Can I charge my S-corp rent for the portion of my home used as office ?(20%)
Trader
with my CPA, he said that:
1/ S-Corp cannot have a home office deduction - only charge
expenses to corp.
2/ Sole Prop (Schedule C filer) can use home office
deduction yet its not nearly as attractive as it sounds
because once I deduct my usual 100% of homeowner mortgage
interest + prop tax against income, I cannot deduct these
costs under the home office deduction (at approx 20% of the
full amount since that is the percentage of my home devoted
to business use). This leaves only the utilities, etc to be
deducted in this scenario (and 20% of these small items at
that).
My question is:
1/ Can I charge my S-corp rent for the portion of my home
used as office ?(20%). I was planning to calculate the rent
based on mortgage + prop tax + repairs (new roof) for the
year, take 20% of this amount (portion of home used
exclusively for business), then divide by 12 for a monthly
amount - basically I would be renting the office space in my
home at my cost to my S-Corp - is this workable?
Thanks for your comments!
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Charles R Markham, MST, EA
> used as office ?(20%). I was planning to calculate the rent
> based on mortgage + prop tax + repairs (new roof) for the
> year, take 20% of this amount (portion of home used
> exclusively for business), then divide by 12 for a monthly
> amount - basically I would be renting the office space in my
> home at my cost to my S-Corp - is this workable?
Works pretty well except for the part of the code that says
you can't take any deductions against the rental income
that you must now report...
Charles Markham, EA
Redsoxbuff
Sch. C, or he may have mis-told you: You can deduct
expenses proportionate to business-use-of-home space
(assuming you meet all the requirements for such, including
engaging in a qualifying business activity); those expenses
reduce both your income and your self-employment tax. You
don't get to 'double-dip' by taking the same expenses twice,
to be sure, but the proportionate deduction can be well
worthwhile.
I'll let somebody else address the S-Corp<G>
Joseph Anthony, EA
Richard B. Gardner
> 1/ Can I charge my S-corp rent for the portion of my home
> used as office ?(20%). I was planning to calculate the rent
> based on mortgage + prop tax + repairs (new roof) for the
> year, take 20% of this amount (portion of home used
> exclusively for business), then divide by 12 for a monthly
> amount - basically I would be renting the office space in my
> home at my cost to my S-Corp - is this workable?
Your best approach would be to set up an accountable plan
between you (employee) and the S corp (employer). Submit
the items as an expense reimbursement to the corp. The
items should include utilities, insurance, depreciation,
etc. based upon the percentage of business use of your home.
As a reimbursement, this would be an expense to the corp,
but not income to you.
---
Richard B. Gardner, EA
Trader
> You may have misunderstood what he said about home offices &
> Sch. C, or he may have mis-told you: You can deduct
> expenses proportionate to business-use-of-home space
> (assuming you meet all the requirements for such, including
> engaging in a qualifying business activity); those expenses
> reduce both your income and your self-employment tax.
I am using an S-Corp, but for the sake of my understanding
how a Sole Prop works in this instance - the first expenses
on my list if I were to "deduct expenses proportionate to
business-use-of-home space" per your comments, would be the
20% (proportionate to use) on the schedule C for homeowners
mortgage expenses + prop tax, etc. Deducting 100% of these
on one part of the return and 20% (proportionate to use) on
the schedule C would be double-dipping, so the only home
office deduction items left are MUCH smaller- which items do
not constitute double-dipping yet are well worthwhile? The
only items I see remaining are 20% of utilities + home
repairs, what am I missing here?
If one were to evaluate S corp vs. Sole Prop based only on
the sole Props' ability to allow the Home Office deduction,
it appears that the home office deductions available (like
the 20% of utilities remaining after above scenario) would
be more than offset by the Corp's ability to allow part of
my income to be a distribution (and saving on payroll taxes
[at an reasonable salary/dist ratio of course])
Bill Trader
Trader
>> 1/ Can I charge my S-corp rent for the portion of my home
>> used as office ?(20%). I was planning to calculate the rent
>> based on mortgage + prop tax + repairs (new roof) for the
>> year, take 20% of this amount (portion of home used
>> exclusively for business), then divide by 12 for a monthly
>> amount - basically I would be renting the office space in my
>> home at my cost to my S-Corp - is this workable?
