Home office Deduction in 1120, 1120S and 1065

Discussion in 'Tax' started by Rashid, Feb 3, 2010.

  1. Rashid

    Rashid Guest

    I wonder how a shareholder of a S corporation or C corporation claim
    home ofiice deduction in 1120S or 1120?. If this can be calimed, will
    that also be considered a rental or other income to the shareholder?

    How that works in partnership (1065)?

    Thank you

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    Rashid, Feb 3, 2010
    #1
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  2. Rashid

    Bill Brown Guest

    On Feb 3, 6:44 pm, Rashid <> wrote:
    > I wonder how a shareholder of a S corporation or C corporation claim
    > home ofiice deduction in 1120S or 1120?. If this can be calimed, will
    > that also be considered a rental or other income to the shareholder?
    >
    > How that works in partnership (1065)?
    >


    For a corporation: the employer establishes an accountable
    reimbursement plan and requires the employee to provide his/her own
    office. The employee provides an accounting of home office costs to
    the employer and the employer reimburses those costs. If reimbursement
    = costs, the employee reports nothing and the corporation deducts the
    expense.

    For a partner: The partnership agreement calls for the partners each
    to provide their own office space. Each partner deducts qualified home
    office expenses on Schedule E.

    Remember, the regular and exclusive use rules still apply.

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    Bill Brown, Feb 4, 2010
    #2
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  3. Rashid

    Guest

    On Feb 4, 4:14 am, Bill Brown <> wrote:
    > On Feb 3, 6:44 pm, Rashid <> wrote:


    > > I wonder how a shareholder of a S corporation or C corporation claim
    > > home ofiice deduction in 1120S or 1120?. If this can be calimed, will
    > > that also be considered a rental or other income to the shareholder?


    You used the word shareholder. Assuming the shareholder is an
    employee paid with a W2, the employee can always take the deduction
    for business use of home subject to the 2% of AGI limit. If the
    shareholder is a contractor paid with a 1099-MISC, they take the same
    deduction, but it is not subject to the 2% of AGI limit, and is not
    subject to AMT.


    > > How that works in partnership (1065)?

    >
    > For a corporation: the employer establishes an accountable
    > reimbursement plan and requires the employee to provide his/her own
    > office. The employee provides an accounting of home office costs to
    > the employer and the employer reimburses those costs. If reimbursement
    > = costs, the employee reports nothing and the corporation deducts the
    > expense.


    Can the accountable reimbursement plan be used to pay for
    depreciation?

    Can the shareholder charge the corporation rent, with depreciation and
    rental expense on the shareholder's individual Schedule E return? The
    corporation will deduct the rent as an immediate expense.

    > For a partner: The partnership agreement calls for the partners each
    > to provide their own office space. Each partner deducts qualified home
    > office expenses on Schedule E.
    >
    > Remember, the regular and exclusive use rules still apply.


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    << >>
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    , Feb 4, 2010
    #3
  4. Rashid

    Mark Bole Guest

    wrote:

    > Can the accountable reimbursement plan be used to pay for
    > depreciation?


    I've asked the question before, still don't know the answer.


    > Can the shareholder charge the corporation rent, with depreciation and
    > rental expense on the shareholder's individual Schedule E return? The
    > corporation will deduct the rent as an immediate expense.



    Can the OIH expense be used to create (or add to) a net loss from the
    activity, if covered under a reimbursable plan?


    >
    >> For a partner: The partnership agreement calls for the partners each
    >> to provide their own office space. Each partner deducts qualified home
    >> office expenses on Schedule E.
    >>
    >> Remember, the regular and exclusive use rules still apply.

    >



    -Mark Bole

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    << nor can it used, for the purpose of avoiding penalties >>
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    << >>
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    Mark Bole, Feb 5, 2010
    #4
  5. >
    > Can the shareholder charge the corporation rent, with depreciation and
    > rental expense on the shareholder's individual Schedule E return?  The
    > corporation will deduct the rent as an immediate expense.


