Locking In Your Home Office Deduction When You Operate as an S Corporation

Home Office Deduction When You Operate as an S Corporation

If you recently switched from being a sole proprietor or single-member LLC to operating as an S corporation, you may have noticed that the home office deduction rules change. What worked before—simply claiming the deduction on your Schedule C—won’t work the same way under an S corporation structure.

The good news: you can still get the full tax benefit, even for a qualifying garage workspace, if you follow the one right way to do it.

Why the “One Right Way” Is Reimbursement

The IRS has made it clear—reimbursement under an accountable plan is the only reliable method for S corporation owner-employees to benefit from a home office deduction. Here’s how it works:

1. You submit expense reports to your S corporation for the costs of your home office.

2. The corporation reimburses you for those expenses and claims the deduction as “office space” on its own tax return.

3. You exclude the reimbursement from your personal income—it’s not taxable to you.

This method ensures the corporation gets the deduction and you avoid adding taxable income to your return.

Why Other Methods Fail

• Renting the space to your corporation: The rent is taxable to you personally, and you can’t deduct home-office expenses against it.

• Claiming unreimbursed employee expenses: Since the Tax Cuts and Jobs Act, these are suspended for 2018–2025, so you get zero benefit.

Doing It Right (and Audit-Proof)

The reimbursement method only works if you follow IRS rules and keep thorough documentation. For a home office—including a qualifying garage—you must have:

• Proof of the expense (utility bills, insurance, property tax statements)

• Proof of exclusive use (attestations, photos)

• Proof of regular use (logs or schedules)

• Proof of business use (tie business tasks to use of the space)

• Proof that it’s for the convenience of the employer (a written statement in your records)

These requirements apply whether your office is inside your home or in a converted garage.

Special Note on Garages

A garage—attached or detached—can qualify under these same S corporation rules if it meets exclusive and regular usestandards. Detached garages have slightly different tax treatment for capital gains when selling your home, but the reimbursement process for claiming expenses is the same.

If your garage is part of your S corporation workspace, make sure your expense reports reflect its square footage and a clear description of its business purpose.

Tax Return Tip

• On the S corporation return: Report total reimbursements under “Other deductions” as “office space.”

• On your personal return: Reduce your itemized deductions for mortgage interest and property taxes by the reimbursed amounts.

• In your permanent records: Track any depreciation reimbursed to you, as it may be subject to recapture when you sell your home.

  
  

Special Note for S Corporation Owners

If you operate your business as an S corporation and plan to deduct garage space as a home office, you must follow different rules than sole proprietors or partners. The key requirement is that the garage must be part of a formal accountable plan—a system where your corporation reimburses you for legitimate business expenses.

AccountablePlanSample.pdf

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Here’s how to stay compliant:

• Submit an expense report to your S corporation for garage-related costs (utilities, depreciation, etc.).

Expense Report.pdf

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• Maintain proof of exclusive and regular business use—just like with any other home office.

• Document the garage space: include floor plans, photos, and usage logs.

• Demonstrate employer convenience: your garage must be necessary for the functioning of the business or your ability to perform your duties as an employee.

Without this setup, your S corporation can’t deduct the expense—and you can’t either.

Key Takeaways

• For S corporation owners, reimbursement is the only practical way to benefit from the home office deduction.

• The same documentation rules apply to garages used for business.

• Avoid rent arrangements and unreimbursed expense claims—they provide little or no benefit.

• Maintain annual documentation to defend your deduction in an audit.

References

1. IRC Section 280A(c)(6) – Limitations on deductions for business use of home by employees.

2. IRC Section 67(a); 67(b) – Miscellaneous itemized deductions and the 2% AGI floor.

3. Reg. Section 1.62-2(c) – Reimbursement arrangements and accountable plans.

4. Reg. Section 1.62-2(d)(1) – Substantiation requirements under accountable plans.

5. IRC Section 280A(c)(1) – Home office deduction requirements for exclusive and regular use.

6. Hamacher v. Commissioner, 94 T.C. 348 (1990) – Court case defining “convenience of the employer” standard.

7. Ibid. – Additional analysis of Hamacher’s interpretation of employee home office use.

8. IRS Section 1(h)(6)(A) – Capital gains treatment and Section 1250 depreciation rules.