> Your best approach would be to set up an accountable plan
> between you (employee) and the S corp (employer). Submit
> the items as an expense reimbursement to the corp. The
> items should include utilities, insurance, depreciation,
> etc. based upon the percentage of business use of your home.
> As a reimbursement, this would be an expense to the corp,
> but not income to you.
I currently submit an expense report to my Corp and get
reimbursed for my expenses on a monthly basis. Please
explain setting up "an accountable plan" - wouldn't I just
include a list of utilities, insurance, depreciation, etc.
based upon the percentage of business use of my home on my
usual monthly expense sheet and include in my usual expense
reimbursement check? You did not mention mortgage + prop tax
+ home repairs, can I be reimbursed for these items as well
in my expense report (per the use %)?
Bill Trader
Wendy Marsden
> "Trader" <Tra...@aol.com> wrote:
>> 1/ Can I charge my S-corp rent for the portion of my home
>> used as office ?(20%). I was planning to calculate the rent
<Snip>
> Your best approach would be to set up an accountable plan
> between you (employee) and the S corp (employer). Submit
> the items as an expense reimbursement to the corp. The
<snip>
Isn't this way too complicated? I've just use a business
use of home worksheet at year end and adjusted it into the S
Corp's books in the Loans to/from Shareholder section, along
with other personal-mixed activity like personal use of the
company car, business expenses paid personally (usually from
personal credit cards), etc.
I've never had to defend this practice on audit, however,
and would be interested to hear if anyone has ever had
trouble with this commonsense way of handling it. Assume
for the sake of this discussion that interest is handled
appropriately on corporate loans and that all the
requirements are made for business use of home as used on a
form 8829.
Also, in case the personal use of auto gets jumped on,
assume we have lovely log books maintained accurately each
day. (VBG)
Wendy Marsden, CPA & EA in MA
Ed Zollars
> I've never had to defend this practice on audit, however,
> and would be interested to hear if anyone has ever had
> trouble with this commonsense way of handling it.
I'll put it this way--if you were challenged under audit, I
suspect you would end up arguing that, in fact, you *HAD*
established an accountable plan under Section 62(c).
Because if you hadn't, you have a few problems. We have the
question of just what these payments were for (and they are
payments, even if they just end up as a debt to the
shareholder). After all, the S corporation didn't own the
house, but rather its employee did. So we are paying
expenses for the employee. Employees must generally deduct
expenses below the line (Section 62(a)) and include as
compensation all payments received from their employer under
Section 61. Section 62(c) (the "accountable plan"
provisions) provide for a specific exemption.
Even worse, perhaps this isn't payment in the nature of
compensation, but rather a rental to the employee. Then
280A ends up denying the individual *any* deduction for
these expenses.
Finally, if you don't have the documentation that would be
needed for an accountable plan, then we have the basic issue
of whether we get a deduction at all.
So, from a practical standpoint, I think you already are
doing what was suggested.
Richard B. Gardner
> Isn't this way too complicated? I've just use a business
> use of home worksheet at year end and adjusted it into the S
> Corp's books in the Loans to/from Shareholder section, along
> with other personal-mixed activity like personal use of the
> company car, business expenses paid personally (usually from
> personal credit cards), etc.
My only problem with it (and the reason I mentioned the
accountable plan) is that it treats the transactions very
informally and by-passes the employer/employee relationship.
If you had an auditor that really wanted to push the issue,
then you could have problems with the informal treatment. At
least with an accountable plan you would have all the bases
covered.
Also, I don't really see that there is much "complication"
involved with the accountable plan. You are just
"formalizing" and presenting your expenses for a
monthly/quarterly submission rather than waiting until the
end of the year to gather all the same info. And, if the
corp didn't have the funds to pay the reimbursement, then it
could be taken to the shareholder note as you are doing now.
---
Richard B. Gardner, EA
<< -------------------------------------------------- >>
Richard B. Gardner
> I currently submit an expense report to my Corp and get
> reimbursed for my expenses on a monthly basis. Please
> explain setting up "an accountable plan" - wouldn't I just
> include a list of utilities, insurance, depreciation, etc.
