Home Office for S Corp

[erchess]

OK I have an S Corp that is owned by four individuals. The three who are clients are all related and even live in the same house. Two of them do all the day to day work. I will be doing the 1120S and the individual returns for the aforementioned people. I have already told them that some of the "deductions" they have given me may not fly and they are ok with that. They understand that their job is to tell me their situation and my job is to do the best job on their taxes that the law allows. Anyway, the fourth individual does not work directly in the business but he is heavily involved in setting policies and in major decisions such as hiring me. The owners do have regular meetings by telephone and they keep minutes. Anyway, I guess you could call this guy a director. He has contributed more capital to the firm than did the others combined. The contract stipulates that half of the profits go to him until he has recovered his investment and then he is entitled to only a 25% share. The business is operated out of the home in question so there is a home office. However I have doubts as to whether the home office is deductible.

First question is, if the home office qualified would there be a way to deduct it in this scenario either as an expense of the S Corp or as an expense of the homeowner? How would this be done?

Second question is, don't the following facts disqualify the "home office" even if it would otherwise be deductible? One member of the couple who own the house is an owner of the business but she does no work. There has been no contract between the couple and the S Corp regarding rental of the home office. The actual work of the business is done around the kitchen table which is cleared of work related stuff three times a day for meals. This is not the home office I am trying to deduct. The office I am trying to deduct is used to store papers related to the business. Trouble is that it is also used to store papers related to the personal lives of family members. Further trouble is that the computer in the "home office" predates the business and I have no information on how much business use it actually gets. My gut says less than 50% of the hard drive space is business related. They keep no records of time on the computer.

Third question is, the company checking account is used to make a monthly payment that provides DSL to the home and a website to the business. As far as I know there is no itemization in the bill between the website and the internet service. The internet service is used by all members of the household for personal use in addition to some business use. The reason the family feels internet should be a business deduction is that they were happy with dialup until they opened the business. Also, the Website has generated leads some of whom have become customers. There's no deduction here either, is there?

[Gretel]

I can't help you much with the OIH. What caught my eye is the unequal distributions, which would disqualify the S-Corp. Maybe loans were, could be set up to avoid this problem plus the bylaws need to be changed?

[erchess]

Thank you Gabrielle

A tax lawyer drew up their by laws and etc. The different owners will have different amounts of stock but the profit per share will be equal and the lawyer insists that this is going to be ok. Contrary to what I said in OP it is currently a single owner S Corp but plans to issue the stock soon and take on the structure I mentioned in OP. Does anyone have any comments? We could perfectly well change the financier from an owner to a bondholder. In fact he has asked for this and the other owners have said no. Their reasoning is that if the corporate shield does somehow get pierced they want his deeper pockets available along with theirs. What I believe they are overlooking is that the debt of the business other than to this investor is in the form of their own credit cards and home equity loan. The company installs water filtration systems so it is not as though they are going to be sued for damaging a home or personal injury.

[veritas]

Look at pages 5-15 and 16 in TTB

For answers related to your business use of home.

[erchess]

TY Veritas for the reference,

but I fear one of us is missing something. The chapter is about Sole Proprietors and my client does business as an S Corp.

[joanmcq]

OIH is an employee business expense on Sch A. unless you write up some kind of accountable plan to reimburse the homeowner for the use of his/her property. Got to be in writing.

[veritas]

I know it says sole prop but

but I fear one of us is missing something. The chapter is about Sole Proprietors and my client does business as an S Corp.

Here is an excerpt from the references I gave you.

"Example: Herb is an employee of his S corporation which he runs out of
his home office. He charges his S corporation rent for using his home.
The S corporation deducts rent paid to Herb, which is passed through
to him on his Schedule K-1. Herb must report the rental income on
Schedule E. Herb cannot deduct any expenses on the business portion
of his home (other than mortgage interest, real estate taxes, and
casualty losses)."

There is more related to joanmcq's post.

[taxxcpa]

Herb's rent

Here is an excerpt from the references I gave you.

"Example: Herb is an employee of his S corporation which he runs out of
his home office. He charges his S corporation rent for using his home.
The S corporation deducts rent paid to Herb, which is passed through
to him on his Schedule K-1. Herb must report the rental income on
Schedule E. Herb cannot deduct any expenses on the business portion
of his home (other than mortgage interest, real estate taxes, and
casualty losses)."

There is more related to joanmcq's post.

Is this the effect?
If Herb gets $1000 for rent and owns 25% of the S-corp, then his share of the S Corp would be reduced by 25% of the $1000, so his taxable income would be $750 more than it would be if he did not rent to the corporation.