S Corp Shareholders - Business Expenses

[Bees Knees]

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?

Yes, but as an employee, the S corporation shareholder has to deduct these expenses on Form 2106 as employee business expenses, subject to the 2% AGI limitation.

Under an accountable plan, employee business expenses are reimbursed to the employee tax-free, and deductible by the employer, by-passing the 2% AGI rule.

[Bees Knees]

In contrast, a partner of a partnership can deduct unreimbursed expenses (such as office in home) on Schedule E, offsetting dollar for dollar the partnership pass through income. That is allowed only if the partnership agreement says the partner must personally pay for those expenses.

The difference is, a partner (or LLC member) is not an employee of the business. An S corporation shareholder is. Thus, S corporation shareholder/employees cannot deduct their unreimbursed business expenses on Schedule E as a dollar for dollar offset against flow-through income from the S corporation. They have to use Form 2106 as an employee.

[jsamans]

And it all makes sense!

In contrast, a partner of a partnership can deduct unreimbursed expenses (such as office in home) on Schedule E, offsetting dollar for dollar the partnership pass through income. That is allowed only if the partnership agreement says the partner must personally pay for those expenses.

The difference is, a partner (or LLC member) is not an employee of the business. An S corporation shareholder is. Thus, S corporation shareholder/employees cannot deduct their unreimbursed business expenses on Schedule E as a dollar for dollar offset against flow-through income from the S corporation. They have to use Form 2106 as an employee.

Ahh - the light bulb has turned on. Thanks for your patience; I get it now. :-)