Most business owners are familiar with the home office deduction. This favorable tax benefit allows business owners to deduct a portion of their home’s rent, utilities, mortgage interest, and property taxes. This deduction is commonly claimed on the Form 8829 of an individual’s 1040 tax return. Since this schedule only applies to an individual tax return, what should you do if your business is an S corporation? Don’t worry, if you are an owner of an S corporation and primarily work out of your home office, you are still eligible for the home office deduction. However, this requires a different approach than completing a tax form at the end of the year. The simple steps below outline how your business deducts home office expenses on your S corporation’s tax return.
Create an Accountable Plan
- An accountable plan allows employees to be reimbursed (tax-free) for expenses paid for on behalf of the business.
Calculate the Home Office Reimbursement
- The home office deduction is calculated based on a pro-rata percentage. Divide the square footage of your home office by the total square footage of your home to determine the appropriate rate.
- A simple home office deduction template are provided to current clients.
Documentation
- Ensure you have substantiated the expense incurred on behalf of the business by documenting the dollar amount, business purpose, and date of expense.
- All reimbursable amounts need to be supported (receipts or other documentation).
Timing and Deadline for Payments
- Documentation and substantiation must be completed within 60 days of the expense.
- For example, if you are being reimbursed for the 1st quarter of the year (1/1 – 3/31), the documentation and reimbursement must be completed by 5/31.
Make the Payment
- Cut a check or transfer the amount from your business bank account to your personal bank account based on the amounts calculated above.
- It’s recommended that each payment or transfer cover a specific expense (rent, utilities, mortgage interest, real estate taxes, depreciation, etc…).
- For example, if you rent your home, you would have two separate transfers each quarter. The first to cover the rent reimbursement and the second for utilities. This simplifies the bookkeeping.
Record the Expense and Claim the Deduction
- Following completion of the payment or transfer, record the expense to the appropriate classification (rent, utilities, interest, taxes, depreciation) in your accounting records.