What if you could write a check from your business to yourself, wave a magic want over it, and turn a legitimate business deduction into tax-free income for you? It’s possible! Abra-cadabra, let me explain how.
First, allow me to explain the “rest of the story”. When a large event comes to a city, hotel rooms are often sold out and travelers must find other options. Before Airbnb, people often rented out their homes for a week or two and made a little extra cash for their inconvenience. A great example is the 1984 and 1996 Olympics when families in Los Angeles and Atlanta rented rooms to visitors from around the world.
Under the old tax laws, these “temporary landlords” would have been required to report that income and allocate tiny fractions of their utilities, repairs and maintenance, homeowner’s insurance – even a small amount of depreciation – to offset the income. Congress, in a rare moment of practicality, recognized that filing an income tax form for a few days of rent and related expenses was not feasible and added Code Section 280(d) to the law.
Under Code Section 280(d), a taxpayer is not taxed on any income received for a rental of his dwelling for periods of less than 15 days in any calendar year. No income, no expense write-off, just like it never even happened. But the rental income in your bank account proves it did.
So what does this mean to you? Potentially a lot. If you are a business owner who also owns a home, you probably need to have business meetings from time to time. Large practices may have monthly or quarterly board meetings, employee retreats, annual parties, etc. You probably have a pretty nice home with a large room. If the going rate for meeting facilities at a local upscale hotel is $500 or $1,000/day for room rental, why not use your home instead?
Here is how it would work:
- The business would rent the “facility” from the homeowner. The rental would count as an ordinary and necessary business expense.
- You (or your spouse), the homeowner, would make your home available for rent for up to 14 days per year. Rental income you receive would be totally tax free.
You would definitely need a contract between you (the homeowner) and your business stipulating facilities provided, terms of service, rates, etc. To prove that you are charging “fair market value”, it would be advisable to have a quote in your files from meeting facilities in your area. Be sure to let your CPA know about it, too, as there is a little box she will need to check on Schedule E of your income tax return.
This works for partnerships, LLCs, and corporations, whether C-corporations or S-corporations. If you are not incorporated (i.e. a “sole proprietor”), I would not recommend it because you and the business are inseparable.
Sure, your home can be a great tax loophole when you sell at a profit. But that may never happen. How much nicer for you to put your home to work for you, tax free, while you’re living in it?