S Corp shareholder home office

[Deborah]

There is an Author's Comment on page 5-15 of the 2008 Deluxe Edition for an S Corp shareholder/employee reimbursing himself under an accountable plan for home office expenses in lieu of rent when the home office is for the convenience of the employer. My question is - if the employee is getting reimbursed for a % of property taxes and mortgage interest - then those amounts will reduce his Sch A Form 1040 deduction for those items - so what is the point of doing this?

[Bees Knees]

There is no point in reimbursing property taxes and mortgage interest, assuming the taxpayer can otherwise deduct them in full on Schedule A without the OIH.

The technique is used to deduct the OIH percentage of heat, electricity, water, garbage, insurance, and other OIH expenses that would otherwise be eaten up by the 2% AGI limitation for miscellaneous itemized deductions.

[Deborah]

Other home office expenses not allows

There is no point in reimbursing property taxes and mortgage interest, assuming the taxpayer can otherwise deduct them in full on Schedule A without the OIH.

The technique is used to deduct the OIH percentage of heat, electricity, water, garbage, insurance, and other OIH expenses that would otherwise be eaten up by the 2% AGI limitation for miscellaneous itemized deductions.

I agree there is no point in the deduction - that was why I was checking - I did not understand why the Author's Comment would be in The Tax Book Book if there was really no point to it.
But, regarding the 2nd parargraph of your response - you are referring to a standard home office deduction - the question is for a S Corp Shareholder/Employee and the utilities etc deductions are not even allowed. Page 5-15 The Tax Book 2008 Deluxe Edition.

[Bees Knees]

But, regarding the 2nd parargraph of your response - you are referring to a standard home office deduction - the question is for a S Corp Shareholder/Employee and the utilities etc deductions are not even allowed. Page 5-15 The Tax Book 2008 Deluxe Edition.

I'm not sure what your point is. My 2nd paragraph was talking about an S corp shareholder/employee.

Example: Taxpayer is an S Corp shareholder and uses an office in his home to conduct S corp business, which represents 10% of his home. Taxpayer incurs $5,000 for heat, electricity, water, garbage, and homeowners insurance during the year. Taxpayer submits receipts to the S corporation for reimbursement. The S Corp writes out a check to the taxpayer for $500 to reimburse the expenses. The S Corp passes through that $500 expense to the shareholder on line 1, Schedule K-1. The $500 is not taxable to the shareholder.

Thus, the $500 is used to reduce S Corp net profits, without increasing the shareholder's taxable income. Net result is the same as a $500 deduction by the shareholder.

Had the shareholder tried to deduct that $500 on Schedule A, subject to the 2% AGI limitation, chances are there would be no benefit.

[tilt53]

I can usually see "logic" in tax situations, but the situation in this thread has me baffled.
Factors: S Corporation
Rental property
Single "employee"

1) If employee is charging "rent" in excess of actual expenses:
a] If rent must be Sch. E income, why aren't allocable expenses allowable against
this income. S Corp tax benefit to employee is effectively a full writeoff of rent paid.
b] Sch. E reportable bottom line income, makes the net tax benefit to employee a
wash...not the negative which should be caused by actual, but unallowed,
expenses.
2) If "rent" is only the actual percentage of true expenses, there wouldn't be Sch. E
income and the net tax benefit to the employee would be appropriate.

We have a client question regarding this exact scenario - what am I not understanding?

[Lion]

Read Bees' Explanation

Bees' explanation was extremely clear and stepped you through the situation. An employee with unreimbursed employee expenses will lose to the 2% on Schedule A. But, an S-corp with an accountable plan can reimburse employee out-of-pocket expenses for working from home with a deduction to the corp (and ultimately lower income and lower pass through to shareholder and lower taxes) without increasing income to employee. Rent does not enter into this at all, except that our clients usually tell us they're renting a room to their s-corp.

[tilt53]

I understand the general post as it applies to someone who owns their home and rents to the S corp. What I don't quite get is how it applies to someone who rents their home and then rents part of it to the corp. TTB 19-12 under the exception for rental (if I'm reading this correctly) states that they have no other deductions other than the rent.

