The home office deduction does not only apply to self-employed individuals (Schedule C). The tax benefit of the home-office deduction is deducted differently for the owners of an S Corporation operating at home. The home-office deduction is available to the S corporation because the corporation can reimburse the home office expenses as an employee business expense.
Under the reimbursement method, the corporation deducts the home-office reimbursement as an employee business expense, and you, the employee of your S corporation, have no income from the reimbursement. The failure to use an accountable plan for your employee expense reimbursements (including yourself if you operate as a corporation) turns those improperly reimbursed expenses into taxable wages.
In other words, by failing to comply with the accountable plan rules, you turn the tax-free reimbursement into taxable W-2 wages. That is about as dreadful as it can get (non-taxable into taxable from a simply and avoidable mistake).
If you have employees who incur business expenses on behalf of your business and you do not reimburse them, they are simply out that money. The Tax Cuts and Jobs Act (TCJA) denies them a deduction for those business expenses. If you reimburse business expenses to yourself as a corporate owner or to your employees incorrectly, you turn what you thought was a tax-deductible reimbursement of business expenses into W-2 taxable income. Here are the Consequences:
- You incur a proper business expense.
- Your corporation reimburses you, the shareholder-employee, for the expense but does so in violation of the rules.
- You now have W-2 income from the improper reimbursement.
- You have no personal tax deduction for the proper business expense.
- Your corporation pays extra payroll taxes because the proper business expense is now a W-2 wage.
With some straightforward safeguards such as an accountable plan, you do not have to suffer from the TCJA, or worry about business expenses disappearing or creating unhappy employees such as yourself.
Without an accountable plan, business expense reimbursements can easily be improper and count as additional taxable wages.
- For you and your employees, that results in an increase in both (a) personal income taxes and (b) FICA taxes on the reimbursements.
- Your company pays the employer’s share of FICA taxes on the reimbursements.
With proper reimbursement under an accountable plan, the employee receives the expense reimbursement tax-free. The corporation deducts the business expenses.
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
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