Home Office Exp. for S-Corp.

[bbrownatl]

Here is the situation – An individual is now setup as the sole owner of an S-Corp., she sees clients in a designated office in the home. I’m just trying to determine the best arrangement for charging rent to the S-Corp. I know one method is to use the accountable reimbursement method via the worksheet from Pub 587. The homeowner submits the worksheet to the S-Corp for tax free reimbursement. S-Corp records office expense for the check reimbursing the homeowner. Is this the best method or is it better to setup an actual rental arrangement at market rates per sq. foot and then have the homeowner recognize revenue. Any thoughts or other ideas?

[Bees Knees]

The reason you want to go the accountable plan reimbursement rout is because you cannot deduct any expenses for an office in home if you rent it to your employer.

TTB page 5-15 says:

Renting home office to employer. If an employee rents a part
of his or her home to an employer and uses the rented part in
performing services for the employer as an employee, 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. [IRC §280A(c)(6)]

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).

Planning Tip: In the example on page 5-15, assume that rather than
charge his S corporation rent, Herb sets up an accountable plan with
his employer (his S corporation) and adequately accounts for the business
portion of expenses in using his home office for the convenience
of his employer. His employer reimburses the home office expenses and
deducts them on Form 1120S, which flow through as expenses against
income on Herb’s Schedule K-1. Because it is an accountable plan,
Herb neither reports the reimbursements as income, nor is there any
need to take deductions on Schedule A that are subject to the 2% AGI
limitation.

[JG EA]

The reason you want to go the accountable plan reimbursement rout is because you cannot deduct any expenses for an office in home if you rent it to your employer.

TTB page 5-15 says:

If accountable plan, does depreciation enter the picture?

[Bees Knees]

If accountable plan, does depreciation enter the picture?

Good question.

Some say yes.

I tend to think that is stretching the rules just a bit. Depreciation is not like some expense you incur and then turn around to get reimbursed by your employer.

Accountable plan rules also require the reimbursement to be within a reasonable period of time (the 30 - 60 - 120 day rules on page 8-12 of TTB). I question how you can justify that the employee incurred the cost of depreciation within those time limits.

I don't know the answer to this one. I would leave it off.

[JG EA]

Thanks B. I'm going to do an OIH for a Shareholder this year on A and tell him about switching to an accountable plan so this advice is very helpful.

[KJ Judd]

With the accountable plan, do you determine the portion of utilities the same method you would use for OIH (i.e. based on sq. footage) except you'd have the corporation reimburse the shareholder?

What expenses are typically included if you do an accountable plan for the S corporation shareholder who works out of home? (mortgage interest too?)

Finally, I understand the concept of an accountable plan. Is there any particular wording that needs to be present to qualify? Or any manner of setting one up? (i.e. can you just document in the corporate minutes?)

[JG EA]

I plan to give the taxpayer a worksheet to fill in with totals and %'s similar to the OIH. (Not including depreciation).

I plan to tell them to put into corporation minutes.

I plan to have him account to the corporation by taking the worksheet and paying himself once a month. Now what to do with January and February HUM. I won't be ready to have it all done (returns and so on) until the end of this month.

Just to account by having deductible expenses while performing services, telling the employer in writing within the right time, and and returning any excess if you got money before the expense is all TTB outlines as an accountable plan. Page 8-12 that B made as a reference.

What do you think of this plan?

[Bees Knees]

That sounds like a good way to handle it.

[KJ Judd]

Thanks! I really appreciate being able to bounce ideas off the others on this board.

Happy Easter! My city got 15 inches of snow yesterday. Looks more like Christmas.