Renting office in home to LLC?

[RZellers]

Got a client wanting to do some creative stuff.

Scenario: Married couple lives together. Home is in her name. He wants to set up an LLC, planning to disregard entity to file on Sch C. Wants to put his wife on payroll (she's heading to retirement age & doesn't have any credits for Social Security). Also wants to use an addition on the house as the primary place of business for the LLC, and pay her rent.

If he were a sole prop, there would be an issue with renting part of the home to the business. But does being an LLC (even if disregarded) eliminate that issue? IE, can he take rent to her as a deduction on his Sch C. Does her being on payroll to the LLC matter? Am I overlooking anything else?

[MLINDER42]

Renting house to LLC

Got a client wanting to do some creative stuff.

Scenario: Married couple lives together. Home is in her name. He wants to set up an LLC, planning to disregard entity to file on Sch C. Wants to put his wife on payroll (she's heading to retirement age & doesn't have any credits for Social Security). Also wants to use an addition on the house as the primary place of business for the LLC, and pay her rent.

If he were a sole prop, there would be an issue with renting part of the home to the business. But does being an LLC (even if disregarded) eliminate that issue? IE, can he take rent to her as a deduction on his Sch C. Does her being on payroll to the LLC matter? Am I overlooking anything else?

Will she be actually doing work for the business? I can not see renting house to yourself. They file a joint return just take use of home.

[Gretel]

Part of the answer to the best of my knowledge.

Since she is owning the house I don't really see a problem renting part of the house to him if exclusive use as long as all the t's are crossed, f.e. lease, FMV rent payments. I also assume she is the one who pays mortgage, insurance, taxes etc. from her own bank account.

I don't think it matters if they file jointly or separately.

I also don't think it matters that she is his employees if she is a truly an employee. Ooops, I am not sure so if the rules made mainly for S-Corps (employee rents part of home to employer) apply here. That would limit the rental expenses that can be taken.

[veritas]

Social Security

"Wants to put his wife on payroll (she's heading to retirement age & doesn't have any credits for Social Security)."

He is probably putting money down a rat hole if she is near retirement. My assumption is she will draw on her husband's account.

[Kram BergGold]

My 2 cents

To me the office rental situation as you described it is a transaction with no economic substance. It is totally designed to reduce SE tax. As such I would say it does not fly.
There is another problem. If he is the employer and she is the employee and owns the house, the aprt of the office which she uses gets treated as her office. As such she has to claim the income but can't claim any deductions. On the part he uses she could claim deductions. However I feel only on a MFS return. If they file joiint you get back to my first point.

[Brian Wendroff]

Just take the office in home deduction

I would advise to just take the office in home deduction. This will show a portion of the expenses and depreciation, overall taking a reduction in selfemployment taxes.

[Gretel]

To me the office rental situation as you described it is a transaction with no economic substance. It is totally designed to reduce SE tax. As such I would say it does not fly.

How do you come to this conclusion? If they need office space anyway why would this have no economic substance?

There is another problem. If he is the employer and she is the employee and owns the house, the aprt of the office which she uses gets treated as her office. As such she has to claim the income but can't claim any deductions. On the part he uses she could claim deductions. However I feel only on a MFS return. If they file joiint you get back to my first point.

I would like to read up on the restrictions on the part she uses as office in HIS business. I also think that even if she is limited by the "rent to employer rules" and claims the income, SE taxes have been saved and she can claim mortgage interest and taxes, which she might or might not be able to claim otherwise.

[joanmcq]

Do they file joint? Then they take HO on his Sch C. No he can't pay her rent.