Renting out home to Coporation

[oceanlovin'ea]

earlier post

I asked a similar question on Jan 14 under "S corp shareholder and use of home"

Brad gave a good explanation and a solution to being able to use reimbursement of expenses under an accountable plan.

Look back at that thread.

Linda F

[Bird Legs]

Geekgirl, Would you

put up red neon lights?

[geekgirldany]

LOL well we had a big red neon open sign in the window at the first tax prep office I worked at. Of course he got it back in 1970 or later.

I figure the lights being on in my office is my open sign.

Veritas this customer I mentioned came from the same accountant that used a 8829 as a worksheet to calculate a home office deduction for the s-corporation of another customer. So really I am not that surprised that he done it. Just wish he would have called. I had to give the other customer the bad news that the $30,000 OIH deduction was not allowed on the s-corporation.

[Bird Legs]

My experience was just

the opposite.
Had a client, S Corp. been doing the work about 15 yrs. Receiving rent from S Corp.
In 2005 she wanted to deduct expenses against the rental income for office in home.
Told her she could not do this.
She said another accountant said she could so she is now with the other accountant.

[Joe Btfsplk]

Accountable Plan

Could the shareholder/owner not establish an accountable plan and have the S-Corp pay the sh/owner the expenses related for the use of the home.

Not unless he is an 'employee' and paid a reasonable salary.
There was a previous discussion about this. I believe, under proper arrangements, you could do it, but see page 19-11 of the Tax Book. It would be best for the corporation to adopt a policy statement or resolution obligating itself to reimburse an employee for such expenses.

[OldJack]

She said another accountant said she could so she is now with the other accountant.

You were right that if she receives rent income the expenses would not be deductible. Such expenses are minor as how much can be incurred for utilities and depreciation that is calculated on 39 years especially for just a few square feet in a home. The expenses usually only reduce taxes by $100 or less. Not to mention that claiming the business use of the home waves a red flag. If that small deduction was that important to the client verses your expertise you are better off without that client.

On the other hand, rent paid by the S-corp to the 1040 Sch-E is not really taxable or deductible as it is a wash on the Sch-E. ie: the S-corp claims rent expense on page 2 and the rent income is disclosed on page 1 netting to zero. The advantage of justifiable rent income payments for the S-corp is only that the S-corp profit has been reduced in the consideration of reasonable salary and its another way of getting money out of the S-corp without SE tax. For a C-corp there are greater advantages especially if there are different tax brackets between the C-corp and the shareholder.

[RJM]

Rent is OK see TAM from 3/19/01

I agree with OJ... and have handled the issue accordingly for many years with no IRS problem, for several high-income clients, and for the past couple years for myself. I issue 1099s for rent each year from the corp to the shareholder-employee, and the employee books the income on sch E. But, the only expenses allowed (and I believe mandated) on the sch E are: mortgage interest, property taxes, and casualty losses, all allocated for the business portion. No depreciation is permitted on the sch E.

The corp can pay directly for its share of indirect expenses like utilities, as well as direct expenses such as painting the home office.

After all is said and done on this type of transaction, the net benefit is small, basically the shareholder-employee avoids self-employment tax on the amount of the fair market rent. For a high-income client, it also helps shift some sch A deductions onto the sch E, where it is not subject to deduction limitations for itemizers.

I believe the correct way to cite this is TAM 200121070. (Correct me if anyone looks but can't find this, and I will get a revised citation). The technical assistance memorandum gives many examples and gives the logic used to develop the IRS interpretation of 280A(c)(6), and many other parts of 280A(c). -Bob

[OldJack]

Could the shareholder/owner not establish an accountable plan and have the S-Corp pay the sh/owner the expenses related for the use of the home.

Not unless he is an 'employee' and paid a reasonable salary.
There was a previous discussion about this. I believe, under proper arrangements, you could do it, but see page 19-11 of the Tax Book. It would be best for the corporation to adopt a policy statement or resolution obligating itself to reimburse an employee for such expenses.

Has not the IRS declared that an officer is by default an employee of the corporation regardless of salary? Of course there are certain fringe benefits that he is not considered an employee.