Less common one-person S-corp deductions

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Topic Author
fyre4ce
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Less common one-person S-corp deductions

Post by fyre4ce »

I'm starting planning on preparing taxes for 2021, and want to make sure I'm considering all available tax deductions. One person (my spouse), ~$270k gross income, ~$150k wages, CA. We already take advantage of better-known deductions (ie. licensing fees, travel to conferences [though none this year], home office, business vehicle, percentage of internet service). These were possibilities for lesser known deductions that caught my eye:
  • Cell phone. We already deduct 40% of cell phone expenses, but considering the nature of the business (on-call 24/7) I'm thinking that the phone qualifies for 100% deduction with personal use as a de minimis benefit (ref: IRS Pub 15-B) Edit: based on discussion below this appears to be a legitimate, if somewhat aggressive, deduction in this situation
  • Dependent care assistance. We definitely have childcare expenses well in excess of the $5,000 limit. Is taking advantage of this benefit as simple as writing a check to the employee's personal account from the business account for $5,000, or is there more complexity (eg. needs to be done through a FSA)? If it matters I have a HSA (fully-contributed) and health insurance through my W-2 job. Edit: a poster below provided a source that this is not allowed for owners of the corporation, which would apply in our case. Any other sources would be welcome.
  • Home gym. My reading of Pub 15-B, I don't see why a home gym wouldn't qualify as a de minimis benefit. If we ever buy a treadmill/exercise bike, is there a reason the business could not deduct it? Edit: there is no one piece of tax law or tax court precedent that clearly prohibits this deduction, but there are a lot of adjacent laws and one court case that make this a dark shade of grey. I will not be taking this deduction.
  • Entertainment tickets. We don't often go out to sporting events, concerts, etc and when we do they are usually low-dollar. But it seems like the de minimis rules allow the corporation to pick up the tab for occasional events we do attend, and for this to be nontaxable compensation. This link suggests a limit of $100, although Pub 15-B doesn't give a dollar amount and instead discusses a frequency limit. Edit: Entertainment expenses are non-deductible to the business (post-TCJA) so would not have the intended effect of being deductible at both business and personal levels
  • Gifts. It looks like 2%+ S-corp shareholders aren't entitled to achievement awards, which can be higher value, but holiday and other special occasion gifts of "low value" are allowed. Our gifts to each other are usually below this limit so would probably qualify. Edit: this looks to be an aggressive deduction but no specific reasons were offered on why it wouldn't be allowed
  • Renting the house. I read about a strategy by which the corporation can rent out your house for shareholder meetings, and the short-term rental income is non-taxable for the first 14 days per year. Seems a bit aggressive, but then again my wife and I usually do spend a weekend doing financial planning around this time of year, so it's not a huge stretch. Edit: the consensus is that this is a very aggressive strategy that some folks (and even tax pros) are comfortable taking but many are not. Anyone considering it should thoroughly document the rental, and even then it may fail an economic substance test.
Any comments on any of these, or items I'm missing?
Last edited by fyre4ce on Mon Oct 25, 2021 10:21 pm, edited 3 times in total.
hotscot
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Re: Less common one-person S-corp deductions

Post by hotscot »

I have an LLC and do my own taxes but a lot of the things you outline hardly seem worth the effort and could possibly point to an audit candidate. (Not really anything wrong with being audited, if you have good records, but it can be hours you'll never get back.)
I always leave some items off my deduction, forgetting them, in case I'm ever field audited and then I can point to the additional deductions that I didn't take.

YMMV

(Do you use TurboTax and do you file Form 568 manually?)
bhsince87
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Re: Less common one-person S-corp deductions

Post by bhsince87 »

We write off 30% of home expenses under the "home office" deduction. But it is totally legitimate since my wife uses that much space to store inventory for her online business.

Maybe your wife needs to stock up on a huge supply of tax forms?

But seriously, Section 179 is your friend, until next year, that is.
Time is what we want most, but what we use worst. William Penn
Topic Author
fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

hotscot wrote: Wed Oct 20, 2021 5:43 pm I have an LLC and do my own taxes but a lot of the things you outline hardly seem worth the effort and could possibly point to an audit candidate. (Not really anything wrong with being audited, if you have good records, but it can be hours you'll never get back.)
I always leave some items off my deduction, forgetting them, in case I'm ever field audited and then I can point to the additional deductions that I didn't take.

YMMV

(Do you use TurboTax and do you file Form 568 manually?)
Interesting perspective, thanks. I did get audited on my personal return (CP2000 correspondence audit, no biggie) a few years ago because I forgot to include one form, the IRS asked for more money, but the net result of including all items from the form is that my taxes went down. So I got a refund, which also included interest at an above-market rate. So I'm hoping they learned their lesson :-)

The tickets, gifts, and cell phone are probably in the noise and could be ignored, total is probably <$1k deductions for the year. Home gym cost could vary but a decent cardio machine is probably $1-2k. We looked at a Peloton at one point but didn't pull the trigger. Dependent care @ $5k would be worth about $2k tax savings and the biggest item, also seems to be the least controversial, it seems explicitly allowed. A fair short-term rental rate on our home would be about $1k/night, so maybe $2200 for a weekend with cleaning fees.

I use TurboTax for our personal return, and H&R Block Business for filing Form 1120S (it's an S-corp, not a LLC).
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fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

bhsince87 wrote: Wed Oct 20, 2021 5:52 pm We write off 30% of home expenses under the "home office" deduction. But it is totally legitimate since my wife uses that much space to store inventory for her online business.

Maybe your wife needs to stock up on a huge supply of tax forms?

But seriously, Section 179 is your friend, until next year, that is.
We deduct about 15% of our home expenses (interest, property tax, utilities, etc.) as a home office. As far as I know that's completely above-board, as my wife regularly conducts business, including seeing telemedicine patients, from our home.
robphoto
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Re: Less common one-person S-corp deductions

Post by robphoto »

Reminds me of my accountant saying, "Little pigs get fat, big pigs get slaughtered."

Clearly probably allowed: phone, dependent care, home office

Sounds like a stretch: giving gifts to yourselves, renting the house to yourselves for a party, etc.

Not a set of things I'd try to argue for. Do you have an accountant, and does he have an opinion?
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fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

robphoto wrote: Wed Oct 20, 2021 6:05 pm Reminds me of my accountant saying, "Little pigs get fat, big pigs get slaughtered."

Clearly probably allowed: phone, dependent care, home office

Sounds like a stretch: giving gifts to yourselves, renting the house to yourselves for a party, etc.

