How S-Corp Owners Can Turn a Home Office Into a Powerful Tax Strategy
Thanks to the One Big Beautiful Bill, real estate-heavy tax strategies are back in the spotlight — and that includes your home office. If you're an S-Corp owner who works from home and owns your residence, there's now a powerful way to structure things to your advantage.
The Strategy in a Nutshell
Instead of just taking the standard home office deduction, S-Corp owners can formalize a lease between themselves (personally) and their business, and then layer multiple deductions on top of that arrangement.
Here’s how it works:
Create a Written Lease Agreement
Your S-Corp rents a portion of your home — say, a dedicated office or workspace — under a legitimate lease.
Must be reasonable market rent
Documented in writing
Must reflect exclusive and regular use for business
This converts a nondeductible personal expense into a legitimate business rent deduction for the S-Corp.
Improve the Space — Then Deduct It
With the lease in place, your S-Corp can make improvements to the rented portion of your home — and deduct them under the updated Section 179 rules or 100% bonus depreciation.
Eligible improvements include:
HVAC upgrades
Electrical rewiring
Built-in furniture
Lighting
Security systems
Fire alarms
Data cabling
Under the new law:
Section 179 now includes qualified real property (roofs, HVAC, etc.) and is indexed for inflation
Bonus depreciation is back at 100% for 2025 — allowing full expensing of eligible improvements
Result: Your S-Corp gets a massive deduction today while you improve your home workspace.
Collect Rent on Your Personal Return
You report rental income personally — but here's the twist:
The rent is not subject to self-employment tax
You can offset that income with depreciation and expenses from the leased portion
Improvements made by the S-Corp increase your home’s basis, potentially avoiding capital gains down the road
Use Cost Segregation to Accelerate Personal Deductions
If you're already doing improvements or have significant home equity:
Do a cost segregation study on your residence
Separate structural vs. personal property and improvements
Depreciate certain components faster (e.g., 5- or 15-year property)
You may be able to use bonus depreciation on qualifying parts of your home — even if it’s partially personal-use — depending on how the lease and space allocation are structured.
Why It Works Now (Post-OBBB)
The 2025 tax law turbocharged this strategy by:
Expanding Section 179 to more types of real property
Making 100% bonus depreciation permanent
Keeping S-Corp rents between related parties deductible (when documented correctly)
Important Caveats
The leased space must be exclusive and regular use — no dual-use rooms
The lease must be arms-length and fair market rent
Improvements should be clearly for business use
S-Corp should avoid triggering self-rental recharacterization if you’re a real estate pro
Example
Jacob owns his home and runs Schwartz & Schwartz from a dedicated 300 sq. ft. office.
His S-Corp signs a lease for $1,000/month
The S-Corp installs a $12,000 HVAC split system and $5,000 in built-ins
It deducts $17,000 in Section 179 improvements and $12,000 in rental expense
Jacob reports $12,000 in rental income — but takes $7,000 in depreciation and $3,000 in expense offsets
Net result: The S-Corp gets $29,000 in deductions. Jacob nets only $2,000 in personal income, taxed at favorable rates.
Bottom Line
If you’re a small business owner working from home, don’t just take the standard home office deduction. Under the new tax law, your spare room could become a tax-saving machine — when structured properly.
Want to explore how to set this up in your own business? We can help with:
Lease templates
Rent valuation
Capital improvement planning
Hedgi AI categorization + cost seg prep