> based upon the percentage of business use of my home on my
> usual monthly expense sheet and include in my usual expense
> reimbursement check? You did not mention mortgage + prop tax
> + home repairs, can I be reimbursed for these items as well
> in my expense report (per the use %)?
An accountable needs to be a "written" plan that requires
the employee to substantiate all expenses and return (or
claim as income) any excess reimbursements. The mechanics
of the plan operate just as you are doing right now.
Yes, the mortgage interest and property taxes can also be
claimed. The repairs can be deducted in full if they are
directly related to your home office. If they are
indirectly related (e.g., a new roof for the entire
residence), then only the business portion can be
reimbursed. And, if they are not related at all (e.g., new
kitchen sink), then they cannot be deducted.
---
Richard B. Gardner, EA
<< -------------------------------------------------- >>
Redsoxbuff
> how a Sole Prop works in this instance - the first expenses
> on my list if I were to "deduct expenses proportionate to
> business-use-of-home space" per your comments, would be the
> 20% (proportionate to use) on the schedule C for homeowners
> mortgage expenses + prop tax, etc. Deducting 100% of these
> on one part of the return and 20% (proportionate to use) on
> the schedule C would be double-dipping, so the only home
> office deduction items left are MUCH smaller- which items do
> not constitute double-dipping yet are well worthwhile? The
> only items I see remaining are 20% of utilities + home
> repairs, what am I missing here?
You don't double-dip because you take 20% of the relevent
deductions on Schedule C and the remaining 80% of those
deductions that qualify for Schedule A treatment (property
taxes & interest) on Schedule A. Other expenses, such as
home maintenance, repairs, qualifying utilities, etc., are
taken on a proportionate basis.
Joseph Anthony, EA
Lanny
>> 1/ Can I charge my S-corp rent for the portion of my home
>> used as office ?(20%). I was planning to calculate the rent
>> based on mortgage + prop tax + repairs (new roof) for the
>> year, take 20% of this amount (portion of home used
>> exclusively for business), then divide by 12 for a monthly
>> amount - basically I would be renting the office space in my
>> home at my cost to my S-Corp - is this workable?
> Your best approach would be to set up an accountable plan
> between you (employee) and the S corp (employer). Submit
> the items as an expense reimbursement to the corp. The
> items should include utilities, insurance, depreciation,
> etc. based upon the percentage of business use of your home.
> As a reimbursement, this would be an expense to the corp,
> but not income to you.
I have never seen this tried but I would be sceptical. If I
were an IRS auditor, I think I would say that the
reimbursements to you were for use of space in your home. I
can't think of a better definition of "Rent" that a payment
for use of space. Therefore, the payments would be income
to you and you would not get a deduction for the underlying
expenses. (See the earlier posts on this point.)
Lanny K Williams, C.P.A.
TaxPlan Ltd.
Tax returns for expats, prepared by expats
Trader
> the employee to substantiate all expenses and return (or
> claim as income) any excess reimbursements. The mechanics
> of the plan operate just as you are doing right now.
>
> Yes, the mortgage interest and property taxes can also be
> claimed. The repairs can be deducted in full if they are
> directly related to your home office. If they are
> indirectly related (e.g., a new roof for the entire
> residence), then only the business portion can be
> reimbursed. And, if they are not related at all (e.g., new
> kitchen sink), then they cannot be deducted.
Thanks Richard - just to confirm my understanding regarding
the mortgage interest and property taxes:
As you know, for the instructions on IRS's Home Office
Deduction form for Schedule C, the IRS advises that only the
business portion of the mortgage (say 20%) should be entered
on the form, with the balance (80%) elsewhere on the return.
Total available mortgage deduction for Schedule C is 100% no
matter where you place it (80/20, 70/30, 90/10, etc). This
limitation makes sense since the return is for one entity
(the Individual/Sole Prop)
For the S Corp, I am trying to take advantage of the fact
that two entities are involved (Individual + S Corp), and
that my S-Corp should reimburse whomever is providing the
office space (which just so happens to be an office that is
a part of its sole shareholder's home). That said, I wanted
to confirm that I would be taking 100% of my mortgage
interest deduction + prop tax on my 1040 AND be reimbursed
for 20% of these same items from my S-Corp by expensing them
per the % use - in effect a 120% combined benefit - correct?