Not a set of things I'd try to argue for. Do you have an accountant, and does he have an opinion?
Definitely not a bad principle. My principle is a bit different. I don't do anything I'm not comfortable explaining face-to-face to an auditor. I agree that home, dependent care, and home office (we already deduct this) seem fine. Last year I got my wife a Space Pen with her name engraved on it. It was maybe $50. Other businesses regularly give similar tax-free gifts to their employees, and as long as the value (<$100) and frequency (a few times per year max) are low, as required for it to be allowed by IRS published guidance, I don't see why her business should be treated differently. I agree it's closer to the line, but based on what I know now I would feel comfortable defending it. House self-rental is the one I'm least sure about. Also, to be clear, it can't be for entertainment (that's non-deductible for the business), but a shareholder meeting where we discuss benefits and plan the next year should technically qualify. I agree it's a very aggressive play, which is why I'm asking here.

FWIW I argued in a recent thread that another business owner should not pay his kids for modeling photos, and we won't be doing anything like that with our kids. So I'm not the most aggressive out there.

I do have an accountant on a per-hour retainer. He's a bit more conservative than me, which is normal for tax pros; it's not their money and they don't want any liability (legal or reputational) if their clients get audited based on their advice. In the past I've followed his advice on some points, and gone a bit further on others (eg. salary $10k lower than recommended), but I've never done anything wildly aggressive.
Cigarman
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Re: Less common one-person S-corp deductions

Post by Cigarman »

I am a one person S-corp and have never taken a home office deduction even though I work from home. My CPA advised me that the space should be used 100% for work and mine clearly isn’t. My understanding is that home office deductions are a red flag for the IRS.
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8foot7
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Re: Less common one-person S-corp deductions

Post by 8foot7 »

The house rental thing is completely legitimate as long as you document what the rental cost of a ballroom comparable to your home in terms of square footage would be, adding in a food and beverage allowance as well as service charges and taxes. Per my tax attorney, not just CPA. It doesn't really matter how it "sounds" to people, it's section 280A and if you follow the rules, it's a valid deduction.
bradinsky
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Re: Less common one-person S-corp deductions

Post by bradinsky »

I go along with fyre4ce, pigs get fat & hogs get slaughtered. Greedy home deductions throw up a red flag to the IRS. Being audited by them is expensive & it sucks!
ralph124cf
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Re: Less common one-person S-corp deductions

Post by ralph124cf »

My understanding is that a home office deduction for an S-Corp would not be kosher.

Consider you, personally, renting a room or two to your wife's S-Corp. Yes, it is another form to fill out, but it is more of an arms length transaction.
You will also have depreciation to recapture if (when) you sell the house.

Ralph
wineandplaya
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Re: Less common one-person S-corp deductions

Post by wineandplaya »

fyre4ce wrote: Wed Oct 20, 2021 4:35 pm [*]Dependent care assistance. We definitely have childcare expenses well in excess of the $5,000 limit. Is taking advantage of this benefit as simple as writing a check to the employee's personal account from the business account for $5,000, or is there more complexity (eg. needs to be done through a FSA)? If it matters I have a HSA (fully-contributed) and health insurance through my W-2 job.
Are you sure that this is allowed? This is in the text of the Section 129 plan:
(4)Principal shareholders or owners
Not more than 25 percent of the amounts paid or incurred by the employer for dependent care assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.
https://www.law.cornell.edu/uscode/text/26/129

Or did you mean some other way? You can claim the Child and Dependent Care Credit however, but that's a personal deduction, not a business expense.
pizzy
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Re: Less common one-person S-corp deductions

Post by pizzy »

fyre4ce wrote: Wed Oct 20, 2021 6:21 pm
robphoto wrote: Wed Oct 20, 2021 6:05 pm Reminds me of my accountant saying, "Little pigs get fat, big pigs get slaughtered."

Clearly probably allowed: phone, dependent care, home office

Sounds like a stretch: giving gifts to yourselves, renting the house to yourselves for a party, etc.

Not a set of things I'd try to argue for. Do you have an accountant, and does he have an opinion?
Definitely not a bad principle. My principle is a bit different. I don't do anything I'm not comfortable explaining face-to-face to an auditor. I agree that home, dependent care, and home office (we already deduct this) seem fine. Last year I got my wife a Space Pen with her name engraved on it. It was maybe $50. Other businesses regularly give similar tax-free gifts to their employees, and as long as the value (<$100) and frequency (a few times per year max) are low, as required for it to be allowed by IRS published guidance, I don't see why her business should be treated differently. I agree it's closer to the line, but based on what I know now I would feel comfortable defending it. House self-rental is the one I'm least sure about. Also, to be clear, it can't be for entertainment (that's non-deductible for the business), but a shareholder meeting where we discuss benefits and plan the next year should technically qualify. I agree it's a very aggressive play, which is why I'm asking here.

FWIW I argued in a recent thread that another business owner should not pay his kids for modeling photos, and we won't be doing anything like that with our kids. So I'm not the most aggressive out there.

I do have an accountant on a per-hour retainer. He's a bit more conservative than me, which is normal for tax pros; it's not their money and they don't want any liability (legal or reputational) if their clients get audited based on their advice. In the past I've followed his advice on some points, and gone a bit further on others (eg. salary $10k lower than recommended), but I've never done anything wildly aggressive.
What is the additional tax savings total from last years deductions to these proposed deductions?
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pizzy
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Re: Less common one-person S-corp deductions

Post by pizzy »

8foot7 wrote: Wed Oct 20, 2021 6:39 pm The house rental thing is completely legitimate as long as you document what the rental cost of a ballroom comparable to your home in terms of square footage would be, adding in a food and beverage allowance as well as service charges and taxes. Per my tax attorney, not just CPA. It doesn't really matter how it "sounds" to people, it's section 280A and if you follow the rules, it's a valid deduction.
For shits and giggles, run through what a one person company’s shareholders meeting at their own home looks like? Over the course of a weekend. With food and beverage service.

Can the non-employee husband be home? What about the kids and the dog? Can they eat the food?
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bhsince87
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Re: Less common one-person S-corp deductions

Post by bhsince87 »

ralph124cf wrote: Wed Oct 20, 2021 7:47 pm My understanding is that a home office deduction for an S-Corp would not be kosher.

Consider you, personally, renting a room or two to your wife's S-Corp. Yes, it is another form to fill out, but it is more of an arms length transaction.
You will also have depreciation to recapture if (when) you sell the house.

Ralph
We've done the home office deduction for an S-corp for 20+ years and have never had an issue. Maybe we were just lucky (knocking on wood). But it seems totally legit to me, based on my reading of the rules.
Time is what we want most, but what we use worst. William Penn
pizzy
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Re: Less common one-person S-corp deductions

Post by pizzy »

bhsince87 wrote: Wed Oct 20, 2021 10:03 pm
ralph124cf wrote: Wed Oct 20, 2021 7:47 pm My understanding is that a home office deduction for an S-Corp would not be kosher.

