Renting Out a Home Office to Your Company

Believe it or not, questions on deducting a home office are still one of the most frequent questions I get. The ability to deduct a home office is tough even if you are the owner of the company. Even if you can qualify for the deduction, itemized deduction limitations and/or the alternative minimum tax may eliminate any tax benefit.

The best strategy to deduct a home office is to rent the office to your company. The company can deduct the rent payments as a business expense. True, you as the owner/employee must still pay income tax on the “net” rental income, but no employment taxes are owed. In some jurisdictions such as New York City, there may be even greater tax savings.

The reason this works is because regular or “C” corporations are not subject to the home office deduction rules. Caution: this will not work if you are the owner/employee of an S corporation. A pass-through entity can’t deduct rent paid to an owner for a home office (an S corporation is a pass-through entity).

Here is one possible way of working around the above rule:

1. Have the S corporation require the owner/employee to provide office space as a condition of employment. (Yes, it seems like a “sham” but it needs to be done).

2. Establish an accountable expense reimbursement plan to reimburse you for costs incurred for work.

3. Submit adequate documentation for these costs.

4. Have your S corporation reimburse these costs.

Result: the S corporation reimbursement is a deductible business expense and you have no income recognition or other tax reporting.