Again, if I'm reading that and 5-12 correctly, the rent that the corp. pays is still a write off to the corp and income (reportable on Sch. E) to the employee/shareholder. We are looking at a possible new client who insists that she has been taking OIH for years. We have not yet seen her returns to see how that has been handled but want to make sure that we understand. From the sound of it, she does not have an accountable plan in place.

[Bees Knees]

I understand the general post as it applies to someone who owns their home and rents to the S corp.

No, you are not understanding the general post.

It is NOT rent. It is reimbursing expenses under an accountable plan. There is a difference.

[Bees Knees]

If I submit a receipt to my S corporation for a toner cartridge I bought for my printer because I used the printer on S corporation business, and my S corporation reimburses me for the expense, did my S corporation pay rent for use of my printer?

No.

I submitted an expense I incurred doing S corp business and my S corporation reimbursed me under an accountable plan. That is not rent.

See the difference?

[Deborah]

renting home office to employer

The home office deduction for a Sch C filer is different than what is allowed when an employee rents space in their home to their employer (which is what this thread is about.)

See The Tax Book 5-15 Deluxe Edition

"Renting Home Office To Employer. ..... the deduction for the business use of a home is limited. Mortgage interest, real estate taxes and personal casualty losses for the rented part are deductible. However, the business portion of other expenses such as insurance, utilities, repairs, and depreciation are not deductible."

BeesKnees earlier statement regarding utilities is incorrect for an employee/employer rent situation or for a single owner S Corp "employee" of his own business. Those expenses are not allowed.

The idea here is that instead of having rent that the corporation deducts and the employee reports as income is to have an accountable plan whereby the employee submits an expense report for the "allowed" expenses and gets a tax free reimbursement.

My original post was trying to figure out what the point of doing this is - because the employee would then be reducing their Sch A deduction for those same items.

So it sounds like a lot of paperwork to me that results in no tax benefit.

If the employee did not file a Sch A the situation would make sense.

[Lion]

2%

He's saving the 2% of AGI he loses before he can deduct unreimbursed employee expenses on Schedule A Miscellaneous. Even better than being able to deduct an expense is to have someone else reimburse you for it. He has NO paperwork re his Form 1040 with a reimbursable plan. Without, he has Form 2106 and loses 2%.

[tilt53]

I guess my whole point/question is... what if it is not an accountable plan?

[Deborah]

Sch A

He's saving the 2% of AGI he loses before he can deduct unreimbursed employee expenses on Schedule A Miscellaneous. Even better than being able to deduct an expense is to have someone else reimburse you for it. He has NO paperwork re his Form 1040 with a reimbursable plan. Without, he has Form 2106 and loses 2%.

If I were submitting expenses for property taxes and mortgage interest to my employer to receive reimbursement under an accountable plan, rather than receiving rent, I would reduce the amount I claim on Sch A for property taxes and mortgage interest - since I would not have paid that portion myself - Miscellaneous Deductions would not even come into play.

[Bees Knees]

I guess my whole point/question is... what if it is not an accountable plan?

If it is not an accountable plan, then it does not work because the 2% AGI limit eats up the deduction. That is the reason why the Author’s Comment suggests using an accountable plan.

If I were submitting expenses for property taxes and mortgage interest to my employer to receive reimbursement under an accountable plan, rather than receiving rent, I would reduce the amount I claim on Sch A for property taxes and mortgage interest - since I would not have paid that portion myself - Miscellaneous Deductions would not even come into play.

And again, we are not talking about property taxes and mortgage interest. Those deductions are allowed anyway, so don’t bother reimbursing those expenses. We are talking about the other deductions (such as utilities and insurance) that would only be deductible as a miscellaneous deduction on Schedule A if there was no accountable plan in place.

[Deborah]

utilities not allowed

And again, we are not talking about property taxes and mortgage interest. Those deductions are allowed anyway, so don’t bother reimbursing those expenses. We are talking about the other deductions (such as utilities and insurance) that would only be deductible as a miscellaneous deduction on Schedule A if there was no accountable plan in place.

And again I will state those deductions are not allowed anywhere anyway in an employer/employee relationship. If you are going to continue to say they are, please provide a reference. I have previously provided a reference for my statements.