Consider you, personally, renting a room or two to your wife's S-Corp. Yes, it is another form to fill out, but it is more of an arms length transaction.
You will also have depreciation to recapture if (when) you sell the house.

Ralph
We've done the home office deduction for an S-corp for 20+ years and have never had an issue. Maybe we were just lucky (knocking on wood). But it seems totally legit to me, based on my reading of the rules.
A Word about S-Corporations
For those of you operating as S-Corporations, standard industry practice is to calculate a fair home office ‘reimbursement’ amount and take a deduction for rent on the S-Corp tax return. The reimbursement is tax-free to you, and the rent is obviously a tax deduction for the S-Corp. However a couple of important notes or requirements:
Make sure the amount of the write-off you claim for ‘rent’ is not inflated and would be similar to the amount taken with the home office worksheet for a sole-proprietorship
It’s also critical you have an “Accountable Plan” set forth in your Annual Minutes for your S-Corp. See my article “Maintaining Your S-Corporation”.
If you are worried about ‘audit risk’, this is a great way to take the deduction in a much less visible manner and further reduce your chances of an IRS taking an interest in your deduction.

https://markjkohler.com/truth-about-the ... deduction/
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
Topic Author
fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

wineandplaya wrote: Wed Oct 20, 2021 8:54 pm
fyre4ce wrote: Wed Oct 20, 2021 4:35 pm [*]Dependent care assistance. We definitely have childcare expenses well in excess of the $5,000 limit. Is taking advantage of this benefit as simple as writing a check to the employee's personal account from the business account for $5,000, or is there more complexity (eg. needs to be done through a FSA)? If it matters I have a HSA (fully-contributed) and health insurance through my W-2 job.
Are you sure that this is allowed? This is in the text of the Section 129 plan:
(4)Principal shareholders or owners
Not more than 25 percent of the amounts paid or incurred by the employer for dependent care assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.
https://www.law.cornell.edu/uscode/text/26/129

Or did you mean some other way? You can claim the Child and Dependent Care Credit however, but that's a personal deduction, not a business expense.
I'm not at all sure this is allowed. When I read through the list of de minimis non-taxable benefits it was in there, and would be worth about $5k x 30% = $1,500, far more than the $3,000 x 20% = $600 dependent care credit we currently get. I did not find any reason why this couldn't apply to an S-corp owner in the IRS Pubs, but you seem to have found such a limitation. This must be why I haven't heard more discussion about this deduction.
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fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

pizzy wrote: Wed Oct 20, 2021 10:09 pm
bhsince87 wrote: Wed Oct 20, 2021 10:03 pm
ralph124cf wrote: Wed Oct 20, 2021 7:47 pm My understanding is that a home office deduction for an S-Corp would not be kosher.

Consider you, personally, renting a room or two to your wife's S-Corp. Yes, it is another form to fill out, but it is more of an arms length transaction.
You will also have depreciation to recapture if (when) you sell the house.

Ralph
We've done the home office deduction for an S-corp for 20+ years and have never had an issue. Maybe we were just lucky (knocking on wood). But it seems totally legit to me, based on my reading of the rules.
A Word about S-Corporations
For those of you operating as S-Corporations, standard industry practice is to calculate a fair home office ‘reimbursement’ amount and take a deduction for rent on the S-Corp tax return. The reimbursement is tax-free to you, and the rent is obviously a tax deduction for the S-Corp. However a couple of important notes or requirements:
Make sure the amount of the write-off you claim for ‘rent’ is not inflated and would be similar to the amount taken with the home office worksheet for a sole-proprietorship
It’s also critical you have an “Accountable Plan” set forth in your Annual Minutes for your S-Corp. See my article “Maintaining Your S-Corporation”.
If you are worried about ‘audit risk’, this is a great way to take the deduction in a much less visible manner and further reduce your chances of an IRS taking an interest in your deduction.

https://markjkohler.com/truth-about-the ... deduction/
When we were renting, the home office deduction was simple. The corporation wrote a check to our personal account for a square footage percent of our rent and utilities, and it didn't appear anywhere on our personal return.

When we bought a house, I had to check with our CPA. My concern was that if the home office (square footage percent of the whole house) is treated as an asset, we would get to / have to (depending on your perspective) depreciate it, and then recapture that deprecation later. It would also require the business to "buy" that portion of the purchase price of the house, a six-figure cost, and also track it as an asset on the balance sheet. He told me that this was not necessary. The business could just reimburse our personal account for the square footage percent of interest, property tax, insurance, utilities, and maintenance, and not bother with depreciation or later recapture thereof. There is a statement in the IRS pub on home offices that says depreciation that wasn't taken doesn't need to be recaptured if the taxpayer has good records, which I hope would apply in our case. Like before, none of this appears on our personal return.
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fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

pizzy wrote: Wed Oct 20, 2021 9:57 pm What is the additional tax savings total from last years deductions to these proposed deductions?
Fully deducting cell phone: maybe $800 in a year with a phone purchase, $200 otherwise
Childcare: $5,000 (although another poster cast serious doubt on whether this is legal for the corporation's owner)
Home gym: currently $0 but maybe $1,500 if we ever buy equipment?
Tickets: $300 max
Gifts: $200 max
Renting the house: $5,000 max

So, perhaps up to $7,500 (excluding childcare), worth $2,250 tax savings assuming a 30% marginal rate.
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8foot7
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Re: Less common one-person S-corp deductions

Post by 8foot7 »

pizzy wrote: Wed Oct 20, 2021 10:00 pm
8foot7 wrote: Wed Oct 20, 2021 6:39 pm The house rental thing is completely legitimate as long as you document what the rental cost of a ballroom comparable to your home in terms of square footage would be, adding in a food and beverage allowance as well as service charges and taxes. Per my tax attorney, not just CPA. It doesn't really matter how it "sounds" to people, it's section 280A and if you follow the rules, it's a valid deduction.
For shits and giggles, run through what a one person company’s shareholders meeting at their own home looks like? Over the course of a weekend. With food and beverage service.

Can the non-employee husband be home? What about the kids and the dog? Can they eat the food?
I'm not sure of your question. I walked through what to do - get quotes from hotels and centers around your area, (I suppose I left out to) take a reasonable average of these (but they won't wildly differ), document that, make a motion and attach it to your corporate minutes of the shareholder meeting to reimburse the homeowner for the cost of having the meeting at the home vs elsewhere.

