Prior to the IRS making a recommendation to use the Accountable Plan and subsequent reimbursements to the employee (or shareholders), taxpayers would charge their corporations rent and declare the rent as income on Schedule E. That’s ok, but it’s not elegant.
In the garden variety LLC world, the beauty of this was to take money out of the company as passive income, sidestepping self-employment taxes. In the S-Corp world, the beauty was to reduce the S-Corp’s overall income, and therefore reduce the reasonable salary thresholds for shareholders while still taking money out of the company as passive income (again side-stepping self-employment taxes).
The IRS got sick of this (among other things, of course).
The new school way is to use an Accountable Plan and reimburse the shareholder for expenses associated with the home office. And the basic housekeeping must be satisfied which means that the home office is exclusively and regularly used for business.
You can have multiple work locations. The IRS states that if you use a home office as your primary location for substantial administrative activities you are allowed to essentially have two work locations. For example, you own a landscaping company and you have an office in your shop. If you perform all your administrative activities such as hiring and firing employees, accounting, balancing your checkbook, talking to your attorney, chatting with Rita CPA in your home office, that office counts as a work location along with your office in your shop.
The expense report should detail the space used as a home office or storage of business items (inventory, supplies, etc.) as a percentage of overall square footage of the home. This percentage is then applied against rent, mortgage interest, property tax, utilities, home phone, insurance and repairs to determine the expense amount to be reimbursed. The reimbursement can be monthly or quarterly or annually—your choice.
There is a safe harbor provision for home office deductions where you can deduct $5 per square foot. There are some real advantages such as still being able to use all mortgage interest on Schedule A instead of a proration. No home depreciation deduction or later recapture of depreciation for the years the simplified option is used. But there are also some limitations that need to be considered. We typically optimize for both methods.
Rita Bhayani is a Certified Public Accountant and a Certified Management Accountant practicing at Pleasanton, CA and she protects the clients from the IRS. For more information log on to www.ritacpa.net.