s-corp home office for renters (not owners)

As with any home office, the form to use is Form 8829. If you look at it you'll see that line 18 is for rent paid. You can't keep away from using the form just by paying part of your rent from the business.

But if it's a corporation, it's no longer a home office, is it?

In that case, you don't use Form 8829; you (the employee) and you (the corporation) need to set up an accountable reimbursement plan to reimburse you for the office you maintain in your rented (or owned) home for the convenience of the employer. You can't "rent" space to the corporation (well, you can, but you can't take any deductions against the "rent" income, which pretty much defeats the purpose).

"need to set up an accountable reimbursement plan to

An accountable reimbursement plan requires that the reimbursement be for a deduction otherwise allowable. The plan could only make tax- free reimbursements for the allocatable interest and taxes.

Depreciation is an allowable deduction for a home office. So is rent. What source supports what seems to be your opinion that neither are reimbursable in an accountable plan as part of home office costs incurred for the benefit of the employer?

But it looks like a way to get around 280(A)(c)(6), which disallows most deductions for business use of your home when you rent it to your employer, so IRS substance over form (or is it form over subtance) won't allow it.

Form over substance? A corporation is considered a real entity and is treated that way. If you call that form over substance, you can't use a corporation to do anything you can't do with a proprietorship because of form over substance.

Good discussion, guys - but let me try and steer it back to my original question. Let's ignore taxes and depreciation, as well as any thought of the individual renting to the s-corp. My question was specific to an apartment rented from a *third party*. As mentioned in the original post, I've come across the accountable plan strategy already in my searches. My question is:

Why is this necessary, if the checks are going directly to the landlord?

Presumably, if my s- corp rented the apartment next door to mine to use as an office, and paid directly to the landlord, there would be no question of reimbursement. Is it the names on the lease that bring reimbursement into it - or is it the special rules surrounding shared / dwelling space? And if the latter, where exactly is the language - I've not been able to find it in the pubs I've read.

My CPA has suggested that I'd be fine paying the entire rent via the s- corp, then simply not taking a (corporate) deduction for the non- office portion. I'd prefer to understand the specific IRS guidance before choosing a method, since it's my name on the return at the end of the day. It seems this is a grey area. (As evidenced by the discussion here.) The sources I've found suggest that even the accountable plan theory (which most people seem to like) hasn't really been tested in court, or addressed specifically by the IRS. But again, my question is: why need it be any different than the rental of any other office space directly from a third party - and where can I find language to this effect?

It isn't quite that simple. You would have to report a dividend from the corporation for the non-deductible part of the rent paid by the corp.

That sounds pretty easy - particularly since it'd be a year-end thing, and I could decide on a percentage at that time, rather than doing set reimbursements throughout the year. Is there any reason to believe that's not an allowable way to go? (I'm assuming there must be some rule related to this - otherwise s-corp owners would just use the corp to pay all their personal expenses, declare these payments as dividends, and use that to get money out of the corp "cheaply".)

Alternatively, if the corp paid only (say) 15% directly & deducted all of it as office space costs, there'd be no dividend required... But now we're back to my original post again - and I'm still unclear whether this is allowable, or if there's a rule somewhere prohibiting it.

mitch

Hi Bill,

Reg 1.162-2 provides for reimbursement plans (accountable and non- accountable). The 1.162-2(c) definition refers to a "business connection" requirement discussed in paragraph (d).

(d) Business connection.

1.162-2(d)(1) Except as provided in paragraphs (d)(2) and (d)(3) of this section, an arrangement meets the requirements of this paragraph (d) if it provides advances, allowances (including per diem allowances, allowances only for meals and incidental expenses, and mileage allowances), or reimbursements only for business expenses that are allowable as deductions by part VI (section 161 and the following), subchapter B, chapter 1 of the Code . . .

Notwithstanding storage and licensed day-care usage, Sect 280A(c)(6) precludes business-use-of-home deductions for depreciation and operating expenses for a dwelling unit rented rented to an employer.

I previously, albeit with reservation, explicitly or tacitly agreed that a accountable reimbursement plan could work. But I re-thought: an accountable reimbursement plan operates as a wash - no income; no deduction. You can't be reimbursed tax free for something that you can't deduct.

As senility approaches me for too many years of this work, I preferred to be remembered as I was during my more lucid times (which was often questionable when compared to my mentors and some colleagues).

Richard Di Bernardo, CPA San Francisco

As usual I misread the post. I understood it to read that the dwelling unit was rented to the employer. As long as 280A doesn't disallow the deductions, an accountable reimbursement plan would work.

Oops, I forgot it was an S-corp. Distributions by an S-corp are not taxable income to the shareholder. They just reduce basis. However, the S-corp could still not deduct the non-business part of the rent paid.

I still like an accountable reimbursement plan. It is much cleaner to me. Either way, someone has to keep track of business related expenses and whether the regular and exclusive use tests are met.

Thanks for going to the effort of clearing up my question. I thought those who said depreciation couldn't be reimbursed in this situation (you were far from the first) were mistaken. Now I know why.

S-corps don't count. But a C-corp owner doesn't gain by that either, since the income used to pay the dividend is taxable to the corp, and it doesn't matter whether the owner gets cash or paid expenses for tax purposes.

In any case, if a corp pays too much dividends and not enough salary, the IRS can reclassify the payments.

Seth