I don't know of exact answers to your question but hotels and ballrooms have lots of unrelated people milling about in other rooms, and some hotels have resident dogs. I would assume those people eat. I think you're missing the point really, in that even if this seems like a stretch to you, your impression is irrelevant: this is a porky carveout to someone in the tax code but it's open to everyone who fits the criteria, just as some of the weird provisions of the first covid bill just transfer large sums of money to private entities seem off but are entirely legitimate.
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Re: Less common one-person S-corp deductions

Post by pizzy »

8foot7 wrote: Thu Oct 21, 2021 5:44 am
pizzy wrote: Wed Oct 20, 2021 10:00 pm
8foot7 wrote: Wed Oct 20, 2021 6:39 pm The house rental thing is completely legitimate as long as you document what the rental cost of a ballroom comparable to your home in terms of square footage would be, adding in a food and beverage allowance as well as service charges and taxes. Per my tax attorney, not just CPA. It doesn't really matter how it "sounds" to people, it's section 280A and if you follow the rules, it's a valid deduction.
For shits and giggles, run through what a one person company’s shareholders meeting at their own home looks like? Over the course of a weekend. With food and beverage service.

Can the non-employee husband be home? What about the kids and the dog? Can they eat the food?
I'm not sure of your question. I walked through what to do - get quotes from hotels and centers around your area, (I suppose I left out to) take a reasonable average of these (but they won't wildly differ), document that, make a motion and attach it to your corporate minutes of the shareholder meeting to reimburse the homeowner for the cost of having the meeting at the home vs elsewhere.

I don't know of exact answers to your question but hotels and ballrooms have lots of unrelated people milling about in other rooms, and some hotels have resident dogs. I would assume those people eat. I think you're missing the point really, in that even if this seems like a stretch to you, your impression is irrelevant: this is a porky carveout to someone in the tax code but it's open to everyone who fits the criteria, just as some of the weird provisions of the first covid bill just transfer large sums of money to private entities seem off but are entirely legitimate.
Isn’t it only legitimate if you aren’t playing pretend?
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bradinsky
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Re: Less common one-person S-corp deductions

Post by bradinsky »

If the OP’s business was larger & more complex, they could probably get away with a couple of these zany & creative deductions. My bet is no way. As the above poster stated, most of their business & financial plans could probably be done around the kitchen table. Home business deductions are carefully scrutinized. IRS dealings are a pain!
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Re: Less common one-person S-corp deductions

Post by bradinsky »

pizzy wrote: Thu Oct 21, 2021 5:50 am
8foot7 wrote: Thu Oct 21, 2021 5:44 am
pizzy wrote: Wed Oct 20, 2021 10:00 pm
8foot7 wrote: Wed Oct 20, 2021 6:39 pm The house rental thing is completely legitimate as long as you document what the rental cost of a ballroom comparable to your home in terms of square footage would be, adding in a food and beverage allowance as well as service charges and taxes. Per my tax attorney, not just CPA. It doesn't really matter how it "sounds" to people, it's section 280A and if you follow the rules, it's a valid deduction.
For shits and giggles, run through what a one person company’s shareholders meeting at their own home looks like? Over the course of a weekend. With food and beverage service.

Can the non-employee husband be home? What about the kids and the dog? Can they eat the food?
I'm not sure of your question. I walked through what to do - get quotes from hotels and centers around your area, (I suppose I left out to) take a reasonable average of these (but they won't wildly differ), document that, make a motion and attach it to your corporate minutes of the shareholder meeting to reimburse the homeowner for the cost of having the meeting at the home vs elsewhere.

I don't know of exact answers to your question but hotels and ballrooms have lots of unrelated people milling about in other rooms, and some hotels have resident dogs. I would assume those people eat. I think you're missing the point really, in that even if this seems like a stretch to you, your impression is irrelevant: this is a porky carveout to someone in the tax code but it's open to everyone who fits the criteria, just as some of the weird provisions of the first covid bill just transfer large sums of money to private entities seem off but are entirely legitimate.
Isn’t it only legitimate if you aren’t playing pretend?
+1
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8foot7
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Re: Less common one-person S-corp deductions

Post by 8foot7 »

pizzy wrote: Thu Oct 21, 2021 5:50 am
8foot7 wrote: Thu Oct 21, 2021 5:44 am
pizzy wrote: Wed Oct 20, 2021 10:00 pm
8foot7 wrote: Wed Oct 20, 2021 6:39 pm The house rental thing is completely legitimate as long as you document what the rental cost of a ballroom comparable to your home in terms of square footage would be, adding in a food and beverage allowance as well as service charges and taxes. Per my tax attorney, not just CPA. It doesn't really matter how it "sounds" to people, it's section 280A and if you follow the rules, it's a valid deduction.
For shits and giggles, run through what a one person company’s shareholders meeting at their own home looks like? Over the course of a weekend. With food and beverage service.

Can the non-employee husband be home? What about the kids and the dog? Can they eat the food?
I'm not sure of your question. I walked through what to do - get quotes from hotels and centers around your area, (I suppose I left out to) take a reasonable average of these (but they won't wildly differ), document that, make a motion and attach it to your corporate minutes of the shareholder meeting to reimburse the homeowner for the cost of having the meeting at the home vs elsewhere.

I don't know of exact answers to your question but hotels and ballrooms have lots of unrelated people milling about in other rooms, and some hotels have resident dogs. I would assume those people eat. I think you're missing the point really, in that even if this seems like a stretch to you, your impression is irrelevant: this is a porky carveout to someone in the tax code but it's open to everyone who fits the criteria, just as some of the weird provisions of the first covid bill just transfer large sums of money to private entities seem off but are entirely legitimate.
Isn’t it only legitimate if you aren’t playing pretend?
I don't understand your question and am done with this conversation. The good news is no one here has to take my word for it. Here are several references for your perusal. Also contact your CPA.
  • IRC 280A(g), or the “14 Day Rental Rule”, allows business owners to claim a home rental fee as a business expense. After all, if you weren’t renting the space from yourself, you would be renting it from someone else. And as long as the number of days on which you rent out your domicile to your business is less than 15 days, the income your business pays to your personal account is tax-free. https://andersonadvisors.com/section-28 ... explained/
lovejoypeace
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Re: Less common one-person S-corp deductions

Post by lovejoypeace »

[/quote]
  • IRC 280A(g), or the “14 Day Rental Rule”, allows business owners to claim a home rental fee as a business expense. After all, if you weren’t renting the space from yourself, you would be renting it from someone else. And as long as the number of days on which you rent out your domicile to your business is less than 15 days, the income your business pays to your personal account is tax-free. https://andersonadvisors.com/section-28 ... explained/
[/quote]

If you rent your personal residence to your S-Corp the income will be taxable to you. The link says "Issue a 1099 to yourself". The IRS is going to match 1099's to your individual return. If you are the sole owner of the S-Corp, what is the purpose of taking a deduction on the 1120S and then reporting the income on your 1040??

