S Corp. renting from stockholder owner

[Bird Legs]

In the Feldman case, 1984, court ruled that the home office expenses are deductible against the rent paid . However, in 1986P. L. 99-514, Sec. 143(b), added para. (c)(6)...
Sec. 143(c), amended subpara. (c)(5)(B), effective for tax years beginning after 12/31/86
which reversed the Feldman Case.
Prior to amendment, subpara. (c)(5)(B) reaad as follow:
"(B) the deductions allocable to such use which are allowable under this chapter for the
taxable year whether or not such unit (or portion thereof) was so used."

in 1976, P. L. 94-455, Sec. 601(a), added code sect. 280A, effective for taxable years
beginning after 12/31/75.
Also see Special Report No. 99-313 (PL 99-514) page 84.

This from the Federal Tax Coordinator 2d

Para L-1354. No home office deductions for space in home rented by employee
to employer.
"The rules allowing the deduction of home office expenses do not apply to any expense
attributable to a taxpayer"s rental of all or part of his dwelling unit to his employer during
any period in which the taxpayer uses the rented portion to perform services as an
employee of the employer."

[OldJack]

Excellent post Bird Legs.. that should make it clear that the dwelling unit expenses are not deductible (1040 Sch-E) by the employee against employer rental income (1040 Sch-E). Thanks for the follow-up to our previous posts.

[Montague]

R Power

Suppose taxpayer is renting and has a rental agreement with the landlord that rents part of the rental to the corporation and part to the taxpayer. Taxpayer pays his share with a personal check and the corporation pays it's share with a corporate check. Taxpayer/shareholder never uses corporate area for personal use.

I would agree that any part of the utilities would not be deductible by the corporation.

[Snaggletooth]

Any mood for an exception?

Where do you draw the line? Listen to this impressive candidate for an exception.

My client has an S Corp which is a Canoe Rental. Taxpayer has built a large house with a split level basement. He uses 40% of the square footage for his canoe rental.

The 40% could hardly be called an "office-in-home." The entire downstairs is a storage area for canoes, paddles, and lifejackets. Part of the upstairs is a large room with two or three canoes which are in process of repair. The room also contains a restroom for customers. Also a cash register where customers pay for their ride down the river.

This is one case where the letter of the law does not match the spirit. I feel fully justified.
His house payment is $1100 per month - I allow him $6000 per year rent to the corporation.

Does anyone think we've committed a no-no?

[Bees Knees]

maybe

You have to split the dwelling unit into two, like a duplex. Each with separate entrances, each with their own living accommodations (such as toilet and cooking facilities).

If you can show that the dwelling unit is clearly divided into two separate units, with one portion clearly a commercial store front and the other a separate dwelling unit, then the office in home rules would not apply to the unit used as a commercial store front.

[fliszt]

exception

Snaggletooth, in addition to the private msg I just sent to you, I have a client that is a fund raiser for a very large company. He uses his basement for storage of his equipment (stage, PA system, scores and scores of boxes of publications, boxes of gifts for "winners" of their contests, etc). He originally wanted me to take 50% of home/utilities. His desk, file cabinets, etc are there too. We settled on 25% of home and utilities. His employer does not have an office for him nor furnishes anything for him to use. I feel fully justified in doing this.
Older Larry

[♠♠♠♠]

Larry M: I can't find anywhere in the books that "justified" give a deduction for anything.

[fliszt]

Dear Guest

I apologize for using the wrong wording.
Sorry.

[OldJack]

I apologize for using the wrong wording.
Sorry.

Larry, I apologize for posting not as myself. I was not trying to be critical or cute, I was only in the unregistered posting mode. I was simply pointing out that what we think is justified has nothing to do with the requirements for a deduction.

The storage space itself would probably be deductible under the office in the home rules, as an employee, but as you imply it is being rented for income on 1040 Sch-E. As the space is most likely considered a part of the dwelling unit (since it isn't physically separate) the expenses associated with it are probably not deductible on 1040 Sch-E.

[fliszt]

Thanks

Thank you for your reply OldJack. I do need to watch my wording when posting. I was agreeing with Snaggletooth when he said the letter of the law does not match the spirit and he felt justified in the way he was handling the return. There are many cases where the letter does not match the spirit, but we have to go with the letter regardless of how we feel. That's like the cops saying, I don't make the laws, I just enforce them. Here's your ticket. Thanks officer.
Anyway, I agree with you 100%.
OlderLarry

[jmc]

Title issue with 1031 exchange

Using 1031 exchange, a husband is going to replace an old property which title is under only his name WITH a new property which title is under both his & wife's names.
Is there any problem with 1031 exchange?
Or no problem, as long as the husband carries over the new basis under his return?

[rosieea]

Using 1031 exchange, a husband is going to replace an old property which title is under only his name WITH a new property which title is under both his & wife's names.
Is there any problem with 1031 exchange?
Or no problem, as long as the husband carries over the new basis under his return?

JMC - this question seems out of place in this thread. I suggest you start a new one.

[rosieea]

Perhaps someone can explain to me why a shareholder would rather rent space in his home to his corporation than simply be reimbursed under an accountable plan.

[OldJack]

Perhaps someone can explain to me why a shareholder would rather rent space in his home to his corporation than simply be reimbursed under an accountable plan.

The reason the IRS doesn't want the taxpayer getting rent is because

1) for a C-corp real estate rent income from the corporation is not subject to self-employment tax and reduces profit.

2) for a S-corp it reduces the amount available for Officer Salaries and therefore payroll taxes. The IRS will and have in the past reclassified rent paid as compensation to the officer with payroll collection and penalties.

3) and for both it is always a question is it fair-market-value rental and are rent expenses appropriate. Is it worth an IRS audit from the IRS standpoint.

[rosieea]

The reason the IRS doesn't want the taxpayer getting rent is because

1) for a C-corp real estate rent income from the corporation is not subject to self-employment tax and reduces profit.

2) for a S-corp it reduces the amount available for Officer Salaries and therefore payroll taxes. The IRS will and have in the past reclassified rent paid as compensation to the officer with payroll collection and penalties.

3) and for both it is always a question is it fair-market-value rental and are rent expenses appropriate. Is it worth an IRS audit from the IRS standpoint.

So, again I ask why not an accountable reimbursement plan instead of fooling around with rent?