How to Take a Home Office Deduction for an S-Corp

Claiming a home office deduction for your S-Corporation isn't as simple as checking a box on your personal tax return. Unlike a sole proprietor who uses Form 8829, an S-Corp shareholder is an employee, and the rules work differently. This article will walk you through the correct, IRS-approved method for your S-Corp to cover the costs of your home office: establishing an accountable plan for expense reimbursements. We will cover the specific requirements, how to perform the calculation, and the practical steps for proper documentation.

Why S-Corp Owners Can’t Take a Direct Deduction

If you've previously operated as a sole proprietor or single-member LLC, you’re likely familiar with Form 8829, Expenses for Business Use of Your Home, which is filed with your Schedule C. For S-Corp owner-employees, this path is closed. The reason is simple: you are an employee of your corporation, not a self-employed individual.

In the past, employees could potentially claim unreimbursed business expenses as a miscellaneous itemized deduction on Schedule A using Form 2106. However, the Tax Cuts and Jobs Act of 2017 (TCJA) suspended this deduction for most employees through 2025. This change cemented the fact that S-Corp owners cannot directly deduct home office expenses on their personal Form 1040. The one and only proper method is for the business to reimburse the owner-employee for those expenses.

The Accountable Plan: The Correct Reimbursement Method

An accountable plan is the key to correctly handling home office expenses in an S-Corp. It’s a formal arrangement set up by the company that allows it to reimburse employees—including shareholder-employees—for legitimate business expenses without the reimbursement being considered taxable wages. As long as you meet the IRS requirements, the reimbursement is a tax-free event for the employee and a deductible business expense for the S-Corporation.

To be valid in the eyes of the IRS, an accountable plan must satisfy three main conditions:

• Business Connection: Every reimbursed expense must have a clear business purpose. The employee must have paid for or incurred expenses while performing services for the company. The home office must be for the convenience of the employer (the S-Corp), not just the employee's preference.
• Substantiation: The employee must adequately account for these expenses to the company within a reasonable period. This means providing proof of the amount, time, and business purpose through records like receipts, statements, and expense logs. "Guesstimates" are not sufficient.
• Return of Excess Funds: If the company provides an advance or a reimbursement that is greater than the substantiated business expenses, the employee must return the excess amount to the company within a reasonable time.

While the plan itself doesn't need to be overly complicated, it must be officially adopted and recorded. The best practice is to formally adopt the accountable plan in your corporate meeting minutes or as a standalone company policy document signed by the officer(s).

Step-by-Step Guide to Calculating the Home Office Reimbursement

With an accountable plan in place, you can move on to the calculation. This process involves proving your office qualifies, categorizing expenses correctly, and applying a business-use percentage.

Step 1: Meet the Basic Home Office Requirements

Before any reimbursement occurs, the home office space must qualify. This hinges on two long-standing IRS tests:

• Regular and Exclusive Use: The area of your home you claim must be used regularly and exclusively for conducting business. A spare bedroom that’s only an office qualifies. Your dining room table, where you also eat dinner with your family, does not. There can be no personal use of the designated space.
• Principal Place of Business: Your home office must be your principal place of business. This is met if you use the space for administrative or management activities of your business and there is no other fixed location where you can substantially conduct these activities. For most S-Corp owners who solely operate from home, this test is easily met.

Step 2: Tally Direct and Indirect Expenses

Once your space qualifies, you need to tally up the expenses. These are split into two categories.

• Direct Expenses: These are costs that apply only to the office area. Examples include painting just the office, installing a dedicated business phone line, or specific repairs made only to that room. Direct expenses are 100% reimbursable.
• Indirect Expenses: These are full-home costs that also benefit the office space. This is the largest category and includes expenses like mortgage interest, homeowner’s insurance, property taxes, rent, utilities (electricity, gas, water), general home repairs, security system fees, and home depreciation.

Step 3: Calculate Your Business Use Percentage

To figure out the reimbursable portion of your indirect expenses, you must calculate the percentage of your home dedicated to business. The standard method—and the one you should use for an accountable plan—is the square footage method.

Square Footage Method: Measure the square footage of your office and divide it by the total square footage of your home.