Deductions for business are supposed to be ORDINARY AND NECESSARY. How is a home gym ordinary and necessary unless you are a fitness trainer? How are gifts to your spouse ordinary and necessary? Taking 100% of the cell phone is unreasonable unless you have a completely separate personal cell phone. As a CPA, I say you are reaching.
pizzy
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Re: Less common one-person S-corp deductions

Post by pizzy »

aprilcpa wrote: Thu Oct 21, 2021 8:11 am
  • IRC 280A(g), or the “14 Day Rental Rule”, allows business owners to claim a home rental fee as a business expense. After all, if you weren’t renting the space from yourself, you would be renting it from someone else. And as long as the number of days on which you rent out your domicile to your business is less than 15 days, the income your business pays to your personal account is tax-free. https://andersonadvisors.com/section-28 ... explained/
[/quote]

If you rent your personal residence to your S-Corp the income will be taxable to you. The link says "Issue a 1099 to yourself". The IRS is going to match 1099's to your individual return. If you are the sole owner of the S-Corp, what is the purpose of taking a deduction on the 1120S and then reporting the income on your 1040??

Deductions for business are supposed to be ORDINARY AND NECESSARY. How is a home gym ordinary and necessary unless you are a fitness trainer? How are gifts to your spouse ordinary and necessary? Taking 100% of the cell phone is unreasonable unless you have a completely separate personal cell phone. As a CPA, I say you are reaching.
[/quote]

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Hayden
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Re: Less common one-person S-corp deductions

Post by Hayden »

I don't understand how you can take a home office deduction AND rent your house for a meeting. That sounds like you're renting the same space twice.
bradinsky
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Re: Less common one-person S-corp deductions

Post by bradinsky »

I would guess the OP is fairly young & new to the business world. A good business that is going to grow & prosper in the future can always benefit from some advice/guidance from a CPA. Typically it’s much less expensive to engage them prior to an IRS audit.
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8foot7
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Re: Less common one-person S-corp deductions

Post by 8foot7 »

aprilcpa wrote: Thu Oct 21, 2021 8:11 am
  • IRC 280A(g), or the “14 Day Rental Rule”, allows business owners to claim a home rental fee as a business expense. After all, if you weren’t renting the space from yourself, you would be renting it from someone else. And as long as the number of days on which you rent out your domicile to your business is less than 15 days, the income your business pays to your personal account is tax-free. https://andersonadvisors.com/section-28 ... explained/
[/quote]

If you rent your personal residence to your S-Corp the income will be taxable to you. The link says "Issue a 1099 to yourself". The IRS is going to match 1099's to your individual return. If you are the sole owner of the S-Corp, what is the purpose of taking a deduction on the 1120S and then reporting the income on your 1040??

Deductions for business are supposed to be ORDINARY AND NECESSARY. How is a home gym ordinary and necessary unless you are a fitness trainer? How are gifts to your spouse ordinary and necessary? Taking 100% of the cell phone is unreasonable unless you have a completely separate personal cell phone. As a CPA, I say you are reaching.
[/quote]

I am surprised "as a CPA" that you don't seem to recognize that just because a 1099 is issued doesn't mean money is taxable to the recipient. Also surprised that, "as a CPA," you wouldn't go straight to the source:

https://www.irs.gov/taxtopics/tc415

Minimal Rental Use

There's a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don't report any of the rental income and don't deduct any expenses as rental expenses.


Note I am commenting on the rental, not home gyms or gifts to spouses. I will say your stance on the cellphone is outdated and even incorrect if the phone is in the name of the business and provided to the employee by the employer - personal use is considered de minimis and is non reportable and non taxable.

Y'all seem to want to fight about whether this rental avenue is legitimate or not despite multiple references that it is. Go ahead. I'm really done now. :sharebeer
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fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

aprilcpa wrote: Thu Oct 21, 2021 8:11 am If you rent your personal residence to your S-Corp the income will be taxable to you. The link says "Issue a 1099 to yourself". The IRS is going to match 1099's to your individual return. If you are the sole owner of the S-Corp, what is the purpose of taking a deduction on the 1120S and then reporting the income on your 1040??

Deductions for business are supposed to be ORDINARY AND NECESSARY. How is a home gym ordinary and necessary unless you are a fitness trainer? How are gifts to your spouse ordinary and necessary? Taking 100% of the cell phone is unreasonable unless you have a completely separate personal cell phone. As a CPA, I say you are reaching.
The personal income would be exempt under the short-term rental exclusion. Whether the whole transaction is legal or not is a separate, more complex matter.

The idea with the home gym is that it's a de minimis benefit provided to employees for their health and wellness, and to help retain them. For example, I'm a W-2 employee for a much bigger employer, whose business has nothing to do with fitness, and we have a fitness center available for free use. I'm sure the costs for creating/maintaining the fitness center were/are deductible to them, and are non-taxable to me. So why should this business be different? Businesses have their drawbacks (licenses, separate tax return and paperwork, half of payroll tax, other taxes, etc.) and advantages (higher retirement account limits, much more freedom to deduct than individuals), and given that the IRS specifically mentions this as an allowable de minimis benefit I don't see why that wouldn't apply here. I was/am asking if I'm missing something but I don't see why this wouldn't be allowed.

On the cell phone, my wife is the director of a decent-size emergency room that is open 24/7 and gets calls throughout the day and night. So "working hours" are really always. De minimis rules say that personal use of an employer-provided phone during working hours is a de minimis benefit. Aggressive? Sure. But it seems to meet both the letter and spirit of the law. It would be more of a stretch of it was a 9-5 job, in which case I would only fully deduct a work phone if she had a separate personal phone.
SuzBanyan
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Re: Less common one-person S-corp deductions

Post by SuzBanyan »

Sure, some rentals of the personal residence of the shareholder may be necessary and ordinary business expenses. I think the question is whether a $5000 rental of the residence for a shareholder meeting for an S corporation with 1 shareholder would ever pass that test. I’d be shocked if that was the market rate for a conference facility for 1 (or even 2).
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Re: Less common one-person S-corp deductions

Post by mcraepat9 »

SuzBanyan wrote: Thu Oct 21, 2021 9:00 pm Sure, some rentals of the personal residence of the shareholder may be necessary and ordinary business expenses. I think the question is whether a $5000 rental of the residence for a shareholder meeting for an S corporation with 1 shareholder would ever pass that test. I’d be shocked if that was the market rate for a conference facility for 1 (or even 2).
+1
Need to do a market check for comparable conference room rentals and save the quotes.

