If you own a business and work from home, you’re likely paying for space, utilities, and supplies out of pocket. But did you know your business can reimburse you — legally and tax-free — for those expenses?
This is known as a home office reimbursement, and when structured properly, it allows you to move money from your business to yourself while reducing taxable income.
At AE Tax Advisors, we help clients establish compliant home office reimbursement systems using IRS Publications 587, 463, and 535 — ensuring deductions are maximized and audit-proof.
This article builds upon How to Set Up an Accountable Plan for Your Business, The Ultimate Guide to Hiring Family Members in Your Business, and The Complete Guide to Section 179 and Bonus Depreciation.
Why Reimburse Yourself Instead of Deducting Directly
If you’re a sole proprietor, you can claim the home office deduction directly on Schedule C. But if your business is an S-Corporation or C-Corporation, you can’t deduct those expenses personally — your company must reimburse you.
That’s where the accountable plan comes in. Under Publication 463, reimbursements for legitimate business expenses (like the business use of your home) are not taxable to you and are deductible to your company.
The result:
- You lower your business’s taxable income.
- You receive tax-free reimbursements personally.
- You remain fully compliant under IRS rules.
AE Tax Advisors designs these systems as part of integrated entity planning for business owners who operate from home.
Step 1: Confirm Home Office Eligibility
Under Publication 587, your home office must meet two tests:
- Exclusive and regular use: The area must be used only and regularly for business.
- Principal place of business: It must be the main location where you conduct business, meet clients, or handle management and administrative tasks.
Examples of qualifying spaces:
- A spare bedroom converted to an office.
- A finished basement used for operations.
- A detached garage used for storage or production.
Non-qualifying examples:
- Dining tables used occasionally for work.
- Shared family spaces.
AE Tax Advisors verifies each client’s eligibility through documentation and photos before establishing the reimbursement structure.
Step 2: Measure and Calculate Business Use Percentage
You must determine the square footage of your office and divide it by the total square footage of your home.
Example:
- Home: 2,000 sq. ft.
- Office: 200 sq. ft.
- Business use: 10%.
Under Publication 587, that percentage applies to all shared home expenses like rent, mortgage interest, utilities, insurance, and repairs.
AE Tax Advisors provides templates for calculating and documenting this percentage for audit defense.
This method ties directly to How to Build an Audit-Proof Recordkeeping System.
Step 3: Identify Reimbursable Expenses
Reimbursable categories typically include:
- Rent or mortgage interest.
- Utilities (electricity, gas, water, trash).
- Internet and phone service.
- Homeowners insurance.
- Repairs and maintenance.
- Depreciation for homeowners.
These must be directly proportional to the business-use percentage of your home.
Publication 535 confirms that only the business portion of such mixed-use expenses can be deducted or reimbursed. AE Tax Advisors structures these reimbursements through monthly accountable plan submissions.
Step 4: Establish an Accountable Plan
For S-Corporations and C-Corporations, the company must have a written accountable plan that outlines:
- Which expenses are eligible for reimbursement.
- How expenses will be documented.
- The timeframe for submitting reimbursement requests.
- The process for returning any excess funds.
Publication 463 details these requirements. AE Tax Advisors drafts customized accountable plans that meet every IRS condition while keeping operations simple.
This step aligns directly with How to Set Up an Accountable Plan for Your Business.
Step 5: Submit Reimbursement Forms Monthly
Each month, create a reimbursement request listing your home office expenses. The company reimburses you via check or transfer from its business account.
Your submission should include:
- Expense breakdown by category.
- Supporting receipts or statements.
- Calculations of business-use percentage.
- Total reimbursement requested.
AE Tax Advisors provides fillable reimbursement templates to automate this process and keep documentation consistent across months.
Step 6: Reconcile Reimbursements with Business Records
Under Publication 583, you must maintain consistent bookkeeping between business and personal records. That means:
- Recording reimbursements as “office expense” on the business books.
- Keeping copies of all documentation with both business and personal tax files.
- Avoiding double deductions (don’t deduct expenses personally and through reimbursement).
AE Tax Advisors conducts annual reconciliations for clients to ensure all reimbursed expenses match the accountable plan and IRS standards.
Step 7: Consider Depreciation for Homeowners
If you own your home, a portion of the structure can be depreciated based on business use. However, Publication 587 warns that depreciation may reduce your adjusted basis and create taxable gain (recapture) when you sell.
AE Tax Advisors models both options — with and without depreciation — to determine whether it’s worth claiming.
This approach builds upon The Business Owner’s Guide to Depreciation Recapture and Asset Sales.
Step 8: Reimburse for Office Improvements
If you make improvements specifically for your home office — such as new flooring, lighting, or built-in storage — those can be reimbursed fully if they benefit only the business area.
Publication 587 allows full deduction or reimbursement for direct expenses, while indirect ones (like a roof repair) must be prorated.
AE Tax Advisors guides clients on allocating costs correctly and maintaining proof of payment, including before-and-after photos.
Step 9: Avoid Common Errors
- Mixing personal and business expenses: Always prorate shared costs.
- No written accountable plan: Makes reimbursements taxable.
- No proof of exclusive use: Violates eligibility rules.
- Forgetting to document square footage: Weakens audit defense.
- Double-dipping deductions: Leads to disallowed expenses.
AE Tax Advisors audits clients’ reimbursement systems quarterly to prevent these compliance issues.
Step 10: Integrate Reimbursements into Entity Strategy
Your reimbursement plan should work in harmony with your entity type:
- S-Corporations: Reimburse owners tax-free through the accountable plan.
- C-Corporations: Deduct reimbursements as business expenses.
- Partnerships: Require reimbursement agreements or guaranteed payments.
AE Tax Advisors aligns home office reimbursements with each client’s overall entity structure, payroll, and deduction plan for maximum impact.
This integrates with The Business Owner’s Blueprint and The Family Office Formula.
AE Tax Advisors Home Office Reimbursement Framework
- Verify eligibility under exclusive and regular use rules.
- Calculate business-use percentage accurately.
- Identify all reimbursable expenses.
- Implement a written accountable plan.
- Submit monthly reimbursement requests.
- Maintain full documentation for audit protection.
- Reconcile reimbursements annually.
This process aligns with IRS Publications 587, 463, and 535, creating a compliant and efficient reimbursement system.
Conclusion: Keep Your Home Office Working for You
A home office isn’t just a workspace — it’s a legitimate business expense. When structured correctly, reimbursing yourself for those costs reduces taxes, improves accuracy, and strengthens your business’s financial foundation.
At AE Tax Advisors, we help business owners implement tax-smart reimbursement plans that follow IRS rules to the letter while capturing every allowable deduction. If you work from home, it’s time your business pays its fair share — to you.