Using an Accountable Plan for Tax Savings
By Laura Johnson, EA
A common question for new clients with businesses is “can I deduct expenses for my home office?” A simple question at first blush. Let’s look more closely.
First, how is your business organized?
A sole proprietorship or a single member LLC (that hasn't made an election to be taxed as a corporation) that uses a space at home regularly and exclusively for business can claim a deduction for a home office. Regularly means not sporadic, but continuous, based on a facts and circumstances evaluation. “Exclusively” means only used for business purposes Courts have varied in their definition of “exclusively”. The deduction is claimed on Form 8829 which hangs off Schedule C (the tax form for reporting income from a trade or business).
Home office deductions for partners in partnerships will be overlooked for the purposes of this article. Sorry partners! Please contact us with questions about home offices of partners.
What if your business is organized as an S corporation? Can you deduct home office expenses? The default answer is no, you cannot.
One of the defining attributes of an S corporation is that an officer/shareholder who performs services for the corporation must receive reasonable compensation. The reasonable compensation must come in the form of a wage, subject to employment taxes. Wages make you an employee. Under current law (scheduled to sunset at the end of 2025) employees may NOT deduct unreimbursed business expenses. And therein ends your quest for a home office deduction.
Is there an alternative? You bet.
The business can create an accountable plan which allows the business to reimburse employees for home office expenses. The business will reimburse the employee and claim the deduction on the S corporation tax return. The reimbursement is not taxable to the employee. Broadly, an accountable plan must satisfy three requirements by:
Proving a business connection
Maintaining adequate substantiation
Requiring employees to return excess advances
Proving a business connection can be thought of as whether or not the expense is ordinary and necessary to the operation of the business and in certain cases, requiring the office to be maintained for the convenience of the employer. For a remote employee or those with no other office space available, a home office should qualify.
Maintaining adequate substantiation relates to having an accountable plan in place and requiring employees to submit expense reports on a reasonable basis for legitimate and substantiated expenses. Think receipts. Monthly or quarterly reports should be acceptable.
Requiring employees to return excess advances is self-explanatory.
What do you get by doing some extra paperwork? A potentially valuable tax deduction for otherwise personal, non-deductible, expenses. Accountable plans can be especially valuable for those who rent their homes or who otherwise would take the standard deduction.
At JS+A we help our clients maximize home office deductions across different entity classifications, including implementing accountable plans where appropriate. Please let us know if we can help you today.
