Hi,

My wife and I are the only owner/employees of a California based S
Corporation. We use 20% of our rental home for business. We would like
to deduct the rent, utilities, etc as "home office deduction". What
process should we follow to be able to deduct them?

Are we supposed to pay 20% of the rent/utilities from our business
account and the rest from our personal account? For the utilities,
does PG&E mind receiving two checks every month, instead of one?

After having paid 20% of the rent/utilities from the business account,
if we decide to change the percentage when we file the income tax
returns for the company, can we do that?

Thanks

Hello and thank you for your question.

The IRS publication of interest is
Publication 587
http://www.irs.gov/pub/irs-pdf/p587.pdf
"The rules in this publication apply to individuals, trusts, estates,
partnerships, and S corporations....  There are no special rules for
the business use of a home by a partner or S corporation shareholder."
Id. at page 2

You'll see on page 6-8 how the deduction is calculated (based on the
square footage of the home used for business) and how it is deducted.
"Generally, the business percentage for utilities is the same as the
percentage of your home used for business."
Id. at page 9

See also
http://www.irs.gov/faqs/faq-kw99.html


As to the mechanics of making these payments, you should simply pay
100% of these items out of your personal funds, and then fill in and
file Form 8829 (you can see the form from page 12 of the publication)
to take the available deductions.  This is the method the IRS expects
you to use, and it also means that there's no need to declare or
calculate the deduction percentage until you actually file the return.
 So the 1120S S corporation return will show taxable income before
these deductions, and then on your personal Form 1040 you will report
your S corp income and you will take the available deductions as an
offset to a portion of that income.

Please read through the IRS publication, and then if you need anything
further from me, request clarification of my answer.  I would
appreciate it if you would hold off on rating my answer until I have a
chance to reply.

Search terms used:
 "s corporation" "home office" site:irs.gov

Sincerely,
Richard-ga

---

Request for Answer Clarification by cwdesigns-ga on 29 Jan 2004 09:27 PST

Would I take the home office deduction in the company's income tax
return (1120S) or in my personal income tax return (1040)?

I would prefer to avoid claiming the home office deduction as an
employee as I read somewhere that this would require additional
paperwork (a reimbursement plan?) to be able to reimburse the expense
from the company.

---

Clarification of Answer by richard-ga on 29 Jan 2004 14:08 PST

Hello again:

The reimbursement plan that you mention would come into play if the S
corp was agreeing to reimburse you for your expenses in connection
with maintaining the home office.  I agree with you that's better
avoided.

So my suggestion as in my original answer is that you pay all your
home expenses personally, and then take the deduction on your 1040. 
So the corporate 1120S doesn't enter into the picture at all. 
Whatever taxable profit the S corp earns will be shown on the 1120S. 
You will in turn report that profit (or your share of it if there are
multiple stockholders) on your 1040, and you will take a deduction on
your 1040 for your home office expenses.

Clear?

-Richard-ga

Be sure to not exceed the maximum allowed as measured by the IRS. 
Personally, I always ate the home-office deduction.  I figured it was
insurance against an audit, and in fact --in 17 years of
self-employemnt, I never did get audited.  The home-office deduction
is a HUGE red flag, and trying to squeeze every last nickel from it
will eventually bite you in the a**.

~~Cynthia

The "maximum allowed" by the IRS is a reference to the fact that the
home office deduction cannot create or increase a business loss. 
However, any amount that cannot be taken in the current year can be
carried forward to the next and used against that year's income, so
include ALL legitimate deductions.  It makes no sense not to take the
home office deduction, if it is legitimate.  There was a fairly brief
period of time during which the home office deduction was approached
with particular care, because of a Supreme Court finding.  Congress
has since changed the tax law to override the ruling.  All you have to
do is be honest -- if it's 10% of your house, don't claim 20%.  It is
a myth that the home office deduction is a red flag to the IRS -- it's
not even a little tiny pink one.  As with all deductions, keep good
records.  Think to yourself, "If I were audited, what would the IRS
agent want to see?"  Then keep it.  It is foolish to make a donation
to income taxes by passing up on a deduction you are completely
entitled to.  Use the resource Richard provided --
http://www.irs.gov/pub/irs-pdf/p587.pdf -- and enjoy the write-off.

8)
JanCPA

I'm a little confused about Richard's answer. In order to use a Form
8829, don't you have to file a Schedule C? And if you're an S Corp,
you won't be filing a Schedule C, obviously. Is there an alternate
form like the 8829 that's for S Corps? Thanks.