Home Office and S Corporation Shareholder

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Can you still get a deduction for your home office if you are an S corporation shareholder? The answer is yes.

There are two options. Either you rent a portion of your home to the S corporation as office or storage space, or the S corporation reimburses you for the home office use under an accountable plan.

First option: renting a portion of your home office to the S corporation

If you rent a portion of your home to the S corporation, you must do it so at fair market value. Otherwise, the IRS may reclassify the excess rent over the fair market value as wage income, resulting in additional payroll taxes and penalties. Or, the IRS can argue that the rent is a disguised distribution.

The rental income must be reported on schedule E on your personal tax return. However, due to the fact that you lease your home space to your employer, there are limitations on the deductions you can take. You can only claim the deductions that would be deductible in the absence of any business use, generally mortgage interest and real estate taxes.

In addition, because you rent property to a business in which you materially participate, the “self-rental” rules apply, which re-characterise the rental income as active income, while the rental loss remains passive.

The advantage of renting your home office to the S corporation is that it reduces the net income of the S corporation, thus reducing the “reasonable salary” threshold, giving you some savings on the self-employment tax.

Second option: reimbursement under an accountable plan

The company must have an accountable plan in order to take advantage of this options.

Per the IRS, “to be an accountable plan, your employer’s reimbursement or allowance arrangement must include all of the following rules:

  1. Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
  2. You must adequately account to your employer for these expenses within a reasonable period of time.
  3. You must return any excess reimbursement or allowance within a reasonable period of time.”

See IRS Publication 463 for more information.

You must use your home office exclusively and regularly for business.

You have to comply with all the requirements for the home office deduction, including the principal place of business test.

When you have multiple work locations, to determine whether or not your home office is your principal place of business, “you must consider:

  • The relative importance of the activities performed at each place where you conduct business, and
  • The amount of time spent at each place where you conduct business.

Your home office will qualify as your principal place of business if you meet the following requirements:

  • You use it exclusively and regularly for administrative or management activities of your trade or business.
  • You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.”

See IRS Publication 587 for more details about the business use of your home.

With this option you save, not only on self-employment taxes, by reducing the “reasonable salary” threshold, you also save on income taxes, because you don’t have to pick any income on the personal return, as was the case with the rental scenario.

In addition, if you have a qualified home office and another work space, like a shop, the commuting miles between your home and your other work place are now becoming deductible. Actually you can deduct the cost of any trips you make from your qualified home office to another business location, like meeting clients, for example. Don’t forget that you also need to reimburse these miles under the Accountable Plan.

To learn more about tax rules and regulations, request a free consultation or call us at 832-919-8448.

Casualty Loss Tax Deduction for Hurricane Harvey Victims

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Flooded Houston residential street can be seen after Hurricane Harvey hit Texas. You may be able to claim a casualty loss tax deduction for the damages you suffered.
Hurricane Harvey floods residential street in Houston, Harris County, Texas, U.S. on Sunday, Aug. 27, 2017.

My heart goes out to all the victims and their families of Hurricane Harvey and I wish well to all those affected! If you did suffer a loss as a result of this disaster, you may be able to claim a casualty loss tax deduction.

You can elect to claim the loss in either of two years: the tax year in which the loss occurred (2017) or the immediately preceding year (2016). In order to determine the most beneficial year in which to claim the loss, you need to evaluate your tax situation for both years. The higher your marginal tax rate, the more valuable the casualty deduction is for you. One other consideration is how  fast you want the refund. If you need help for paying for some of the restoration costs, you might consider claiming  the deduction in 2016 . This allows you to get the refund from IRS before you even file your 2017 tax return.

What’s a casualty?

A “casualty” is the destruction of property from some sudden, unexpected, or unusual event. If you have progressive deterioration, for example, from pest infestation or a water leak, that does not qualify.

For more information about “casualty losses” see IRS Publication 547.

Casualty loss tax deduction for personal property

If  you held the destroyed property for personal (nonbusiness) use, your casualty loss tax deduction is the lesser of (1) the decline in the property’s value or (2) your basis in the property (usually, its cost). You must further reduce this calculated loss by any salvage value or insurance proceeds you might have received.