    If you rent an "office-in home" to your employer you can't claim
    deductions other than interest, taxes, and casualty losses. IRC
    280A(c)(6)

    --
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    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
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    Richard Di Bernardo, CPA, Feb 5, 2010
    #5
  6. Rashid

    Bill Brown Guest

    On Feb 4, 12:33 pm, "" <removeps-
    > wrote:
    > On Feb 4, 4:14 am, Bill Brown <> wrote:
    >
    > You used the word shareholder.  Assuming the shareholder is an
    > employee paid with a W2, the employee can always take the deduction
    > for business use of home subject to the 2% of AGI limit.  If the
    > shareholder is a contractor paid with a 1099-MISC, they take the same
    > deduction, but it is not subject to the 2% of AGI limit, and is not
    > subject to AMT.
    >

    Sure, but why take a limited deduction from AGI when one can easily
    get an effective 100% deduction that reduces AGI?

    >
    > Can the accountable reimbursement plan be used to pay for
    > depreciation?
    >


    Good question and I'm not sure. I've seen the issue discussed without
    resolution.


    > Can the shareholder charge the corporation rent, with depreciation and
    > rental expense on the shareholder's individual Schedule E return?  The
    > corporation will deduct the rent as an immediate expense.
    >


    No. See Di Bernardo's response.

    --
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    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
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    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Bill Brown, Feb 5, 2010
    #6
  7. On Feb 5, 6:24 am, Bill Brown <> wrote:
    > On Feb 4, 12:33 pm, "" <> wrote:
    > > On Feb 4, 4:14 am, Bill Brown <> wrote:

    >
    > > You used the word shareholder.  Assuming the shareholder is an
    > > employee paid with a W2, the employee can always take the deduction
    > > for business use of home subject to the 2% of AGI limit.  If the
    > > shareholder is a contractor paid with a 1099-MISC, they take the same
    > > deduction, but it is not subject to the 2% of AGI limit, and is not
    > > subject to AMT.

    >
    > Sure, but why take a limited deduction from AGI when one can easily
    > get an effective 100% deduction that reduces AGI?
    >
    >
    >
    > > Can the accountable reimbursement plan be used to pay for
    > > depreciation?

    >
    > Good question and I'm not sure. I've seen the issue discussed without
    > resolution.
    >
    > > Can the shareholder charge the corporation rent, with depreciation and
    > > rental expense on the shareholder's individual Schedule E return?  The
    > > corporation will deduct the rent as an immediate expense.

    >
    > No. See Di Bernardo's response.
    >
    >


    Bill,

    I believe my post applies to those attempt to circumvent the OIH
    requirements to get related deductions as rental expenses by renting
    their dwelling to their employer. This code provision does not
    disallow a rental deduction to the employer/corporation. It limits
    the employee's deduction to those previously mentioned, thereby
    invalidating any tax savings from the arrangement .

    In a OIH arrangement, there is no landlord-tenant relationship, lease
    or rental agreement. The employer has no contract right to occupy the
    taxpayers dwelling. I would not consider the employees use of a his/
    her dwelling as a rental arrangement.

    The first requirement of a accountable reimbursement plan is that the
    reimbursement be for a allowable expense that the taxpayer could
    otherwise deduct. I don't know of an exception that would preclude a
    OIH under the the accountable reimbursement plan rules.

    I think an accountable reimbursement plan would work for a OIH.

    Richard Di Bernardo, CPA

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Richard Di Bernardo, CPA, Feb 6, 2010
    #7
  8. On Feb 5, 6:24 am, Bill Brown <> wrote:
    > On Feb 4, 12:33 pm, "" <> wrote:
    > > On Feb 4, 4:14 am, Bill Brown <> wrote:

    >
    > > You used the word shareholder.  Assuming the shareholder is an
    > > employee paid with a W2, the employee can always take the deduction
    > > for business use of home subject to the 2% of AGI limit.  If the
    > > shareholder is a contractor paid with a 1099-MISC, they take the same
    > > deduction, but it is not subject to the 2% of AGI limit, and is not
    > > subject to AMT.