By the way, why not the entire mortgage payment (including
the principal).
Bill Trader
Ed Zollars
> I have never seen this tried but I would be sceptical. If I
> were an IRS auditor, I think I would say that the
> reimbursements to you were for use of space in your home. I
> can't think of a better definition of "Rent" that a payment
> for use of space.
Well, the auditor is going to have to get around Section
62(c) and the long and glorious histories of Section 162 and
Section 280A. While some have wondered about whether such
reimbursements have to be limited to cash out of pocket, for
purposes of arguement, even if we limited it to cash
expenditures, it seems clear that Section 62(c) allows
reimbursement for expenses that otherwise would be
deductible by the employee under these provisions.
The fact that something *can* be rented does not mean that
it can't be reimbursed for. A reimbursement is limited to
payment of substantiated expenses. I think a court would
have a tough time buying the argument that a lessor, in an
arms length arrangement, would look only to recover actual
expenses in a real lease.
Now, if we have a situation where the shareholder simply
takes a specific amount of cash each month and never
substantiates the reimbursement, *THEN* I think we have a
real issue of this being rent rather than a reimbursement.
But I clearly not accept the theory that the IRS can take
*any* arrangement and simply label it "rent to the employee"
in order to deny a deduction.
Vince
> wmar...@mtholyoke.edu (Wendy Marsden) wrote:
> Even worse, perhaps this isn't payment in the nature of
> compensation, but rather a rental to the employee. Then
> 280A ends up denying the individual *any* deduction for
> these expenses.
Answering my own question, fair market rent doesn't help.
(IRC 280A(c)(6)).
Vince
> ...
> Even worse, perhaps this isn't payment in the nature of
> compensation, but rather a rental to the employee. Then
> 280A ends up denying the individual *any* deduction for
> these expenses.
Even if it is rented at fair market value?
Lanny
The problem, as I see it, is that under the circumstances,
the expenses would NOT be deductible by the employee.
Maybe this is a sign of how long I've been in practice but I
can remember why the law was changed to specifically deny
deductions to stockholder/employees of a corporation --
whether C or S. I am not going to do the research for this
posting but there was a court case a number of years ago.
An accountant (who else) was a stockholder or partner in an
accounting practice. He kept an office at home and rented
it to the firm; reporting the rental income and claiming all
the deductions on Schedule E. IRS challenged him and lost
in court, maybe even on appeal (I don't remember the
details.) IRS went to Congress and had the law changed to
specifically prohibit this type or arrangement.
It seems to me that the reimbursement idea is a very
transparent attempt to get aroung the statutory prohibition.
IRS has broad powers to recharacterize transactions to
reflect substance over form, and that power could be used
here, I would think.
I know that I would have a hard time justifying such an
arrangement and doubt that I would prepare a return for a
client on this basis. At the least, I would make it clear
to the client that this was a very doubtful approach and
that I would not be responsible for any adverse rulings
by the Service.
Lanny K Williams, C.P.A.
TaxPlan Ltd.
Tax returns for expats, prepared by expats
<< -------------------------------------------------- >>
David Woods EA MST
> the principal).
Because a mortgage payment is not a deduction under
ANY circumstances.
David M. Woods, EA, MST
(617) 723-2422
Boston, MA
www.rytercpa.com
evild...@aol.com
This advice does not constitute a client relationship.
If you are not a client, you are on your own.
Trader
Richard would be greatly appreciated.
Bill Trader
> An accountable needs to be a "written" plan that requires
> the employee to substantiate all expenses and return (or
> claim as income) any excess reimbursements. The mechanics
> of the plan operate just as you are doing right now.
>
> Yes, the mortgage interest and property taxes can also be
> claimed. The repairs can be deducted in full if they are
> directly related to your home office. If they are
> indirectly related (e.g., a new roof for the entire
> residence), then only the business portion can be
> reimbursed. And, if they are not related at all (e.g., new
> kitchen sink), then they cannot be deducted.
Thanks Richard - just to confirm my understanding regarding
the mortgage interest and property taxes:
As you know, for the instructions on IRS's Home Office
Deduction form for Schedule C, the IRS advises that only the
business portion of the mortgage (say 20%) should be entered
on the form, with the balance (80%) elsewhere on the return.
