S Corp Shareholders - Business Expenses

[KaraCollot]

I work with small business S Corp Owners/Shareholders and am always looking for insight on how to treat their business use of home and car expenses. Is it correct and acceptable if they are receiving wages for services worked to allow the corp to reimburse them for these types of expenses and book them as business expenses on the Corp return? I'm wondering how others are handling these items for the SCorp clients.

[oceanlovin'ea]

For an s corporation, it is perfectly acceptable to have an accountable plan and reimburse employee/shareholder for mileage and for the business share of operating expenses of the home office. The operating expenses include utilities, insurance, but not mortgage interest or real estate taxes.

Linda, EA

[Bill Tubbs]

For an s corporation, it is perfectly acceptable to have an accountable plan and reimburse employee/shareholder for mileage and for the business share of operating expenses of the home office. The operating expenses include utilities, insurance, but not mortgage interest or real estate taxes.

Linda, EA

why wouldn't mort interest & real estate taxes be included, assuming a home office for the convenience of the employer?

[geekgirldany]

Mortgage Interest and property tax are not ordinary and necessary businesses expenses for the employee. So in my opinion would not qualify for reimbursement under an accountable plan.

[oceanlovin'ea]

real estate taxes and mortgage interest can be deducted on Schedule A. Only operating expenses can be reimbursed under an accountable plan.

Linda, EA

[ChEAr$]

real estate taxes and mortgage interest can be deducted on Schedule A. Only operating expenses can be reimbursed under an accountable plan.

Linda, EA

Not so sure about that. I researched it using Tax book no less last year when I established a home office for summer months for my S corporation. The worksheet I drew up did include pro rata share of mortgage interest and taxes. Don't have the cite at hand, since I'm home.

[BOB W]

"Self Rental" is a problem for a corporation owned by the renter. SP are allowed but not corporations. Especially in regards to mortgage interest and real estate taxes.

[Bees Knees]

Mortgage Interest and property tax are not ordinary and necessary businesses expenses for the employee. So in my opinion would not qualify for reimbursement under an accountable plan.

Why not? If the S corporation requires the shareholder employee to run the business out of the shareholder employee's home, then mortgage interest and taxes are every bit as necessary as utilities and insurance.

There is no rule that says only operating expenses can be reimbursed under an accountable plan. TTB page 8-12 says:

Accountable plan. To qualify as an accountable plan,
employees must:
1) Have paid or incurred deductible expenses while
performing services as an employee,
2) Adequately account to the employer for these
expenses within a reasonable period of time, and
3) Return any excess reimbursement or allowance
within a reasonable period of time.

Thus, the rule simply requires that the expense be deductible if paid by the employee. Mortgage interest, real estate taxes, and depreciation are deductible under the office in home rules. They are every bit as deductible as utilities and insurance.

Thus, if you are going to take the position that utilities and insurance can be reimbursed under an accountable plan for the employee use of an office in home, mortgage interest, taxes, and depreciation are also allowed.

[Bees Knees]

BTW, the only reason employees don't include mortgage interest and taxes for an office in home on Form 2106 is because they get a BETTER deduction for those expenses deducting them directly on the Schedule A, NOT subject to the 2% AGI limitation. The employee still calculates the limitation on deductible office in home expenses as if mortgage interest and taxes were included on Form 2106.

The point being, since the accountable plan rules require the reimbursed expense to be deductible if paid by the employee, then mortgage interest and taxes deductible under the office in home rules qualify for tax-free reimbursement, assuming all other accountable plan rules are followed.

[oceanlovin'ea]

If you will look at page 5-16 in The TaxBook, it discusses home office expenses and what is deductible. If you read starting with Renting home office to employer and follow the example and author's comment, it would appear that under an accountable plan all the expenses could be deducted including mortgage interest and taxes.

Linda, EA

[geekgirldany]

I suppose the way I look at it is that I have never had a client reimburse their employees for their mortgage interest and real estate taxes through an accountable plan. If they won't offer it to their employees why should they then do it for themselves.

But if you did reimburse mortgage interest and real estate taxes under an accountable plan then there would have to be an adjustment on Schedule A so there is no double benefit. That is if the person is able to itemize.

[ChEAr$]

If you will look at page 5-16 in The TaxBook, it discusses home office expenses and what is deductible. If you read starting with Renting home office to employer and follow the example and author's comment, it would appear that under an accountable plan all the expenses could be deducted including mortgage interest and taxes.

Linda, EA

And that's the way I read it too, Linda.

Here we're talking about reimbursement for expenses, not renting premises to the corporation which as Bob said is a no no.

However just be sure there is a written accountable plan in place.

[jsamans]

What's the difference?

Sorry if I'm a little slow here, but it seems to me that any member of a pass-through entity -- not just an S-Corp, but also a Partnership or MMLLC -- would come out the same for having the expenses deducted by the business or deducted on his or her own return.

What is the gain of an S-Corp shareholder receiving a reimbursement for these expenses versus deducting them as business expenses, since in either case the deduction is made against pass-through income before the application of any relevant self-employment tax?

[Bees Knees]

What is the gain of an S-Corp shareholder receiving a reimbursement for these expenses versus deducting them as business expenses, since in either case the deduction is made against pass-through income before the application of any relevant self-employment tax?

The S corporation does not own the home. It is the shareholder's house. Thus, the S corporation cannot directly pay and deduct the expense because the S corporation is not liable for the expense.

That is the purpose of having an accountable plan. The S corporation is reimbursing an expense that the shareholder is liable for and pays. That is how the S corporation, in turn, gets to deduct the expense. The S corporation is deducting an expense incurred by it's employee. No different than an employer deducting reimbursements to an employee for using his/her personal car for business.

[jsamans]

The S corporation does not own the home. It is the shareholder's house. Thus, the S corporation cannot directly pay and deduct the expense because the S corporation is not liable for the expense.

That is the purpose of having an accountable plan. The S corporation is reimbursing an expense that the shareholder is liable for and pays. That is how the S corporation, in turn, gets to deduct the expense. The S corporation is deducting an expense incurred by it's employee. No different than an employer deducting reimbursements to an employee for using his/her personal car for business.

Right, I get that the S-Corp can't pay the expenses outside of reimbursing them under an accountable plan, and I see why this sort of reimbursement is useful for a C-Corp, because it has its own tax liability, or to an S-Corp employee who isn't a shareholder. I'm missing the advantage in the case of the S-Corp shareholder-employee.

He or she can claim the home-office deduction for these expenses, which has the effect of reducing the pass-through income he or she receives from the S-Corp by an amount equal to what would be reimbursable under an accountable plan... doesn't it?