    >
    > Sure, but why take a limited deduction from AGI when one can easily
    > get an effective 100% deduction that reduces AGI?
    >
    >
    >
    > > Can the accountable reimbursement plan be used to pay for
    > > depreciation?

    >
    > Good question and I'm not sure. I've seen the issue discussed without
    > resolution.
    >
    > > Can the shareholder charge the corporation rent, with depreciation and
    > > rental expense on the shareholder's individual Schedule E return?  The
    > > corporation will deduct the rent as an immediate expense.

    >
    > No. See Di Bernardo's response.
    >

    Bill,

    I am sorry, I misread your post. Please ignore my response.

    Your prior post accurately and intelligently explains the OIH.

    Richard Di Bernardo, CPA

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
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    Richard Di Bernardo, CPA, Feb 6, 2010
    #8
  9. Rashid

    Guest

    On Feb 4, 8:46 pm, "Richard Di Bernardo, CPA" <>
    wrote:

    > > Can the shareholder charge the corporation rent, with depreciation and
    > > rental expense on the shareholder's individual Schedule E return?  The
    > > corporation will deduct the rent as an immediate expense.

    >
    > If you rent an "office-in home" to your employer you can't claim
    > deductions other than interest, taxes, and casualty losses.  IRC
    > 280A(c)(6)


    Section 280(A) is really difficult to read. But I found this IRS
    letter ruling that explains the issue well, and the letter also says
    why the rule exists, which is to avoid arrangements where part of the
    employee's compensation is through rent. I have difficulty absorbing
    that idea because an S corporation with one shareholder still seems
    just like a sole proprietorship for practical purposes.

    http://www.irs.gov/pub/irs-wd/0121070.pdf

    <Quote>

    Accordingly, § 280A(c)(6) will bar E-2 from deducting otherwise
    allowable
    § 162 trade or business expenses, § 165(c)(1) business casualty
    losses, and § 167
    depreciation. That statutory bar, in turn, explains why there is no
    place on the forms to
    deduct those expenses.

    </Quote>

    What forms are they talking about? One would still use Schedule E,
    but depreciation allowable and other fields would be blank.

    So the effect of this ruling is this. If the property tax, mortgage
    interest is $300, the employer should pay rent of $300. The
    employee's Schedule E page 2 will be zero (rent $300, deductions
    $300). The itemized deductions on the employee's personal return will
    be reduced by $300 (because they have moved from Schedule A to
    Schedule E page 2), but the corporation will deduct $300, and the
    employee's Schedule E page 1 income from K-1 will be reduced by $300,
    and thus the employee's AGI will be reduced by $300.

    Depreciation not being allowed: not a big deal because you have to
    recapture it anyway, although you deduct it at your marginal tax rate,
    at recapture at the long term capital gains rate.

    Trade expenses. Would these be things like the pro-rated portion of
    condo fees, gas/electricity, repairs on the business part of the house
    (things like painting, fixing water pipes in that area, fixing the
    windows in that area, etc)?

    Business casualty losses. What are these?

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    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
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    , Feb 10, 2010
    #9
  10. <> wrote in message
    news:...
    > On Feb 4, 4:14 am, Bill Brown <> wrote:
    >> On Feb 3, 6:44 pm, Rashid <> wrote:

    >

    SNIPPED

    > If the shareholder is a contractor paid with a 1099-MISC, they take the
    > same
    > deduction, but it is not subject to the 2% of AGI limit, and is not
    > subject to AMT.


    MORE SNIPPED

    OK, I'll bite - HOW would you justify a shareholder of a corporation (S or
    C) to get paid as a contractor?

    Gene E. Utterback, EA, RFC, ABA

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
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    Gene E. Utterback, EA, RFC, ABA, Feb 17, 2010
    #10
  11. On Feb 17, 11:22 am, "Gene E. Utterback, EA, RFC, ABA"
    <> wrote:
    > <> wrote in message
    >
    > news:...> On Feb 4, 4:14 am, Bill Brown <> wrote:
    > >> On Feb 3, 6:44 pm, Rashid <> wrote:

    >
    > SNIPPED
    >
    > >  If the shareholder is a contractor paid with a 1099-MISC, they take the
    > > same
    > > deduction, but it is not subject to the 2% of AGI limit, and is not
    > > subject to AMT.