Two additional tax rules apply before you can take the deduction. First, you must reduce the loss by a $100 “floor”. Second, you can claim the deduction only to the extent it (combined with any other casualty losses) exceeds 10% of your adjusted gross income (AGI).

To take a casualty loss tax deduction for personal property, you must itemize your deductions on Schedule A and complete Form 4684, Casualties and Thefts.

Casualty loss tax deduction for business property

If the disaster totally damaged your trade or business property, you can claim a loss equal to the property’s adjusted basis. This rule prevents your business from taking a casualty loss tax deduction for more than the depreciated value of the property.

If you held the property partly for personal use and partly for business use, you must treat it as two separate properties. You will have to allocate the loss appropriately.

How to deduct the personal property loss in 2016

If you have already filed your 2016 return, you may claim the casualty loss tax deduction by filing an amended return. You have until October 15, 2018, if you are a calendar year taxpayer, to amend your 2016 tax return to claim the casualty loss that occurred during 2017. If you filed an extension for 2016, you have until January 31, 2018  to file your 2016 tax return.

In both cases you must include a statement saying that you are making the election to deduct the loss in the preceding year. You can either make the statement on the return or you can file it with the return. You must include the name or a description of the disaster that gave rise to the loss, the date or dates of the disaster, and the city, town, county or parish, state, and ZIP code where the damaged or destroyed property was located at the time of the disaster.

To learn more about tax rules and regulations, request a free consultation or call us at 832-919-8448.

IRS Gives Tax Relief to Hurricane Harvey Victims

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A photo of a flooded business building after Hurricane Harvey hits Texas
Hurricane Harvey floods business building in Montgomery County, Texas, U.S. on Monday, Aug. 28, 2017

IRS announced yesterday that it gives tax relief to Hurricane Harvey victims. Affected taxpayers have until January 31, 2018 to file certain individual and business tax returns and make certain tax payments.

Eligible Counties for the Hurricane Harvey Tax Relief

As of now, in Texas, the following counties qualify for the tax relief: Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria and Wharton. Montgomery County and other affected areas are not on this list yet, but more counties will be added  later, based on the damage assessments by FEMA. Update 8/30/2017: more counties were added by the IRS, to include Colorado, Fayette, Hardin, Jasper, Jefferson, Montgomery, Newton, Orange, Sabine, San Jacinto and Waller Counties.

Tax Relief – Certain Tax Filings and Payment Deadlines Postponed to January 31, 2018

The tax relief postpones to January 31, 2018 various tax filing and payment deadlines that occurred starting on August 23, 2017.

Businesses and individuals that filed extensions for their returns that run out on September 15 and October 16, respectively, have until January 31, 2018 to file their returns. However, keep in mind, that even if you extended your tax return, the 2016 tax was due on April 18th. The extensions extend the time to file, not the time to pay. Thus these payments are not eligible for relief. But, the the 2017 estimated quarterly tax payments get an extension. They were due September 15, 2017, December 15, 2017 and January 16, 1018. Now you have until January 31, 2018 to make these payments.

The quarterly payroll and certain excise tax returns, which were normally due on October 31, 2017 qualify as well for the relief. You have until January 31, 2018 to file them. The IRS will also wave the late-deposit penalties for federal payroll and excise tax deposits normally due after August 23 and before September 7, if you make the deposits by September 7, 2017.

There are other tax filings that qualify and you can read more about them on the IRS disaster relief page:

https://www.irs.gov/uac/tax-relief-in-disaster-situations

Who Qualifies for the Hurricane Harvey Tax Relief

The tax relief applies to taxpayers that have the address of record in the disaster area. The filing and penalty relief is provided automatically, thus you don’t need to contact the IRS to obtain it. In addition, the IRS will work with the taxpayers that, even though they live outside the disaster area, had their records in an affected area. Workers assisting the relief activities affiliated with a recognised government or charitable organisation and other taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227.

If you need assistance with your accounting or tax fillings, we are here to help. Call us at (832) 919-8448 or request a free consultation.