Office in the home S Corp

[JON]

Client drops off his 2005 information. He is a 50% owner and an employee in a S corp. Sometime at the end of 2004 they closed down their office space and moved everything to the client's house. The Corp's return is done and reflects nothing for office rent, because he wants to take an office in the home on his Schedule E under the S Corp income. He has records of exact footage used and the S Corp is profitable He gets a W-2 plus a nice UTI on the K-1. We have had this discussion before can you take an office in the home without any limitations(other then space) and can it be done as an subtraction to the K-1 information-it looks like Ultra Tax is set up to allow it.

Thanks.........

[Corduroy Frog]

Where?

Jon, I'm assuming the question is "Can" this be allowed, rather than "Should" this have been done instead of other alternatives.

He wants to deduct this on a schedule E? Where? Will this number be forced into column (i) along with section 179? If your software allows for it, where will the expense end up?

Implied from your conversation, the corporation is showing nothing because the taxpayer wants to deduct the whole thing on his personal return. If that be true, how can ANY number appear on the K-1? The corporation should have no visibility as to what the shareholders' utility bill is, or any of the other housing expenses.

I didn't answer the question definitively, but obviously I'm having problems getting your client's wishes fulfilled...

[JAinNC]

I had a similar client. I did not deduct it on 1040. I suggested to my client (33% shareholder) to request a board meeting and request an accountable plan written into the minutes if approved with details to follow closely. He is now directly reimbursed for the corp office quarterly when he turn in copies of his recpts and worksheet.. He rec's about $100 per quarter because the office is small, but does had entry for their clients.It works for that S corp.

[abby]

Itemized Deduction

I know that many software companies do allow the attachment of a home office to Sched E for S Corps, but if there is a qual home office for an S Corp shareholder, it should be attached as an employee expense as a 2% limit Itemized Deduction - most software will attach it correctly through Form 2106.

If you have it you can check TB Deluxe 19-11 for more info.

Because of the limits on employee expense deductions, it seems to be more and more common to have an accountable plan where the S Corp reimburses the shareholders for the costs of the home office.

[JAinNC]

Sorry about all

The typos ................

[JON]

It has nothing to

do with his employment, roofing, this is the only place the comapny has for an office..

[Corduroy Frog]

All the better reason...

All the better reason for the corporation to either pay this guy rent or pay him under an accountable plan...

[Bees Knees]

It has nothing to do with his employment, roofing, this is the only place the comapny has for an office..

If the business use of home expense has NOTHING to do with his employment as an employee of the corporation, then NONE of the expense is deductible. Not by the corporation, because the corporation did not pay the expense, nor by the employee/shareholder, because an employee cannot deduct expenses that belong to the corporation, not on Schedule E or on Form 2106. (Tax Court Memo. 2005-197)

The only two ways this expense can be deductible, is if the corporation reimburses the expense under an accountable plan, as has been suggested, or the corporation pays those expenses directly.

Renting the space to the corporation will not work, because even though the corporation gets a deduction for the rent paid, the shareholder cannot claim business use of home expenses against the rental income for renting space to his employer.