S Corp Office

[Harvey Lucas]

I have read all the posts on this subject, as well as all the text in TTB 1040 and Business until my eyes were crossed.

I'd like to make sure I have this right.

My client is a business consultant, he operates as an S-Corp, he is the 100% shareholder.

He individually owns a residential two story home. He owns it free and clear, ie, no mortgage.

His S-Corp operates from the entire lower level of the home.

There is a rental agreement in place and the Corporation pays him $1500 per month as rent for the use of that lower level.

He lives in the upper portion of the home.

For 2009, the total rent will be $18,000.

The S-Corp will deduct the $18,000 as rent expense on it's 1120S.

The client will include the $18,000 as rent income on the schedule E of his 1040.

In compliance with IRC 280(a)(6), the client will have no deductions on his schedule E, ie, no property taxes, no insurance, no repairs, no depreciation.

He can include 100% of the property taxes on the home on his 1040 Sch A.

Since there is no mortgage, he has no interest expense, but if he did, he would deduct 100% of the interest expense on 1040 Sch A as well.

He does not have an accountable plan in place for 2009 so there is no deduction anywhere, ie, 1040 or 1120S, for any portion of the home utilities, repairs, insurance, etc.

Under the rental agreement, the tenant, ie, the corporation is responsible for any and all tenant improvements to the lower level space it occupies.

The corporation incurred and paid approx $10,000 in expense remodeling the space in 2009 to make it more suitable for business use..

The Corporation will depreciate this $10,000 as a tenant improvement over 39 years.

Have I got this right?

Harvey Lucas

[JG EA]

To the top

Under the rental agreement, the tenant, ie, the corporation is responsible for any and all tenant improvements to the lower level space it occupies.

The corporation incurred and paid approx $10,000 in expense remodeling the space in 2009 to make it more suitable for business use..

The Corporation will depreciate this $10,000 as a tenant improvement over 39 years.

Have I got this right?

Harvey Lucas

Everything sounded right to me until I got to the above. Not that it sounds bad - just didn't know without further research and so bumping to the top. Reading TTB on Leasehold Improvements it isn't 15 year which you knew already.

Last year's SB 5-11 (Don't have new one with me today.)

Leased property. Leased property is depreciable only if the taxpayer
retains incidents of ownership. Incidents of ownership include
legal title to the property, legal obligation to pay for the
property, responsibility to pay maintenance and operating expenses,
responsibility for taxes, and risk of loss if the property is
destroyed or damaged.

I'm not sure exactly what this means, but maybe searching info on this will help.

[Gretel]

My 2 cents.

I think if rental expenses can be taken depends on whether the story occupied by S-Corp. is a closed unit by itself or part of the residence.

Leasehold improvements can be depreciated over 15 years if placed in service before 1/1/2010.

Look at pg. 9-17 TTB to see if your leasehold improvements are qualified. It says there must be 3 years between placing property in service and the leasehold improvements.

[Harvey Lucas]

Thank You

Thank you JG.
Thank you Gretel.

Interesting thing regarding 15 year life for Tenant Improvements, Means that it qualifies for the 50% bonus depreciation for 09. That seems a little aggressive to me, think I will stick to SL 15 years.

Also the issue of depreciation only applies if you "own" or have "incidents of ownership" of the property.

Who "owns" a tenant improvement?

Since most rental agreements require that the tenant return the space to it's original condition at the end of the lease, I would argue that the tenant "owns" his tenant improvements..even if they have no value once he gives up his lease or his lease ends.

Regarding the 3 year rule. I assume that means that they dont want you to take leasehold improvement depeciation deductions on new construction. New being defined as a building that is not yet 3 years old.

The building in my example was built in the 1980's.
However, my client bought it July of 2008.
So "he" placed it in service in July of 2008.
The S-Corp tenant began leasing in July 2008.
Are you saying that the S-Corp tenant cant take depreciation deductions in 2009 for 2009 tenant improvements because the building was placed in service in July of 2008?

Harvey Lucas