Options for Two Single Tax Payers

[Maria]

Hello,

I am preparing a S corp and the two shareholders individual returns. The two shareholders are both single but have been living together for years. The have joint bank accounts like a married couple. But they file their own tax return.

The S corp income is split 50% v.s. 50%. However, the "husband" has wages income from another job but the "wife" does not. They never pay themselves from the S corp.

They have been claiming business use of home. I did a test, if the "husband" claims all the home office deduction and remaining mortgage interest and real estate tax on schedule A, the "husband" will save thousand of dollars in tax. The "wife" will use standard deduction and still owe zero tax due to carryforward of Section 179 and home office deduction. By the way, the mortgage interest statement has his social security number and both names. I guess the house is under both names. We are in California.

Can I use this strategy to maximize tax savings?

Thanks a lot in advance for your advice.

Maria

[Bees Knees]

The interesting thing about our tax laws in this country is, despite the years of talk, there is still a marriage penalty. Two working single people living together and sharing expenses will pay less tax than a married couple with similar income and expenses.

There is nothing in the law that says you have to split expenses between co-owners. The law only requires that to claim a deduction, you have to pay the expense, and in the case of mortgage interest, be liable for the loan. If the “husband” paid the expenses for office in home, and is liable for the mortgage interest, then he can claim all of the deduction, even if he used funds from a joint checking account. Community property rules in California would not apply since this couple is not married.

One thing I would caution. It is a big red flag that they do not pull W-2 wages out of the S corp for their services. Any income flowing through on the K-1 will get reclassified as wages if your clients ever get audited. So I think that should be your biggest concern at this point.

[jainen]

please clarify

Maria, please clarify about the office in home. If there is only one office, I don't see how either taxpayer can claim exclusive use. If there are two offices, I don't see how one taxpayer can claim both.

[Bees Knees]

Maybe only the "husband" goes in there. The "wife" uses a desk in the rec room and doesn't claim that space.

[Maria]

Thanks for Your Help

Thank you everybody, there is only one home office.

Really goodpoint, they haven't paid themselves from the S corp. I suggested that I calculate a big payroll check for each of them this year but they said they have cash flow difficulty.

This couple have been working very hard to keep their business running. They owe the government taxes and have been paying installments. I'd like to help them out within the tax authority guideline.

Again, thanks a lot and have a good day.

[OldJack]

The interesting thing about our tax laws in this country is, despite the years of talk, there is still a marriage penalty. Two working single people living together and sharing expenses will pay less tax than a married couple with similar income and expenses.

You are ignoring the marriage "benefit" of the marital status rate when one spouse has no taxable income. As usual there are those that are penalized and those that benefit from every tax law. However, regardless which side you are on, you end up getting a tax-shaft as your government partner demands to much of your income.

[DaveO]

If they don't take wages where do you deduct the business use of home?

The example on page 19-11 of the Tax Book Deluxe would seem to preclude a home office deduction in the absence of wages. The corp could pay rent but they couldn't deduct expenses since they provide services.

[Bees Knees]

You are ignoring the marriage "benefit" of the marital status rate when one spouse has no taxable income. As usual there are those that are penalized and those that benefit from every tax law.

My quote was around the statement: "Two working single people living together..."

And I believe the concept of one spouse working and the other spouse staying home with the kids went out about 1965, if I'm not mistaken...

[OldJack]

My quote was around the statement: "Two working single people living together..."

Bees the original post was about a "husband with income and a "wife" with no income other than 50% ownership of a S-corp.

The S corp income is split 50% v.s. 50%. However, the "husband" has wages income from another job but the "wife" does not. They never pay themselves from the S corp.

And I believe the concept of one spouse working and the other spouse staying home with the kids went out about 1965, if I'm not mistaken...

You are mistaken... the concept of only one spouse with income, went out only with those that could not afford to live on just one income. True there are more these days than was in 1965. Most of my clients have the wife NOT working and yes they are NOT living in 1965 homes or style but of course they are not your average working class.

[rosieea]

If they don't take wages where do you deduct the business use of home?

The example on page 19-11 of the Tax Book Deluxe would seem to preclude a home office deduction in the absence of wages. The corp could pay rent but they couldn't deduct expenses since they provide services.

You set up an accountable plan & reimburse the shareholders for the home office expenses. It's a deduction for the corporation and not income to the shareholders.

[Unregistered]

You are ignoring the marriage "benefit" of the marital status rate when one spouse has no taxable income. As usual there are those that are penalized and those that benefit from every tax law. However, regardless which side you are on, you end up getting a tax-shaft as your government partner demands to much of your income.

The real penalty is on the childless.

[Bees Knees]

Most of my clients have the wife NOT working and yes they are NOT living in 1965 homes or style but of course they are not your average working class.

Like you said...not your average working class client. I believe that just proved my point.

[Bees Knees]

Bees the original post was about a "husband with income and a "wife" with no income other than 50% ownership of a S-corp.

No doubt, she works too. Probably does most of the work for the S-corp that never makes any money.

Women have a long history on this planet of working for no pay.

[OldJack]

No doubt, she works too. Probably does most of the work for the S-corp that never makes any money.

Women have a long history on this planet of working for no pay.

The point was not that she might work, it was one income for the married family that gets a tax benefit with the MFJ tax rate that you think penalizes every married household.

[veritas]

I could go for some of that penalty sometimes.