    >
    > MORE SNIPPED
    >
    > OK, I'll bite - HOW would you justify a shareholder of a corporation (S or
    > C) to get paid as a contractor?
    >
    > Gene E. Utterback, EA, RFC, ABA


    "OK, I'll bite - HOW would you justify a shareholder of a corporation
    (S or
    C) to get paid as a contractor? "

    Would the services, if performed by an outsider, be subject to the
    corporation's control? What skills are required for the job? Are
    these skills normally applied while working for the corporation. Are
    these services subject to a special license or legal regulation? A
    common example is a notary.

    Amounts analogous to Section 707 payments.

    What if (s)he performs duties outside of the scope of their normal
    duties, such as paint the office.

    Having multiple personalities, like Sybil, would be helpful to
    sustaining a contractor status. This would address the most
    significant common law factor or worker classification - the right to
    control. This right to control is analyzed in a legal context. Like,
    despite their arduous effort, your clients can't tell you how to
    prepare a tax return. Likewise, the corporation can't force you to
    paint the office at 8:00AM on Saturday morning.

    People can wear can wear different hats. But mirrors never lie.

    Richard Di Bernardo, CPA

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    << nor can it used, for the purpose of avoiding penalties >>
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    << >>
    << The Charter and the Guidelines for submitting posts >>
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    Richard Di Bernardo, CPA, Feb 19, 2010
    #11
  12. "Richard Di Bernardo, CPA" <> wrote in message
    news:...
    > On Feb 17, 11:22 am, "Gene E. Utterback, EA, RFC, ABA"
    > <> wrote:


    SNIPPED AGAIN

    >> MORE SNIPPED
    >>
    >> OK, I'll bite - HOW would you justify a shareholder of a corporation (S
    >> or
    >> C) to get paid as a contractor?
    >>
    >> Gene E. Utterback, EA, RFC, ABA

    >
    > "OK, I'll bite - HOW would you justify a shareholder of a corporation
    > (S or
    > C) to get paid as a contractor? "
    >
    > Would the services, if performed by an outsider, be subject to the
    > corporation's control? What skills are required for the job? Are
    > these skills normally applied while working for the corporation. Are
    > these services subject to a special license or legal regulation? A
    > common example is a notary.


    Even More snippage - hope it isn't too hard to follow.

    Here is where I think you and I may be taking separate paths. I would agree
    with you in regards to the common employee. However, that is not the way I
    took the original situation. I HEARD than owner of a small company was
    getting paid as a contractor and I think this is just plain WRONG.

    Business owners do many things, composing various disciplines, quite a bit
    of which may be outside the scope of their daily duties or expertise.
    However, as owners they are burdened with making sure everything gets done.
    I hope you aren't suggesting that as an owner of a small tax practice that I
    can get paid as a contractor when:

    1 - I take out the trash
    2 - I mop up a spill on the floor
    3 - I vacuum the office
    4 - I plow snow from the parking lot
    5 - I change a lock on the door
    6 - I do ANY of the hundreds of things that need to be done around the
    office through the course of the year which need to be done but for which
    I've chosen to do myself rather than hire (AND PAY) an outsider.

    Again, I agree completely when you're talking about a non-owner employee.
    BUT for a business owner I think we're treading on very thin ice when we try
    to pay them as a contractor for doing anything other than what they
    "normally" do for the company.

    Now there may be a legitimate position for a major project - for example, if
    the owner were to remodel the office or replace the roof, I might be OK with
    him being paid as a contractor instead of as an employee. But short
    something major like that, I remain unconvinced of your position.

    There has been a lot of snippage, especially by me, but as I recall the OP
    didn't include a LOT of details - just a blurb about an employee/stockholder
    getting compensated on a 1099, or maybe I missed something.

    Gene E. Utterback, EA, RFC, ABA

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    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
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    Gene E. Utterback, EA, RFC, ABA, Feb 19, 2010
    #12
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