Deductions Owners Miss: Accountable Plans, Augusta Rule, Family Payroll

By MercConsulting · Published 2026-08-29 · Updated 2026-09-02

The deductions owners miss most are ordinary provisions that need structure: accountable plan reimbursements, the §280A(g) home rental, paying children real wages, HSAs, and a correct home office.

The deductions owners most often miss are not exotic. They are ordinary provisions that require a little structure: an accountable plan so the company reimburses you for the home office, vehicle, and phone you already pay for; the §280A(g) rule that lets your business rent your home for up to fourteen days a year without the rent becoming your income; paying your children real wages for real work; a health savings account; and a home office computed the way the regulations describe. None of them is a trick. Each is legitimate only when it is documented and done in the form the rule requires, which is exactly why they go unused.

This guide walks through each one — what it is, what the paperwork looks like, and where owners get it wrong — and closes with the documentation habits that make all of them hold up.

"I'd been paying for my home office, my truck, and my phone out of my own pocket for years and deducting nothing, because I'd elected S-corp status and nobody told me the rules had changed for me. A one-page reimbursement plan fixed it."

Accountable Plans: Getting Reimbursed for What You Already Pay

An owner who runs a sole proprietorship deducts business expenses directly on the return. An owner who has elected S-corp status, or who runs a C-corp, is an employee of the company, and employees currently cannot deduct unreimbursed business expenses on their personal returns. The result is that the home office, the mileage, and the phone bill silently stop being deductible the year the election takes effect, unless the company reimburses them.

An accountable plan, defined in Reg. §1.62-2, is the mechanism. When it is followed, reimbursements are deductible to the company and are not wages or income to the owner. The regulation has three requirements:

• Business connection. The expense must be one the owner paid while performing services for the business.
• Substantiation. The owner submits the amount, date, place, and business purpose within a reasonable time — a monthly expense report with receipts is the standard.
• Return of excess. Any advance above substantiated expenses must be returned.

Typical items: the business-use share of home costs (rent or mortgage interest, utilities, insurance, repairs), vehicle expenses under either the current standard mileage rate or actual costs, cell phone and internet at a documented business percentage, travel, meals subject to their own limitation, professional dues, and supplies. The plan should be a written document adopted by the company, and the reimbursements should be paid from the business account as separate transactions. The interaction with the salary and payroll decisions is covered in our comparison of LLC, S-corp, and C-corp taxation.

The Home Office, Done Correctly

Two conditions apply. The space must be used regularly and exclusively for business — a spare bedroom that is also a guest room fails; a defined area used only for work passes. And it must be your principal place of business, which includes a space used for administrative and management activities when you have no other fixed location where you do that work. A contractor who works at job sites all day and runs the business from a home office qualifies on that basis.

A sole proprietor claims the deduction on Form 8829, using either actual costs allocated by square footage or the simplified per-square-foot method. An S-corp owner runs it through the accountable plan instead, using the business-use percentage of actual home costs. Storage of inventory or product samples has its own, looser exception.

The Augusta Rule Under §280A(g)

Section 280A(g) provides that if you rent your personal residence for fewer than fifteen days in a year, the rental income is not included in your income at all and no rental deductions are allowed. It applies to any residence and any renter, including a business you own. A company that genuinely needs a venue for a board meeting, a planning retreat, a client event, or a team training day can rent the owner's home for it, deduct the rent as an ordinary and necessary expense, and the owner excludes the rent from income, up to fourteen days a year.

The rule works when the transaction is real, and the Tax Court has cut deductions sharply where it was not. The elements that hold up:

• A genuine business use that the business would otherwise pay a venue for, with an agenda, attendees, and minutes or notes from each event.
• Fair market rent supported by written comparables for similar event or meeting space in your area — not nightly hotel rates, not a number chosen to fill fourteen days.
• A written rental agreement between you and the company, an invoice for each use, and payment from the business account.
• Consistency with the calendar. Meetings held on days you were elsewhere, or a monthly board meeting for a company with one owner and no board, are the facts examiners look for.

The fifteenth day converts the entire year's rent into taxable income, so the count matters. And the rent must be reasonable for the space and the use; a large payment for a routine meeting is the pattern that fails.

Hiring Your Children

Paying a child for real work in the business shifts income from your bracket to theirs, where earned income up to the standard deduction is not taxed, and it can fund a Roth IRA in the child's name. For a sole proprietorship or a partnership owned only by the child's parents, wages paid to a child under eighteen are exempt from Social Security and Medicare taxes, and wages paid to a child under twenty-one are exempt from federal unemployment tax. Those exemptions do not apply when the employer is a corporation, including an S-corp.