If you have employees, it's better to have a staff meeting at your house vs a shareholder meeting.
Amateur investors are not cool-headed logicians.
soxfan10
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Re: Less common one-person S-corp deductions

Post by soxfan10 »

fyre4ce wrote: Thu Oct 21, 2021 11:40 am
aprilcpa wrote: Thu Oct 21, 2021 8:11 am If you rent your personal residence to your S-Corp the income will be taxable to you. The link says "Issue a 1099 to yourself". The IRS is going to match 1099's to your individual return. If you are the sole owner of the S-Corp, what is the purpose of taking a deduction on the 1120S and then reporting the income on your 1040??

Deductions for business are supposed to be ORDINARY AND NECESSARY. How is a home gym ordinary and necessary unless you are a fitness trainer? How are gifts to your spouse ordinary and necessary? Taking 100% of the cell phone is unreasonable unless you have a completely separate personal cell phone. As a CPA, I say you are reaching.
The personal income would be exempt under the short-term rental exclusion. Whether the whole transaction is legal or not is a separate, more complex matter.

The idea with the home gym is that it's a de minimis benefit provided to employees for their health and wellness, and to help retain them. For example, I'm a W-2 employee for a much bigger employer, whose business has nothing to do with fitness, and we have a fitness center available for free use. I'm sure the costs for creating/maintaining the fitness center were/are deductible to them, and are non-taxable to me. So why should this business be different? Businesses have their drawbacks (licenses, separate tax return and paperwork, half of payroll tax, other taxes, etc.) and advantages (higher retirement account limits, much more freedom to deduct than individuals), and given that the IRS specifically mentions this as an allowable de minimis benefit I don't see why that wouldn't apply here. I was/am asking if I'm missing something but I don't see why this wouldn't be allowed.

On the cell phone, my wife is the director of a decent-size emergency room that is open 24/7 and gets calls throughout the day and night. So "working hours" are really always. De minimis rules say that personal use of an employer-provided phone during working hours is a de minimis benefit. Aggressive? Sure. But it seems to meet both the letter and spirit of the law. It would be more of a stretch of it was a 9-5 job, in which case I would only fully deduct a work phone if she had a separate personal phone.
The bigger problem with the home gym... is even if you win the argument that it is an incentive to retain an employee (i.e. your self), then you also have to win that it should be excluded from wages.

Maybe there is an argument for that, but given you (and perhaps your wife/children) are the only people using it (as compared to a large employer gym that is generally accessible on premises), I think you would have a hard time winning both that it should be deductible as an employment incentive and that it was not taxable wages to you.
hachiko
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Re: Less common one-person S-corp deductions

Post by hachiko »

Entertainment - isn't deductible currently so that's an easy no.

Cell phone - it has to be provided by the employer to qualify as a de minimis fringe.

Home gym equipment - I don't know how this could be a de minimis fringe. The purpose of de minimis fringe benefits is essentially because it's too difficult keep track of expenses. It's not difficult to account for a $1,500 piece of gym equipment.

Rental of home for a 1 person board meeting - How is this an ordinary and necessary expense? Someone cited rules under 280A, but in order to ever get to 280A, you first have to get past 162. And the obvious question is why would a single person need to rent out a space in a home for a meeting with themselves, if the corporation already rents out part of that home. It doesn't matter what the rate is. It's simply not ordinary or necessary. The decision in the PLR that someone cited is based on the premise that the expenses qualify under 162. However, even renting out a hotel conference room for a one person meeting from a completely unrelated third party across the street from a company's office wouldn't qualify under 162. So again, 280A is not relevant if we're just talking about taxes, and not the corporation's books.

A $50 space pen bought by the S Corp for the purpose of giving it from the S-Corp to a sole employee-owner's spouse? This is not deductible to the S-Corp and treated as a deemed dividend. This one is easy.

Do you have an accountable plan?
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fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

soxfan10 wrote: Thu Oct 21, 2021 10:23 pm The bigger problem with the home gym... is even if you win the argument that it is an incentive to retain an employee (i.e. your self), then you also have to win that it should be excluded from wages.

Maybe there is an argument for that, but given you (and perhaps your wife/children) are the only people using it (as compared to a large employer gym that is generally accessible on premises), I think you would have a hard time winning both that it should be deductible as an employment incentive and that it was not taxable wages to you.
As far as I know, businesses can buy anything they want to compensate their employees- vacations, golf clubs, Ferraris, etc. - and deduct the cost, as long as it's included in the employee's taxable compensation. This isn't evading taxes, it's just shifting the taxes from the business to the employee (plus the employer pays payroll tax on it). The question is, what benefits can a business provide that are deductible to the business and non-taxable to the employee? Pub 15-B contains a list, which includes athletic facilities:
Athletic Facilities

You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, hasn't attained the age of 25. The exclusion doesn't apply to any athletic facility if access to the facility is made available to the general public through the sale of memberships, the rental of the facility, or a similar arrangement.
It seems if they wanted to put in an exclusion for S-corp owners or similar they could, as they have for other fringe benefits.
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Re: Less common one-person S-corp deductions

Post by Lee_WSP »

fyre4ce wrote: Thu Oct 21, 2021 11:27 pm
soxfan10 wrote: Thu Oct 21, 2021 10:23 pm The bigger problem with the home gym... is even if you win the argument that it is an incentive to retain an employee (i.e. your self), then you also have to win that it should be excluded from wages.

Maybe there is an argument for that, but given you (and perhaps your wife/children) are the only people using it (as compared to a large employer gym that is generally accessible on premises), I think you would have a hard time winning both that it should be deductible as an employment incentive and that it was not taxable wages to you.
As far as I know, businesses can buy anything they want to compensate their employees- vacations, golf clubs, Ferraris, etc. - and deduct the cost, as long as it's included in the employee's taxable compensation. This isn't evading taxes, it's just shifting the taxes from the business to the employee (plus the employer pays payroll tax on it). The question is, what benefits can a business provide that are deductible to the business and non-taxable to the employee? Pub 15-B contains a list, which includes athletic facilities:
Athletic Facilities

You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, hasn't attained the age of 25. The exclusion doesn't apply to any athletic facility if access to the facility is made available to the general public through the sale of memberships, the rental of the facility, or a similar arrangement.
It seems if they wanted to put in an exclusion for S-corp owners or similar they could, as they have for other fringe benefits.
You don’t have “premises.”