Example:

• Your office measures 300 square feet.
• Your entire home is 2,000 square feet.
• Your business use percentage is: 300 / 2,000 = 15%.

This 15% is the figure you will apply to all your indirect home expenses.

A Note on the Simplified Method: The IRS offers a “simplified option” for the home office deduction ($5 per square foot, capped at 300 sq ft). This is a deduction for sole proprietors, not a reimbursement framework. An accountable plan is designed to reimburse for actual expenses incurred. Using the simplified rate as a basis for reimbursement is an audit risk because it doesn't align with the substantiation rules that govern accountable plans. Stick to the actual expense method for S-Corps.

Step 4: Putting It All Together – A Calculation Example

Let’s run the numbers for Maria, an IT consultant operating her S-Corp from a qualifying home office. Her office is 250 sq ft and her home is 2,500 sq ft, giving her a 10% business use percentage.

Direct Expenses (100% Reimbursable):

• New office paint: $200
• Dedicated internet line for the office only: $960 ($80/month)
• Total Direct Expenses: $1,160

Indirect Expenses (Portion Reimbursable):

• Mortgage Interest: $9,000
• Property Taxes: $4,500
• Homeowner’s Insurance: $1,200
• Utilities (Gas & Electric): $2,400
• General Home Maintenance: $500
• Home Depreciation: $3,500
• Total Indirect Expenses: $21,100

Calculation:

• Reimbursable Indirect Expenses: $21,100 * 10% = $2,110
• Reimbursable Direct Expenses: $1,160
• Total Annual Home Office Reimbursement: $2,110 + $1,160 = $3,270

Maria’s S-Corp can reimburse her $3,270 for the year. This amount is tax-free to her and a valid business expense for her company.

The Mechanics: Documenting and Processing the Reimbursement

Getting the numbers right is only half the battle. Creating a clean paper trail for your accountable plan is what stands up in an audit.

1. Submit Expense Reports: Even if you are the sole employee, you should submit a formal expense report to your company. This can be done monthly, quarterly, or annually. A simple spreadsheet is fine, but it should list each expense category, the total cost, the business percentage applied, and the final reimbursement amount. Attach copies of underlying bills (utility bill, mortgage interest statement, etc.).
2. Record the Transaction: In your accounting software, such as QuickBooks Online, the reimbursement should not be coded to "Payroll Expenses." It should be recorded as a regular operating expense under a specific account like "Office Expense," "Rent," or a dedicated "Home Office Reimbursement" account on the S-Corp's books (Form 1120-S).
3. Make a Separate Payment: Pay the reimbursement from the business bank account to your personal bank account. This transaction should be separate from your regular salary or shareholder distributions. Label the transfer or check memo clearly as "Home Office Reimbursement" to maintain the paper trail.

Common S-Corp Home Office Mistakes to Avoid

• Paying Yourself "Rent": Avoid having your S-Corp pay you formal rent for your office. This method is problematic because it creates taxable rental income on your personal return (Schedule E). Furthermore, passive activity loss (PAL) rules can limit or disallow any rental expenses you try to take against that income, creating a tax headache that the accountable plan neatly avoids.
• Skipping the Paperwork: Failing to adopt a written accountable plan or create expense reports is a major red flag. If you are audited, an IRS agent will ask for this documentation. Simply transferring money from your business to your personal account lacks the necessary substantiation.
• Being Loose with “Exclusive Use”: Do not claim a space that has dual personal and business use. A home office with a Peloton bike in the corner or one that doubles as a guest room technically violates the exclusive use rule and can lead to a full disallowance of the deduction.

Final Thoughts

For an S-Corporation shareholder who works from home, leveraging an accountable plan for home office expense reimbursements is the only correct and audit-defensible method. It ensures the business gets a legitimate deduction for the costs of providing a workspace while allowing the owner-employee to receive tax-free money to cover those same expenses, as long as documentation is meticulous.

When clients ask nuanced questions on topics like S-Corp reimbursements, the specific substantiation requirements matter immensely. Instead of spending valuable time hunting through IRS publications for the exact rules on accountable plans, we use Feather AI to get clear, citation-backed answers in seconds. This ensures our advice is fast, accurate, and built directly on the foundation of current tax law.