I have bad news for you: your S-Corporation cannot automatically deduct expenses related to your home office.

We previously established that you want a home office if you claim a lot of per diem. This article recommends setting up an accountable reimbursement plan as the best practice to claim your home office expenses and other reimbursements. This workaround to claim home office deductions is a pain in the neck but worthwhile. First, let’s understand why we have a problem by looking at some IRS regulation mumbo jumbo:

Problem 1: Internal Revenue Code Section 280A(a) blocks deductions related to our home:

no deduction…shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.

This means S-Corps cannot deduct rent paid for use of the home office unless the business rents the office space from the shareholder. Yikes! This terrible piece of tax code was added after the 1986 Feldman tax court case.

Setting up a rental agreement is one possibility but I don’t like it since rental income has to be reported on your personal tax return. The rent paid lowers the taxable income coming from your S-Corp, but increases your tax liability when you report the rental income. Let’s look at another problem before we get to the solution.

Problem 2: We can no longer claim non-reimbursed business expenses on our personal tax returns

Remember the 2017 Tax Cuts and Jobs Act? It eliminated unreimbursed employee expenses from Schedule A. An easy work around that doesn’t work anymore was to claim unreimbursed employee expenses as an itemized deduction on your personal tax return. We will revisit this in 2026 when the Tax Cuts and Jobs Act expires.

Problem 3: Reimbursements for expenses like mileage can be taxable for employees

If your business doesn’t have an accountable reimbursement plan, the reimbursements may become taxable income to the taxpayer.  The easiest fix is to create an Accountable Reimbursement Plan!

What makes a reimbursement plan “accountable”?

Three things need to happen:

  1. Your company has paid or incurred deductible expenses while you perform services as an employee, and
  2. You adequately document these expenses within a reasonable period of time, and
  3. Return any excess reimbursement or allowance within a reasonable period of time.

All three of the above have to be true to avoid having the reimbursement appear with our gross wages on our W2. For mileage claims, employees (and S-Corp shareholders) must provide the details (date, business purpose, and odometer mileage). I am a big fan of the movie Office Space and this type of form reminds me of their TPS reports. Although it seems like a waste of time to fill out a form for reimbursements, it will save you during an IRS audit.

Setting up your Accountable Reimbursement Plan is easy:

STEP 1: Fill out some legal mumbo jumbo to keep with your company’s operating agreement:

Check with your attorney to confirm the agreement to adopt an accountable plan does not interfere with your company’s Operating Agreement.

Step 2: Report your deductions using this form:

You’re done! Be sure to keep up with the documentation portion as described in your company’s new accountable reimbursement plan.