourself a little bit more than you should have. As long as you return the money within a reasonable amount of time, then you should be in good standing.
Exact Expense Amount
The expense that is recorded on your accountable plan cannot be an estimated expense amount. Only the actual expense amount needs to be recorded.
Written Policy
Although this step is not required, it is still recommended. An accountable plan should be a written policy for reimbursement and kept in the business’s permanent records.
What Expenses Qualify for an Accountable Plan?
While S-Corps have to use an accountable plan instead of a form, the expenses that you can deduct as a home office deduction are similar to those of businesses that use Form 8829.
As mentioned above, some common home office deductions include.
- Insurance
- Repairs
- Internet
- Utilities
Remember, these expenses must have a direct use within your business. If the use was for a personal reason, then the expense will not be recognized as a home office deduction, and as a result, it can cause some tax issues down the line.
Why is This Important for an S-Corp Owner?
Tax Saving
Using an accountable plan will allow you to save on taxable business income. These reimbursements under an accountable plan are deductible to the business but are not considered income to you personally. Choosing not to reimburse yourself for expenses running through your home office could cost you a significant amount. With the ability to deduct these expenses, you’ll be saving some money that can be used on either personal or business-related goals.
Avoid IRS Issues
Understanding how to use an accountable plan can avoid any issues with the IRS. Since Form 8829 cannot be used by an S-Corp to deduct home office expenses, learning about an accountable plan can save you an audit or any unwanted attention from the IRS.
Record Keeping
Using an accountable plan can simplify tracking your expenses. It can keep your finances organized, and it is highly recommended that you keep a detailed record of what is being reimbursed.
Bottom Line
S-Corps can’t use Form 8829, but this doesn’t mean that they can’t take advantage of home office deductions. Instead, S-Corps can use an accountable plan to track and record their expenses as a home office deduction. As long as an S-Corp follows the necessary guidelines, such as keeping documentation, returning excess reimbursement, and keeping deductions business-related, then an S-Corp can get access to the tax-saving benefits.
Keeping track of your expenses can be a bit daunting; our team at LedgerFi can handle that with zero problems! We’ll keep your expenses in check while you enjoy the benefits that come from an organized financial record. Contact our team today!