The word that matters is bona fide. The rules that keep this legitimate:

• Real work, age-appropriate. Filing, social media content, cleaning the shop, data entry, modeling for marketing — tasks the business would otherwise pay someone for. Chores at home are not employment.
• Reasonable wages for the work, at the rate you would pay an unrelated person.
• Payroll treatment. A job description, timesheets, a W-2, and payment from the business account into an account in the child's name.
• Labor law. Federal law allows parents to employ their own children in non-hazardous work in a business they own, but hours and duties for minors are regulated, and Texas has its own child-labor rules; confirm both.

Health Savings Accounts

An owner covered by a qualifying high-deductible health plan can contribute to a health savings account up to the current annual limit, deduct the contribution, let the balance grow without tax, and withdraw it without tax for qualified medical expenses at any point in the future. Unlike a flexible spending account, the balance carries over indefinitely, and after the eligibility age withdrawals for non-medical purposes are taxed as ordinary income without penalty. It is the only account in the code where contributions, growth, and qualified withdrawals all escape income tax.

The account can be invested, and medical costs paid out of pocket can be reimbursed years later if receipts are kept. For an S-corp owner, contributions run through payroll and appear on the W-2 in the same way health insurance premiums do; the deduction is then taken on the personal return.

Smaller Deductions That Add Up

• Startup and organizational costs under §195 and §248, deductible up to a limit in the first year with the remainder amortized, if the election is made.
• The de minimis safe harbor for small equipment and furnishings, which allows items below a per-item threshold to be expensed rather than depreciated when the election is attached.
• Self-employed health insurance, deductible above the line for sole proprietors, partners, and S-corp owners whose premiums are properly run through the W-2.
• Business use of a personal vehicle, with a contemporaneous log; vehicle, travel, and gift expenses are subject to strict substantiation rules that estimates do not satisfy.
• Texas franchise tax deductions. The margin calculation allows a cost-of-goods-sold or compensation deduction, and choosing the right one each year is a real decision for a Texas entity.

The Documentation Habits That Make It All Hold

Every provision above fails on the same thing: records created after the fact. The habits that make them durable are unglamorous — a written accountable plan and reimbursement template; a mileage log kept as trips happen; a calendar with agendas and notes for every home rental day; timesheets and job descriptions for family employees; receipts filed monthly; and a business account that pays for business items only. Together these turn a set of deductions into a system, one piece of a coordinated approach to minimizing taxation. MercConsulting is a business consulting firm, not a law firm or CPA firm; strategies are general information, depend on your facts and current law, and are implemented with licensed tax and legal professionals — no tax outcome is guaranteed.

Frequently Asked Questions

What is an accountable plan?

A written reimbursement arrangement that meets Reg. §1.62-2: expenses have a business connection, are substantiated with amount, date, place, and purpose within a reasonable time, and any excess advance is returned. Reimbursements under the plan are deductible to the company and are not income to the owner-employee, which is how S-corp and C-corp owners recover home office, vehicle, and phone costs.

How does the Augusta rule work for a business owner?

Under §280A(g), a residence rented for fewer than fifteen days in a year produces no taxable rental income. A business can rent the owner's home for genuine meetings or events at documented fair market rent, deduct the rent, and the owner excludes it. It requires a real business use, comparable-supported rent, a written agreement, invoices, and records of each event.

Can I pay my kids from my business and deduct it?

Yes, when the child does real, age-appropriate work at a reasonable wage, with a job description, timesheets, a W-2, and payment into the child's account. For a sole proprietorship or a partnership owned only by the parents, wages to a child under eighteen are exempt from Social Security and Medicare taxes; corporations, including S-corps, do not get that exemption.

Can an S-corp owner deduct a home office?

Not directly on the personal return, because unreimbursed employee expenses are currently not deductible. The company reimburses the business-use share of home costs through an accountable plan and deducts the reimbursement. The space must still be used regularly and exclusively for business and qualify as the principal place of business.

Why is an HSA considered the best tax-advantaged account?

Because contributions are deductible, growth is not taxed, and qualified medical withdrawals are not taxed either. Eligibility requires a qualifying high-deductible health plan, and limits change annually.

This article is for educational purposes only and is not legal, tax, or investment advice. Consult qualified professionals about your specific situation.