S Corp.-OIH

[Bird Legs]

Taxpayer, 100% stockholder, employee, of S Corp. Approx 1/2 of home is office space.
All the 2nd floor of home is office. Client has 3 employees plus himself. Client
pays himself a salary, plus rental.
The rental is reported on Sched. E form 1040. Can the client deduct any home expenses
ie, utilities, home insurance, etc. against the rental income?
Thanks for your response.

By the way, several years ago, an employee got made, quit, then went to the real estate
tax board and told them that this person had an office in home. The Homestead
exemption was revoked and the real estate taxes went up.

[veritas]

You can't deduct expenses on schedule E if you rent part of your house that you use as an employee of a corpoartion.

[rosieea]

Taxpayer, 100% stockholder, employee, of S Corp. Approx 1/2 of home is office space.
All the 2nd floor of home is office. Client has 3 employees plus himself. Client
pays himself a salary, plus rental.
The rental is reported on Sched. E form 1040. Can the client deduct any home expenses
ie, utilities, home insurance, etc. against the rental income?
Thanks for your response.

An accountable plan is the answer. Shareholder should not be collecting rent. Rather, the business should reimburse him for the appropriate percentage of home expenses. This is not income to the shareholder and is deductible by the corporation.

As in your state, the homestead exemption would probably also be lost in Florida. Additionally, commercial rental income would be subject to sales tax. Do your client a favor & set up an accountable plan.

[OldJack]

An accountable plan is the answer. Shareholder should not be collecting rent. Rather, the business should reimburse him for the appropriate percentage of home expenses. This is not income to the shareholder and is deductible by the corporation.

I agree with Rosie and the reimbursement method, however, in cases where there is little, if any, expense to deduct and a need to get income out of the Corp, especially if it is a C-corp,... rental income on the 1040 Sch-E with a reduction of profit to the corp is a valid alternative that can save taxes. Also, a reduction in profit could help justify a lower required S-corp salary.

[Unregistered]

Old Jack

Believe me I feel very old this AM, this is an S Corp. and the reimbursable plan
seems the way to go. Have used this on several other S Corp. but didn't think
about it on this one.
Client is upset because she gave me the total utilities, insurance and all of that for
the year. When I did not deduct any of them she got upset and took it to someone
else and showed them. She later called me and said that person told her she
could and for me to call him and let him explain it to me.
Birdlegs

[OldJack]

The flow chart on page 4 of pub 587 makes it clear that if you rent home space to your employer (S-corp) that you get no deduction for office in the home expenses. And the words are pretty clear at the top of page 3. http://www.irs.gov/pub/irs-pdf/p587.pdf

[Unregistered]

Is there a seperate entrance

If there is I think you have an out, if not the above are correct.

[Unregistered]

Entrances

consist of: front door, back door & garage door.


Birdlegs

[Roland Slugg]

Another lone voice in disagreement

The flow chart on page 4 of pub 587 makes it clear that if you rent home space to your employer (S-corp) that you get no deduction for office in the home expenses.

Your reply is a non sequitur. That flowchart is designed to help taxpayers decide if they can deduct OIH expenses either on Schedule C or on Schedule A via F-8829. The original post asks if legitimate expenses can be deducted on Schedule E. I believe they can ... and should. A better reference would be to IRS Pub 527. See "Renting Part of Property" on page 5.

Some here have stated that if a taxpayer rents part of his home to his S corp, he can not deduct any expenses against that rental income. Those who say that, however, never cite any authority for their opinions. In another thread someone did make a vague reference to Code §280 ... probably meaning §280A. (§280 was repealed in 1986.) IRC §280A covers the matter of deducting OIH expenses, and subsections (e) and (f) do refer to S corps and shareholders of S corps. However, after several careful readings of §280A in its entirety (which I readily admit is not easy), I can not see where §280A(e) and (f) alter the meaning of §280A(c) which allows the deductions. The later subsections are referring to personal use of the business portion. As long as the business portion of the residence is not used for personal purposes for more than the 14-days/10% limits, there should be no problem deducting legitimate expenses on Schedule E.

