A self-employed business owner that uses an office in the home can deduct business use of home office on their personal tax return using Form 8829. Unfortunately, this sticks out like a sore thumb and is highly likely to be audited by the IRS because of the aggressive approach taken by many self-employed business owners to reduce their taxable income.
The S corporation makes the home office deduction much less likely to be audited by the IRS. The calculation would be similar to the self-employed Form 8829. The S corporation owner who has a home office used for business can calculate its percentage in one of two ways. One is to take the home office square footage divided by the home total square footage to calculate the business use percentage. The other is to take the office, being one room, divided by the total number of rooms in the home. Whichever calculation yields the greater percentage can be used. The business use percentage is then multiplied by the home expenses of mortgage interest, real estate tax, insurance, utilities and repairs/maintenance to come up with the deduction.
Once you calculate the home office deduction amount, you would record the office expense in your accounting software and reimburse yourself from the business checking account to your personal checking account.
A couple of points to keep in mind: You can do this quarterly, but make sure to record the final reimbursement and have the payment from your business checking clear before year end. Since most businesses are cash basis, it is important to have the reimbursement be processed by the business checking in the current tax year. You will need to adopt an “Accountable Plan” in your board minutes, which is an accounting policy that allows the business to reimburse employees for business expenses paid personally.
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Reducing Taxes – Increasing Wealth
Please understand that I cannot give you specific investment or legal advice, just guidance in these areas, and you should consult a professional licensed in these areas for specific advice before making any final decisions.
