Citation: Chief Counsel Advice 200121070 (3/19/01)

Common question: As the sole shareholder and employee of my S corporation, can I deduct my home office?

Short answer: Yes, partially.

This CCA goes into much detail as to the IRS’ position here after IRC Section 280A(c)(6) was added to the tax code as Congress’ answer to Feldman v. Commissioner, 84 T.C. 1 (1985).

IRS preferred treatment: Shareholder/employee completes form 8829 with his/her individual return and (assuming that all home office tests are met) takes the deduction as a miscellaneous itemized deduction of Schedule A of the individual return.

Alternative treatment discussed: The shareholder/employee is paid fair rental for the home office and reports this income on Schedule E as rental income on his/her individual return. However, deductions are limited to only mortgage interest and property taxes (i.e., those items already fully deductible on Schedule A). Essentially, this treatment goes nowhere. The deduction on the S corporation return becomes pure income for the same amount on the individual return.

Planning: Be sure that expenditures 100% traced to the S corporation are paid directly by the corporation. Examples include: Separate internet line, office computer and furniture, window treatment for the office space, etc.

Please call or email for further discussion here.

-Dalton, Mathias & Deever, CPAs, LLP