Paying Rent, Home Office
Posted November 23, 2018
Should I have my LLC or S Corp pay me rent is another daily question. No. Technically this is old school. When you own 2% or more of an S Corp, the rules dramatically change when it comes to car ownership, paying rent for shareholder assets and home office deductions. These fringe benefits can be considered not so fringe, and therefore income.
What you might be asking is- Is there a way to have the business reimburse, compensate, or otherwise pay for my home office? Or, can I still take a home office deduction with an S corporation? Yes there is a way to claim a home office deduction with an S Corp.
Prior to the IRS making a recommendation to use the Accountable Plan and subsequent reimbursements to the employee (or shareholders), taxpayers would charge their corporation rent and declare the rent as income on Schedule E. Ok, but not elegant.
In the garden variety LLC world, the beauty of this was to take money out of the business as passive income. Since you were changing the color of money from earned income to passive income you were also sidestepping self-employment taxes. In the S corporation world, the beauty of this 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 business as passive income (again reducing 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 employee (you) for expenses associated with the home office. Remember, if you are an S Corp owner, you are both shareholder and employee. Imagine yourself as an employee of Google- the relationship would be arms-length, and you would submit expenses to Google just like you should with your own S corporation. Maintaining an arms-length perspective in your dealings as an employee of your S Corp will help you in the long run.
Your business must have an Accountable Plan to take advantage of this scenario. And the basic housekeeping must be satisfied which is a home office must be exclusively and regularly used for business. The reimbursement calculation follows shortly.
Multiple Work Locations
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 business and you have an office in your shop. You perform all your administrative activities such as hiring and firing employees, accounting, balancing your checkbook, talking to your attorney, chatting it up with your Colorado Springs CPAs at WCG etc. in your home office, that office counts as a work location in addition to your office in your shop. Here is the play by play blurb from the IRS-
You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. To determine whether your home is your principal place of business, you must consider:
1. The relative importance of the activities performed at each place where you conduct business, and
2. The amount of time spent at each place where you conduct business.
Your home office will qualify as your principal place of business if you meet the following requirements.
1. You use it exclusively and regularly for administrative or management activities of your trade or business.
2. You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
This also works well for the consultant who works out of his or her home office, but also spends a ton of time on site with the client.
Don’t forget that commuting miles between your residence and your office are not deductible, but if you have a home office suddenly these miles become business miles and therefore deductible. Boom! The use of Boom! is apparently out of fashion. Whatever.
You can read the full IRS Publication 587 (Business Use of your Home) by using the link below-
We will discuss the question, “What is my tax home?” in a few pages.
Get Reimbursed for the Home Office
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, HOA dues, insurance and repairs to determine the expense amount to be reimbursed. The reimbursement can be monthly or quarterly or annually- your choice.
No depreciation or mortgage principal payments can be expensed and reimbursed since depreciation is not an actual expense. Depreciation would normally be allowed under the traditional home office deduction on your individual tax return. The good news is that you don’t have to carry forward the depreciation schedule to recapture it when you sell. Makes life simple.
Keep in mind that two major expenses associated with a home office are mortgage interest and property taxes. These expenses are already 100% deductible on Schedule A (assuming your state and local taxes (SALT) do not exceed $10,000), so for most taxpayers the home office deduction or reimbursement is relatively small. And you must reduce your mortgage interest and property taxes being deducted on Schedule A by the amounts reimbursed by your business. No double dipping.
Here is quick table on what we mean-
|Total Home Size||2500|
|Home Office Size||150|
|Home Office %||6.00%|
|Total Non Sched A|
|Savings @ 22%|
|Savings @ 37%|
In essence with a home office you are only deducting the items that you otherwise cannot deduct on Schedule A of your individual tax return, such as Hazard Insurance, Utilities and HOA Dues.
So, a home office reimbursement as a business deduction might put $75 to $200 in your pocket. Might not be worth it. But where the home office has a ton of weight is now your commute is from the bedroom to the basement or den, and all travel from your home office is business travel.
Here is another consideration. For those taxpayers who are seeing Schedule A deductions being phased out due to high income, SALT limitations and / or Alternative Minimum Tax (AMT), using the home office reimbursement is a way to ensure these deductions are not reduced.
This can be a huge swing in taxes. This is one of the largest compelling reasons to have WCG (formerly Watson CPA Group) prepare both your corporate and individual tax returns- we can move things around to ensure the maximum deduction is obtained.
There are other examples. A quick example would be where you own an office building 100% through an LLC and the business is operating as a separate LLC or S Corp. The rent must be market rent- we suggest using Zillow or a realtor to periodically update your comparables for market rent analysis. This is outside the home office world (see our chapter on self-rentals).
Home Office Safe Harbor
There is a safe harbor provision for home office deductions where you can deduct $5 per square foot. This would be on Form 8829 for LLCs without an S Corp election. However for S Corps where you choose to reimburse yourself for the use of the home office, you cannot use the safe harbor method. You must use actual expenses! This is in stark contrast to the mileage reimbursement since the IRS simply gives you a rate per mile regardless of what you spend.
For non S Corps, there are some real advantages for using the safe harbor method such as being able to use all mortgage interest on Schedule A instead of a proration. But there are also some limitations that need to be considered. We typically optimizes for both methods for non-S corporations.
Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
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