Rental of Home for Board Meetings

[JohnH]

Admittedly, I'm up at an odd hour an this post may be driven by sleep deprivation. However, I don't recall seeing this discussed anywhere before and it is intriguing at this hour. I ran across it while looking up a slightly related matter and it caught my attention.

Assume a closely-held corporation, with the only shareholders being a husband and wife, who are also the only directors. Instead of holding board meetings at the corporate office, they elect to hold the meetings in their home. They rent the home to the corporation for the purpose of holding the meetings at a rate of $400 per day, which would be a reasonable rate for a comparable facility in their area of the country. They have one meeting per month plus an extra annual meeting, so in the course of the year they receive $5,200 in rental income, which is deductible by the corporation. Since their total days of rental are 14 or less, they are not required to report the rental income under Section 280A(g).

If the rental were an arms-length transaction with an unrelated party, the rental income would clearly be non-taxable to the homeowner and the expense would be deductible by the customer if there is a valid business purpose for the rental. Does anything in this scenario change when the related-party corporation (either a C corp or an S corp) is the customer?

I saw this on a site promoting multi-level marketing "tax savings" strategies and considering the source I was ready to dismiss it outright, but then I ran into some trouble debunking it. Can somebody either shoot this down or confirm it for me? All responses are encouraged, including idle speculation, derisive laughter, or harsh criticism.

[WhiteOleander]

I wonder if it would be shot down by IRS calling it "self-rental"?

[Dusty2004]

?

So you are telling me I can rent my house out for $1,000,000 for 13 days and I don't have to report any of that income.

Dusty

[Dusty2004]

1099-Misc

What about the 1099-Misc that the corp will have to file to be able to deduct it? What happens with that?

Dusty

[WhiteOleander]

Page 3 Pub 527. Rental of property also used as your home. Rent received for the rent of your home for less than 15 days in the year is not included in the income.

Some people rent their homes for Super Bowl and other events each year. Under this rule, they do not have to report the income. So, if you could get someone to pay 1,000,000 in rent for less than 15 days on your personal residence, then yes, it would be non taxable.

[JohnH]

If you look on page 7-7 of The Tax Book, you will see that if a taxpayer's residence is rented out for 14 days or less during the year, the rental income is not reportable. (and expenses cannot be claimed). So on the surface, if you can rent out your house for 13 days for $1,000,000, you meet that test. (I'm assuming that there may be some rule about reasonableness of the rent, but I don't know what it would be)

As for the 1099-Misc, if you meet the above test you can throw it away.

[JON]

Good luck

related party income/expense only deduction to one when picked up by the other... As long ownership is more than 50%. I would have a DVD of the Board meeting to show to the IRS as prove of the business purpose - audio and picture needs to be good for the review.

[S T]

Self Rental

Still curious about the "self-rental" rules and how they might apply to this scenario - shareholder to S Corp? But the self - rental is for losses only - correct - so income would be reported

How does this play in with the under 14 day rule??

Sandy

[JohnH]

These are the sort of things that are bugging me. Intuitively it doesn't seem right, but there are certain rules which specifically allow part of the strategy (on the rental side). I do agree that if it breaks down, the problem revolves around related party issue.

The Democraric national convention is coming to Charlotte next year and I know some people who are planning to take advantage of the "under 15 day" rule to cash in. But while I was looking up some details about the short-term rental rules, i ran across this other matter and it made me curious.

[Burke]

It is so obviously a sham, since there would be no reason to "rent" a portion of the home for a board meeting (once a month?) -- due to the fact they live together in that home and could discuss any business at any time. But I have seen situations where related parties did go to a resort for a corp board meeting (once a year).

[oceanlovin'ea]

corporation

If they are set up as a corporation or s corporation, they would be required to have board meetings and to document those meetings.

If it is a home-based business, they would not have an outside office to have their board meetings in. So they would naturally have them in their home.

This is not to say that the expense would stand up under IRS standards or would be allowed. But those are 2 reasons that they would have a board meeting in their home.

Linda, EA

[JohnH]

Good discussion, and lots to think about. Admittedly it's a risky move, but not prohibited. No question that anyone who tried it could expect close scrutiny in an audit.

