SCorp self rental of personal residence - handling deductions correctly

8 This situation can definitely be handled in a couple different ways, but it's important to get it right. First, there's nothing inherently wrong with the S Corp paying rent to the owner for business use of the home - that's a legitimate arrangement. However, there are specific rules when it comes to using part of your personal residence. When the owner receives rental payments from their S Corp for use of their primary residence, those payments are indeed reportable on Schedule E. The catch is that because this is a "self-rental" situation (related parties), you need to consider passive activity rules. The rental activity is typically considered passive, but since the owner materially participates in the S Corp, the self-rental rules would recharacterize any net rental income as nonpassive. As for expenses, they can still deduct the appropriate percentage of mortgage interest, property taxes, insurance, utilities, repairs, and depreciation on Schedule E. However, the home office deduction rules (which limit deductions for business use of home) don't apply to Schedule E rentals - those rules are for Schedule C business use of home. The accountable plan approach is an alternative worth considering, especially if it results in better tax treatment. With an accountable plan, the S Corp would reimburse the owner for the business portion of actual expenses rather than paying rent.

12 After dealing with a similar issue for my clothing design business, I discovered taxr.ai (https://taxr.ai) and it was super helpful for analyzing my self-rental situation. I was confused about whether to report rental income on Schedule E or use an accountable plan for my home studio space. The site analyzed my corporate documents and rental agreement, then outlined the pros and cons of both approaches. It highlighted that with the self-rental on Schedule E, I needed to be careful about Section 280A limitations and passive activity rules. For my situation, an accountable plan ended up being cleaner tax-wise. Their analysis saved me tons of research time and helped me avoid potential audit flags. They also provided templates for setting up an accountable plan properly going forward. Might be worth checking out for your client's situation!

4 I have to say, I was initially skeptical about taxr.ai when I saw it mentioned here, but I decided to give it a try with my complex multi-entity situation. I'm genuinely impressed with the detailed analysis they provided. They identified several issues with how I was handling my home office deductions across my different business entities and gave me specific recommendations for restructuring things. The most valuable part was their explanation of how to properly document an accountable plan that would stand up to IRS scrutiny. They provided templates and a step-by-step implementation guide tailored to my specific situation. This cleared up confusion I've had for years about whether I should be using Schedule E or an accountable plan for different spaces in my home. If you're wrestling with S Corp self-rental issues, it's definitely worth checking out.

9 After struggling to get through to the IRS for clarification on self-rental rules for months, I finally tried Claimyr (https://claimyr.com) and was able to speak directly with an IRS representative within 45 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that for an S Corp owner renting part of their personal residence to their business, you can use either Schedule E reporting (subject to Section 280A limitations) or an accountable plan approach. They recommended the accountable plan for cleaner documentation and potentially better tax treatment in most cases. For your question about 2023, the agent said you could file an amended return if the current approach isn't optimal. But most importantly, they clarified the documentation needed going forward regardless of which approach you choose.

5 I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway out of desperation. Within 37 minutes, I was talking to an actual IRS agent who specialized in business entities. The agent walked me through the exact documentation requirements for self-rentals versus accountable plans for S Corps. She explained that while both approaches are legitimate, an accountable plan typically provides cleaner documentation and potentially better tax treatment in most self-rental situations involving a primary residence. For anyone dealing with S Corp self-rental issues and needing official clarification, this service is a game-changer. I wasted so much time trying to interpret conflicting information online when I could have just asked the IRS directly.

2 One important consideration that hasn't been mentioned: if your client has been taking significant depreciation deductions on Schedule E for the portion of the home used by the business, switching to an accountable plan could impact the depreciation recapture situation down the road when they sell the house. Under the Schedule E approach, they've been reducing their basis in that portion of the home. With an accountable plan, the S Corp would be reimbursing for direct expenses without the owner claiming depreciation on their personal return. The Section 121 exclusion ($250k/$500k for primary residence) wouldn't apply to the business portion that's been depreciated. Worth discussing with your client before making any changes.

7 Another consideration is whether your client's S Corp has other shareholders or if it's 100% owned by the person whose home is being used. That can affect the most advantageous approach. If there are multiple shareholders, using an accountable plan ensures that the corporation is only reimbursing the exact business expenses rather than potentially overpaying rent that benefits one shareholder personally - which could create dividend distribution issues for the other shareholders. Also, make sure whatever approach you take is supported by proper documentation - ideally a written lease agreement for the rental approach or a formal accountable plan policy for the reimbursement approach.

One thing I'd add to this excellent discussion is the importance of fair market value when setting rental rates for the self-rental approach. The IRS scrutinizes related-party transactions closely, so the rental rate should be comparable to what an unrelated party would pay for similar space in your area. I've seen situations where taxpayers set artificially high rental rates to maximize deductions, which can trigger audit attention. Conversely, setting rates too low might not maximize the business deduction benefit. For the accountable plan approach, make sure you're only reimbursing actual business expenses and maintaining detailed records. The key advantage is that properly structured accountable plan reimbursements aren't taxable income to the recipient and are fully deductible by the S Corp. Given the complexity and potential audit exposure, I'd strongly recommend documenting whichever approach you choose with formal written agreements and consistent year-over-year treatment. Switching approaches frequently can raise red flags with the IRS.

This is such a timely discussion! I'm dealing with a similar situation with one of my clients who runs a consulting business from their home office. After reading through all these comments, I'm leaning toward recommending the accountable plan approach for them. One thing I'd add is the importance of getting the square footage measurements right from the beginning. I've seen taxpayers get tripped up by inconsistent measurements between their home office deduction calculations and their rental or reimbursement calculations. Make sure you're measuring the same spaces the same way year over year. Also, for those considering the accountable plan route, don't forget about the potential benefits during an audit. The IRS tends to view properly documented accountable plans more favorably than self-rental arrangements, especially when the rental rates might seem aggressive. The documentation trail is typically cleaner and easier to defend. Has anyone had experience with how state tax authorities handle these arrangements differently from the federal treatment? I'm particularly curious about states that don't follow federal S Corp elections.

This is an excellent thread with lots of practical insights! As someone who's dealt with similar S Corp home office situations, I wanted to add a perspective on the timing considerations for making this decision. If your client has been consistently using the Schedule E rental approach for several years, switching to an accountable plan mid-stream requires careful consideration of the tax implications. You'll want to look at the cumulative depreciation taken on Schedule E, as this affects the basis in their home and potential recapture issues down the road. One approach I've successfully used is to run both scenarios (continuing with Schedule E vs. switching to accountable plan) to see the net tax impact over a 3-5 year period, including factoring in potential sale of the residence. Sometimes the depreciation recapture issue makes it worthwhile to stick with the current approach, especially if the rental income has been minimal. For the 2023 correction question, I'd recommend calculating both methods and only amending if there's a significant benefit. The IRS tends to scrutinize frequent changes in methodology, so you want to make sure you're settling on the approach you'll stick with long-term. Also worth noting: if your client is planning to expand their business use of the home or potentially move the business out of their residence in the near future, that could influence which approach makes more sense from a long-term planning perspective.