Self rental and options

[Strongsilence-CPA]

Client S corporation has a 2024 revenue of 400,000 and $200,000 of wage expense, which is paid to him. He has no other employees. He has a home (high mtg int and high RE taxes) and an office in that home. The prior CPA had the S corporation pay the owner rent for this office space. That means the S Corporation gets a rent deduction and the individual has rental income. And a $400 net investment income tax on his 2023 1040 results.

I think an accountable plan reimbursing the owner for home office costs would be better because no rental income would be reported. 

A comparison for 2024 shows a $500 tax increase with the self-rental.

Any thoughts?  Yawns of boredom? Huzzahs for something interesting?

[sjrcpa]

Accountable plan sounds good to me.

[qbteachmt]

The S Corp has no other office location. The person does no other work in this office.

Are both of these true?

[sjrcpa]

@qbteachmt Do either of those matter?

The S Corp can reimburse the shareholder employee for the use of the home office. Doesn't have to be exclusive. They can negotiate among themselves.

[qbteachmt]

They can't really negotiate among themselves. The point of An Accountable Plan is to show substantiation, not based on an allowance. A vague amount comes across as rental. "For the convenience of the employer" applies, and there might be another primary location; I was asking not to eliminate but to find out. It seems unlikely the S Corp would be audited to that level, but a kitchen table with the computer at one end isn't going to fly.

[Strongsilence-CPA]

The S Corp has no other office location. The person does no other work in this office.

Thank you for interesting considerations.

Both of those statements are reasonable and "feel" or seem true to me based on what I know. 

A larger point you raise is the Circular 230 considerations and a tax preparers professional responsibility. Happy to be corrected but I don't think I have an obligation other than considering and concluding as I did above.

I'm happy that you raised those issues.

[Strongsilence-CPA]

"They can't really negotiate among themselves. The point of An Accountable Plan is to show substantiation, not based on an allowance. A vague amount comes across as rental."

Thanks qbteacher. Good points.  She is a high earner, medical/doctor, owns a ranch with no profit every year, high debt.  I will raise these issues. My sense is she may be reviewed some time.

[qbteachmt · Accepted solution]

I'm so glad you mentioned that this person is medical. They have had a lot of scrutiny.

Other than telehealth, the only home office work for a doctor is administrative. This is the IRS take on home office in a nutshell:

The IRS has two main home office deduction rules:

1. Regular and exclusive use. The space must be used regularly for business activities and exclusively to conduct business. As a physician, this could mean a designated space where you manage patient records, conduct telehealth sessions, or handle administrative tasks.
2. Principal place of business. Your home office must be your principal place of business or where you meet patients, clients, or customers in the normal course of your business. For doctors who split their time between a hospital, clinic, and home office, the home office must be used for substantial administrative or management activities with no other fixed location where you conduct such activities.

That is why I asked those first two questions.

I watch and use the resources from these folks. Here is a specific link for you:

https://www.whitecoatinvestor.com/tax-deductions-for-a-home-office/

For issues of double-dipping, how the expense report reimbursement affects itemizing, and why you can't use the safe harbor method, I found this:

https://wcginc.com/kb/home-office-deduction/

"According to IRS Revenue Procedure 2013-13 which reads in part-

.02 Reimbursement or other expense allowance arrangement. The safe harbor method provided by this revenue procedure does not apply to an employee with a home office if the employee receives advances, allowances, or reimbursements for expenses related to the qualified business use of the employee’s home under a reimbursement or other expense allowance arrangement (as defined in § 1.62-2) with his or her employer."