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September 11, 2011

S-Corp Home Office

by Tim Yeager, CPA

There is A LOT of fictitious tax advice out there.  The majority of it involves fraudulent or incorrect tax deductions.  One of the most common bad pieces of advice given to taxpayers involves an S-Corporation owner renting a home office from a shareholder.

Many tax “professionals” will tell an S-Corp shareholder to sign a Net Lease with the Corporation and lease a portion of their home to the company.  The problem with this advice is that the IRS has clearly ruled on how this transaction is to be handled.  The majority of taxpayers who decide to follow this advice will rent out the office at a substantial increase over the actual expenses.   For example, their home office expenses, based on a percentage of square footage of the home, might only be $200 per month, but they will rent the office to the Corporation for $1,000 a month.  This creates rental income, reportable on Schedule E of the taxpayer’s personal return.

The correct way to handle a home-office for an S-Corp is to create an accountability plan that states that the Corporation will reimburse the shareholder an amount up to, but not more than, the actual expenses of the shareholder.  This will prevent the shareholder from having rental income.  Instead, it will be considered an expense reimbursement.

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