It's your audit risk, do what you want.
Last edited by Lee_WSP on Fri Oct 22, 2021 12:16 am, edited 1 time in total.
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fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

hachiko wrote: Thu Oct 21, 2021 11:14 pm Entertainment - isn't deductible currently so that's an easy no.
Ah fair point, maybe not taxable to the employee but non-deductible to the business.
hachiko wrote: Thu Oct 21, 2021 11:14 pm Cell phone - it has to be provided by the employer to qualify as a de minimis fringe.
Agreed, although in the case of a one-person corporation, the employer and the employee are one and the same, no?
hachiko wrote: Thu Oct 21, 2021 11:14 pm Home gym equipment - I don't know how this could be a de minimis fringe. The purpose of de minimis fringe benefits is essentially because it's too difficult keep track of expenses. It's not difficult to account for a $1,500 piece of gym equipment.
That's the idea behind some fringe exclusions, but not all. Dependent care benefits are very easy to account for but are still excluded. See my citation of Pub 15-B above and let me know if that changes your mind.
hachiko wrote: Thu Oct 21, 2021 11:14 pm Rental of home for a 1 person board meeting - How is this an ordinary and necessary expense? Someone cited rules under 280A, but in order to ever get to 280A, you first have to get past 162. And the obvious question is why would a single person need to rent out a space in a home for a meeting with themselves, if the corporation already rents out part of that home. It doesn't matter what the rate is. It's simply not ordinary or necessary. The decision in the PLR that someone cited is based on the premise that the expenses qualify under 162. However, even renting out a hotel conference room for a one person meeting from a completely unrelated third party across the street from a company's office wouldn't qualify under 162. So again, 280A is not relevant if we're just talking about taxes, and not the corporation's books.
Theoretically at least, single-person corporations still require board meetings with written minutes.
hachiko wrote: Thu Oct 21, 2021 11:14 pm A $50 space pen bought by the S Corp for the purpose of giving it from the S-Corp to a sole employee-owner's spouse? This is not deductible to the S-Corp and treated as a deemed dividend. This one is easy.
The pen was bought by the spouse as a gift to the owner-employee, not bought by the business as a gift to the spouse. Too late, this happened last year, but my point is it seems like the business could have bought the pen for the owner-employee as a deductible benefit, and would have been a non-taxable benefit to the owner-employee. Not sure when we'll need another pen though...
hachiko wrote: Thu Oct 21, 2021 11:14 pm Do you have an accountable plan?
Sort-of. I'll tell you what we do, not that this is necessarily the best way. Our family keeps a big multi-tab spreadsheet of all our income and expenses, both business and personal. As many business expenses as possible are paid directly from business accounts. Once per quarter (ideally) or half-year, I scrub through our expenses and identify any business expenses that were purchased from personal accounts (eg. I buy my wife some IT product she needs from Amazon), plus add in the home-office portion of house expenses (eg. interest and property tax), and the business writes each of us a reimbursement check for the exact amount. At the end of the year, all business expenses, whether paid directly, or from personal accounts and later reimbursed, are put in their appropriate place on Form 1120S and the business tax returns are filed. I try to be as accurate as possible, avoiding deducting things like landscaping, and applying reasonable percentages to internet service use, etc. Our accountant thinks this method is good enough. I certainly have detailed records, down to the penny, for every transaction, and I'm confident it would hold up well in an audit. If you disagree please let me know.
Last edited by fyre4ce on Fri Oct 22, 2021 12:08 am, edited 1 time in total.
hachiko
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Re: Less common one-person S-corp deductions

Post by hachiko »

fyre4ce wrote: Thu Oct 21, 2021 11:27 pm
soxfan10 wrote: Thu Oct 21, 2021 10:23 pm The bigger problem with the home gym... is even if you win the argument that it is an incentive to retain an employee (i.e. your self), then you also have to win that it should be excluded from wages.

Maybe there is an argument for that, but given you (and perhaps your wife/children) are the only people using it (as compared to a large employer gym that is generally accessible on premises), I think you would have a hard time winning both that it should be deductible as an employment incentive and that it was not taxable wages to you.
As far as I know, businesses can buy anything they want to compensate their employees- vacations, golf clubs, Ferraris, etc. - and deduct the cost, as long as it's included in the employee's taxable compensation. This isn't evading taxes, it's just shifting the taxes from the business to the employee (plus the employer pays payroll tax on it). The question is, what benefits can a business provide that are deductible to the business and non-taxable to the employee? Pub 15-B contains a list, which includes athletic facilities:
Athletic Facilities

You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, hasn't attained the age of 25. The exclusion doesn't apply to any athletic facility if access to the facility is made available to the general public through the sale of memberships, the rental of the facility, or a similar arrangement.
It seems if they wanted to put in an exclusion for S-corp owners or similar they could, as they have for other fringe benefits.
There already is the limitation in the 274 regs. The IRS publication isn't authority. Even if it was, the failure of the IRS to list out all disqualifying activities doesn't mean there aren't additional disqualifying activities.
Made money. Lost money. Learned to stop counting.
hachiko
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Re: Less common one-person S-corp deductions

Post by hachiko »

fyre4ce wrote: Fri Oct 22, 2021 12:06 am
hachiko wrote: Thu Oct 21, 2021 11:14 pm Entertainment - isn't deductible currently so that's an easy no.
Ah fair point, maybe not taxable to the employee but non-deductible to the business.
hachiko wrote: Thu Oct 21, 2021 11:14 pm Cell phone - it has to be provided by the employer to qualify as a de minimis fringe.
Agreed, although in the case of a one-person corporation, the employer and the employee are one and the same, no?
hachiko wrote: Thu Oct 21, 2021 11:14 pm Home gym equipment - I don't know how this could be a de minimis fringe. The purpose of de minimis fringe benefits is essentially because it's too difficult keep track of expenses. It's not difficult to account for a $1,500 piece of gym equipment.
That's the idea behind some fringe exclusions, but not all. Dependent care benefits are very easy to account for but are still excluded. See my citation of Pub 15-B above and let me know if that changes your mind.
hachiko wrote: Thu Oct 21, 2021 11:14 pm Rental of home for a 1 person board meeting - How is this an ordinary and necessary expense? Someone cited rules under 280A, but in order to ever get to 280A, you first have to get past 162. And the obvious question is why would a single person need to rent out a space in a home for a meeting with themselves, if the corporation already rents out part of that home. It doesn't matter what the rate is. It's simply not ordinary or necessary. The decision in the PLR that someone cited is based on the premise that the expenses qualify under 162. However, even renting out a hotel conference room for a one person meeting from a completely unrelated third party across the street from a company's office wouldn't qualify under 162. So again, 280A is not relevant if we're just talking about taxes, and not the corporation's books.
Theoretically at least, single-person corporations still require board meetings with written minutes.
hachiko wrote: Thu Oct 21, 2021 11:14 pm A $50 space pen bought by the S Corp for the purpose of giving it from the S-Corp to a sole employee-owner's spouse? This is not deductible to the S-Corp and treated as a deemed dividend. This one is easy.
The pen was bought by the spouse as a gift to the owner-employee, not bought by the business as a gift to the spouse. Too late, this happened last year, but my point is it seems like the business could have bought the pen for the owner-employee as a deductible benefit, and would have been a non-taxable benefit to the owner-employee. Not sure when we'll need another pen though...
hachiko wrote: Thu Oct 21, 2021 11:14 pm Do you have an accountable plan?
Sort-of. I'll tell you what we do, not that this is necessarily the best way. Our family keeps a big multi-tab spreadsheet of all our income and expenses, both business and personal. As many business expenses as possible are paid directly from business accounts. Once per quarter (ideally) or half-year, I scrub through our expenses and identify any business expenses that were purchased from personal accounts (eg. I buy my wife some IT product she needs from Amazon), plus add in the home-office portion of house expenses (eg. interest and property tax), and the business writes each of us a reimbursement check for the exact amount. At the end of the year, all business expenses, whether paid directly, or from personal accounts and later reimbursed, are put in their appropriate place on Form 1120S and the business tax returns are filed. I try to be as accurate as possible, avoiding deducting things like landscaping, and applying reasonable percentages to internet service use, etc. Our accountant thinks this method is good enough. I certainly have detailed records, down to the penny, for every transaction, and I'm confident it would hold up well in an audit. If you disagree please let me know.
Cell phone - no, the corporation is another entity, they aren't the same.