Total available mortgage deduction for Schedule C is 100% no
matter where you place it (80/20, 70/30, 90/10, etc). This
limitation makes sense since the return is for one entity
(the Individual/Sole Prop)
For the S Corp, I am trying to take advantage of the fact
that two entities are involved (Individual + S Corp), and
that my S-Corp should reimburse whomever is providing the
office space (which just so happens to be an office that is
a part of its sole shareholder's home). That said, I wanted
to confirm that I would be taking 100% of my mortgage
interest deduction + prop tax on my 1040 AND be reimbursed
for 20% of these same items from my S-Corp by expensing them
per the % use - in effect a 120% combined benefit - correct?
By the way, why not the entire mortgage payment (including
the principal) when getting the 20% reimbursement?
Bill Trader
Dick Adams
> I wanted to confirm that I would be taking 100% of my
> mortgage interest deduction + prop tax on my 1040 AND be
> reimbursed for 20% of these same items from my S-Corp by
> expensing them per the % use - in effect a 120% combined
> benefit - correct?
The 20% reimbursement is called rent on which you'll have to
pay taxes. You'll also need an extra schedule, have to take
depreciation on your residence, and recapture that
depreciation upon the sale of your residence. There is a
benefit, but it's less than you think.
> By the way, why not the entire mortgage payment (including
> the principal) when getting the 20% reimbursement?
That's a great idea. Just don't mention my name at your
trial.
David desJardins
> I wanted to confirm that I would be taking 100% of my
> mortgage interest deduction + prop tax on my 1040 AND be
> reimbursed for 20% of these same items from my S-Corp by
> expensing them per the % use - in effect a 120% combined
> benefit - correct?
Of course not. If 20% of your property is being used for
your office, then it's not being used for your residence.
> By the way, why not the entire mortgage payment (including
> the principal) when getting the 20% reimbursement?
Because principal payments are not an expense. Obviously,
you can't take out a $100,000 mortgage, pay it off the next
month, and claim that you have a $100,000 deduction.
David desJardins
Michael T. Wing, CPA
> It seems to me that the reimbursement idea is a very
> transparent attempt to get aroung the statutory prohibition.
As I recall, the prohibition on "rental" deductions was
primarily an attempt to prevent avoidance of the "principal
place of business rule". In other words, if your home office
was not your *principal* place of business, you would try to
qualify it as a rental property instead. But, in cases where
the home office clearly *is* the principal place of
business, I don't think a properly constructed
"reimbursement" arrangement would automatically fail
(although I *do* have some issues with respect to the actual
tax return treatment of such an arrangement).
MTW
Please reply to newsgroup - unsolicited email ignored.
bar...@news.one
> (including the principal).
Think about it -- Principal is part of the basis in the
event of a sale of the property
Frederick E. Jorden
> Tra...@aol.com writes:
>> I wanted to confirm that I would be taking 100% of my
>> mortgage interest deduction + prop tax on my 1040 AND be
>> reimbursed for 20% of these same items from my S-Corp by
>> expensing them per the % use - in effect a 120% combined
>> benefit - correct?
>>
> The 20% reimbursement is called rent on which you'll have to
> pay taxes. You'll also need an extra schedule, have to take
> depreciation on your residence, and recapture that
> depreciation upon the sale of your residence. There is a
> benefit, but it's less than you think.
>> By the way, why not the entire mortgage payment (including
>> the principal) when getting the 20% reimbursement?
> That's a great idea. Just don't mention my name at your
> trial.
But what about documentation or justification of zero commutation?
--
Frederick E. Jorden http://fejcpapc.com/
Frederick E. Jorden, CPA PC
10049 Midlothian Tpk - 2-H Richmond, VA 23235 EMAIL fej...@erols.com
(804) 320-6210 FAX (804) 320-6211
David Woods EA MST
>> (including the principal).
> Think about it -- Principal is part of the basis in the
> event of a sale of the property
And JUST a part of it, as few mortgages are for the exact
pruchase price of a home.
David M. Woods, EA, MST
(617) 723-2422
Boston, MA
www.rytercpa.com
evild...@aol.com
This advice does not constitute a client relationship.
If you are not a client, you are on your own.
<< -------------------------------------------------- >>