Is free rent taxable compensation?

[Zee]

I'm not getting much response to my earlier independent contractor question. So, I'll try again.

An Association owned boat rack facility has contracted with an individual for it's operation as an independent contractor. Let's assume that status/classification is correct.

As part of the agreement, the individual is allowed the use of a small building operating as a store/deli/baitshop at no cost. All Inventory costs/revenue are the responsibility of the independent contractor and he keeps all profits. There is also a gas pump with the same conditions. The contracted individual also receives substantial revenue from a mobile mechanic business that is allowed to operate at the rack (almost like a kickback...he receives a portion of the billing). The Association pays telephone costs.

The small building (and store) and adjacent dock staging area remains in the ownership of the developer. The Association rents the small building and staging area for over $9000 month and also pays taxes, utilities, etc. which are substantial. The dock staging area is a necessary component of the operation. The store isn't. So, the lease value at $9000 monthly is grossly overstated because of the boat staging area. In other words, the Association is handcuffed by the developer's ownership.

Finally, the question. Since the contracted individual receives the use of the store "free", and the Association also pays telephone expenses, taxes, and the utilities, isn't this taxable compensation at the FMV of the rent and actual other expenses? The store is open to the public.

[Jesse]

Is the independent contractor a related party?


Off the top of my head, if not a related party, I wouldn't think it would be taxable income to the independent contractor. But as well if the Association is not receiving any rent I wouldn't think they could deduct and of the expenses they are paying.

[MAMalody]

An the surface, it would look like noncash compensation of some type to me.

[Zee]

Is the independent contractor a related party?


Off the top of my head, if not a related party, I wouldn't think it would be taxable income to the independent contractor. But as well if the Association is not receiving any rent I wouldn't think they could deduct and of the expenses they are paying.

Why do you think it's non-taxable or why the Association couldn't deduct the rent on the leased building (they're paying all the rent)? Only the supplies expense for inventory items, food stuffs, etc. is being paid for by the independent contractor Manager.

[les grans]

Seems to me that whatever amount the "contractor" picks up as income for the use of the space is also a deduction to him as rent on the space he's using, since he's using it in his trade or business.

Or did I somehow miss something, like is he living in the bait store? This may be OK in Georgia, but not up here in the North...

[Jesse]

Zee, maybe I'm misunderstanding the big picture.

Would the association incur all expenses whether this other building had a tenant in it or not?

If not and they are not receiving rent why would they be able to deduct the expenses associated with this extra building?

As far as the income, if they are not a related party or an employee why aren't they charging rent?

[taxea]

Is free rent taxable compensation?

Zee...I moved my response to this post since it seems to be the post being used more frequently.

The contract between them MUST address all of the agreements between your client and the association. The association is contracting with your client to manage "consessions" on their property. There should be a clause that explains what service/s are/is being provided by your client "in lieu of rent" for the building he is using on the property. Whatever this is, it would be income to the association and an expense to your client.

It is up to the Association to put a value on this "in lieu of rent" item. taxea

[Zee]

Zee, maybe I'm misunderstanding the big picture.

Would the association incur all expenses whether this other building had a tenant in it or not?

If not and they are not receiving rent why would they be able to deduct the expenses associated with this extra building?

As far as the income, if they are not a related party or an employee why aren't they charging rent?

Good question. The Association is trying to keep out of pocket costs to a minimum for the rack owners for the basic services of the forklift and rack maintenance. As such, they have attempted to structure a contract that will allow the independent contractor to develop additional revenues through usage of the storefront, and relationships with outside vendors for mechanical work, etc. The Association does not share in the profits. If they did, I supposed UBIT might be an issue. Of course, avoiding workmen's compensation and employer taxes also reduce the out of pocket costs. Their hope was that the additional unrelated profits will keep their fixed cost at a minimum. The agreement includes a substantial fixed amount (around $135000).
As I stated in the other string, the agreement isn't working well. The IC is spending most of his time on the other activities requiring the hiring of additional employees. The Association wants to reduce the agreement amount suggesting one employee be removed. The amount of profits produced from the other activities are unknown, but they are most likely significant.