I did find a discussion on another forum about this issue, and one poster made a comment I found particularly interesting. I was initially coming down on the side that related party income/expense couldn't be deducted unless the other party picks up the income. But that poster pointed out that this rule applies only with respect to the timing of deductions & income when one party is an accrual basis taxpayer and the other is a cash basis taxpayer. So that poster argued that this particular rule would not be a basis for ruling out the deduction by the corporation. Timing is not an issue because the income is simply not reportable on the individual return at any time.

[taxea]

Admittedly, I'm up at an odd hour an this post may be driven by sleep deprivation. However, I don't recall seeing this discussed anywhere before and it is intriguing at this hour. I ran across it while looking up a slightly related matter and it caught my attention.

Assume a closely-held corporation, with the only shareholders being a husband and wife, who are also the only directors. Instead of holding board meetings at the corporate office, they elect to hold the meetings in their home. They rent the home to the corporation for the purpose of holding the meetings at a rate of $400 per day, which would be a reasonable rate for a comparable facility in their area of the country. They have one meeting per month plus an extra annual meeting, so in the course of the year they receive $5,200 in rental income, which is deductible by the corporation. Since their total days of rental are 14 or less, they are not required to report the rental income under Section 280A(g).

If the rental were an arms-length transaction with an unrelated party, the rental income would clearly be non-taxable to the homeowner and the expense would be deductible by the customer if there is a valid business purpose for the rental. Does anything in this scenario change when the related-party corporation (either a C corp or an S corp) is the customer?

I saw this on a site promoting multi-level marketing "tax savings" strategies and considering the source I was ready to dismiss it outright, but then I ran into some trouble debunking it. Can somebody either shoot this down or confirm it for me? All responses are encouraged, including idle speculation, derisive laughter, or harsh criticism.

LOL!
do you really think all this blowing smoke is worth what they would expense if the IRS actually accepted this deduction? Also How did you arrive at 5400 per year? How many hours does a meeting between two people take when they obviously work together on a daily basis and most likely discuss issues on a daily basis rather than wait for the monthly meeting? I just don't see a justification that the IRS would buy....sorry

[Gary2]

I'd just like to know where that $400/day number came from. A quick search for small meeting space in Boston (not a cheap city, by any means), came up with one place for $25/day, another shows a room with a co-working desk at $15/hour. (How many hours does it take for a 2 stockholder corporation to have a board meeting?) Even in NYC, I found rates below $400/day (but nothing smaller than classroom size on a quick look).

The IRS is looking at self-rentals suspiciously, but more in the context of converting income to passive income (to make use of passive losses). While that's not what's happening here, I'd still expect the IRS to scrutinize the substance of the transaction. Does it serve a legitimate business need? Are they comparing a conference room for a dozen with a projector to a home office adequate for two or three, and a computer? If a stranger came along and said they could rent similar space for $350/day, would the corporation go with the lower bidder?

There's nothing wrong with using the under-15-day rule for legitimate rentals. The classic examples are renting out rooms for Mardi Gras in New Orleans or for the Super Bowl wherever. But using it when the purpose is clearly to shelter income is a different story.

[JohnH]

Well, the $5,200 is the result of 13 meetings at $400 per day. I used $400 per day as a reasonable amount to pay for a suite at a hotel for the meetings. (did you read the original post?)

Interesting question about what is reasonable - I've never seen any guidelines that the expense for a board meeting must be based on the number of hours it may take. Board meetings are for strategic planning purposes, not for routine review of financial statements. Sometimes that can take a while. Boards of directors often travel long distances and numerous hours to spend a few hours in a meeting or two, enjoy a few meals or some entertainment, and then return home. Time really isn't in view in these situations, is it?

As for the tax savings, I'd calculate it as a minimum of $1,000 for the corporate tax deduction (using a 15% Fed rate and a 5% state rate). And on the shareholder side, it would be another $1,100 at a minimum (using a Fed rate of 15% and a state rate of 7% for a constructive dividend). Of course, you could really get crazy and say the tax savings at the shareholder level is $2,000 - $2,200 if you assume this would otherwise have been ordinary income subject to Fed income tax at 28%, state income tax at 7%, plus FICA/Medicare.

But thanks for the comments just the same. One never knows when a nugget of useful information might surface in any reply.