[OldJack]

Well Roland you got me there... I don't have any idea what "non sequitur" means but I guess it is not a compliment. However, you are wrong in your analysis that the home expenses are deductible on Sch-E. True, my reference to the chart was for form 8829 but it also applies for the worksheet for other business use.

The code that disallows the expenses is §280A(c)(6). Here is a quote of the code:

(6) Treatment of rental to employer
Paragraphs (1) and (3) shall not apply to any item which is
attributable to the rental of the dwelling unit (or any portion
thereof) by the taxpayer to his employer during any period in
which the taxpayer uses the dwelling unit (or portion) in
performing services as an employee of the employer.

Here is what Research Institute has to say about it:

Problems of the closely held corporation.
If the business operated out of a taxpayer's home is organized as a corporation, direct and indirect expenses of the home office are the entity's expenses, not the owner-employee's. Taxwise, there are three ways to handle these expenses.

Payment of rent.
The corporation can pay its shareholder-employee rent to offset home office expenses and supply him with a return. The rent will be deductible by the corporation, assuming it's a reasonable amount for the space and services actually provided, and will be taxable to the shareholder-employee. However, the shareholder-employee/homeowner won't be able to claim offsetting deductions. The rules allowing deductions for business use of a dwelling unit do not apply to any expense attributable to the rental of all or part of a taxpayer's dwelling unit to his employer during any period in which he uses the rented portion to perform services as an employee of the employer. ( Code Sec. 280A(c)(6) ) For purposes of this rule, an independent contractor is treated as an employee, and the party for whom the independent contractor is performing services is treated as an employer. (S Rept No. 99-313 (PL 99-514) p. 84) Where such a lease arrangement exists, the only deductions that are allowable are those that could be claimed in the absence of any business use,
e.g., mortgage interest, real estate taxes and casualty losses. (S Rept No. 99-313 (PL 99-514) p.84)

Sorry.. off hand I don't recall where or what document I clipped that RIA quote from but the file on their website was "WZBVHQV8.htm".

But then paragraph 1647 of RIA Federal Tax Handbook 2006 says:

No home-office deduction is allowed for expenses attributable to the rental by an employee of all or part of his home to his employer if the employee uses the rented portion to perform services as an employee of the employer. [code Sec. 280A(c)(6)]

[veritas]

The history behind no deduction

My memory is not always the best and it's not getting any better but this whole thing came about because some smart CPAS' came up with this to of course to avoid SE tax and to to convert their personal deductions into business expenses. My hat off to them.

The IRS didn't like it so as is their way they went crying to congress and got the prohibition put into place.

[OldJack]

Veritas your memory is good. By the way, do you have any idea what "non sequitur" means? My American College Dictionary does not contain the word. I'm just curious as to how bad I have been slapped. It hurts and I feel awful.

[veritas]

Your intuition is finely tuned

non sequitur means "it does not follow" or better yet an absurd statement which does not make sense.

ouchie!

[OldJack]

Oh.... now that really hurts. The last think I ever wanted to be was "absurd". Is that something like a "nerd"? Glad my parents aren't around to see this.

[Roland Slugg]

Get a better dictionary

Dear Old Jack

"Non sequitur" is neither an insulting nor a disparaging term. If you choose to view it as one, of course, that's up to you.

Your selected quotes from part of Code §280A and RIA's analysis are correct as to the disallowance of an OIH deduction. It isn't allowed in that situation. The original post in this thread, however, and the fundamental issue at hand is NOT an OIH deduction. It is rental deductions on Schedule E ... a distincly different matter.

When a taxpayer's C or S corp pays him rent for the use of a room or rooms in his residence, the rent paid is deductible by the corporation and taxable to the employee/landlord ... on Schedule E. That's a wash, except for a possible difference in tax rates for the corp versus the individual. So are the direct and allocated expenses related to the rented space lost? Of course not. Just as a self-employed person can take an OIH deduction for those expenses via F-8829, a taxpayer renting space to his corporation deducts the expenses on Schedule E, where they reduce the related rental income. This is not an OIH deduction ... it's a straightforward deduction of legitimate expenses related to taxable rental income.