Gym - I stated "de minimis fringe" which is what you said you were basing the exclusion on. Of course there are other types of excludible fringes.

Board meeting - why do minutes require the renting of a conference room?

The pen (in the if scenario) - sure, I suppose that would be fine, it would be owned by the corp though if the corp bought it. The corporation can't just buy the pen and give it to the employee with no consequences. That's not a de minimis fringe. You know exactly what you're buying and the intent when you buy it is to give it to an employee. This is not the same as a company buying 500 pens, putting them in the supply room and sometimes employees just taking one home (that's a de minimis fringe). Basically, you can't "plan" de minimis fringes for the purpose of obtaining tax benefits.

You need to setup and adopt an accountable plan that meets IRS requirements to make sure legitimate expenses can be deducted before you worry about playing around with all of these other games.

(Sorry I couldn't quote in line but it's too much of a pain on my phone)
Made money. Lost money. Learned to stop counting.
neverpanic
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Re: Less common one-person S-corp deductions

Post by neverpanic »

fyre4ce wrote: Wed Oct 20, 2021 11:30 pm When we were renting, the home office deduction was simple. The corporation wrote a check to our personal account for a square footage percent of our rent and utilities, and it didn't appear anywhere on our personal return.
As described, how is this self-dealing legal?

If your corporation wrote a check to cover a business expense, then that paid expense was a revenue item for someone else.

You didn't state the amount, but I'm assuming the rent was at least $50/month. That means at least $600/year, so your business would have issued a 1099 to their landlord.

As the landlord receiving those payments, I'm pretty sure you should be reporting that income from the corporation that's paying you rent.

I'm not a tax professional, but I have successfully defended myself against multiple IRS audits. The red flags which triggered the audits in my case were nowhere near as eyebrow-raising as what you're proposing.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
SuzBanyan
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Re: Less common one-person S-corp deductions

Post by SuzBanyan »

hachiko wrote: Fri Oct 22, 2021 12:08 am
fyre4ce wrote: Thu Oct 21, 2021 11:27 pm
soxfan10 wrote: Thu Oct 21, 2021 10:23 pm The bigger problem with the home gym... is even if you win the argument that it is an incentive to retain an employee (i.e. your self), then you also have to win that it should be excluded from wages.

Maybe there is an argument for that, but given you (and perhaps your wife/children) are the only people using it (as compared to a large employer gym that is generally accessible on premises), I think you would have a hard time winning both that it should be deductible as an employment incentive and that it was not taxable wages to you.
As far as I know, businesses can buy anything they want to compensate their employees- vacations, golf clubs, Ferraris, etc. - and deduct the cost, as long as it's included in the employee's taxable compensation. This isn't evading taxes, it's just shifting the taxes from the business to the employee (plus the employer pays payroll tax on it). The question is, what benefits can a business provide that are deductible to the business and non-taxable to the employee? Pub 15-B contains a list, which includes athletic facilities:
Athletic Facilities

You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, hasn't attained the age of 25. The exclusion doesn't apply to any athletic facility if access to the facility is made available to the general public through the sale of memberships, the rental of the facility, or a similar arrangement.
It seems if they wanted to put in an exclusion for S-corp owners or similar they could, as they have for other fringe benefits.
There already is the limitation in the 274 regs. The IRS publication isn't authority. Even if it was, the failure of the IRS to list out all disqualifying activities doesn't mean there aren't additional disqualifying activities.
With regard to the gym, there is a distinction between the use of the gym — non-taxable fringe benefit— and a deduction for the cost of setting up the gym. I believe that the latter is not tax deductible unless the gym is available to non-highly compensated employees, which it appears do not exist. So buy that treadmill, bit don’t deduct the cost. But no need to increase the salary each time the shareholder or family uses it.
hachiko
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Re: Less common one-person S-corp deductions

Post by hachiko »

If that's the case, which I don't completely agree with (though I understand the argument and I agree it certainly has merit), the "on premises" athletic facility required for the fringe benefit to be non-taxable cannot be in the residence which I think Lee-WSP mentioned earlier, so it still wouldn't qualify as an excludible fringe.

Either way though, this distinction seems mostly theoretical with respect to a single owner single employee S Corp. I don't understand why the corp would buy the equipment. Why not just buy the equipment personally?

Also, just to add, a lot of these would implicate sham transaction and economic substance doctrine which is never a position you want to be in as a taxpayer because it's so hard to win these arguments at an administrative level, and so expensive to fight in court.
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hachiko
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Re: Less common one-person S-corp deductions

Post by hachiko »

neverpanic wrote: Fri Oct 22, 2021 12:57 am
fyre4ce wrote: Wed Oct 20, 2021 11:30 pm When we were renting, the home office deduction was simple. The corporation wrote a check to our personal account for a square footage percent of our rent and utilities, and it didn't appear anywhere on our personal return.
As described, how is this self-dealing legal?

If your corporation wrote a check to cover a business expense, then that paid expense was a revenue item for someone else.

You didn't state the amount, but I'm assuming the rent was at least $50/month. That means at least $600/year, so your business would have issued a 1099 to their landlord.

As the landlord receiving those payments, I'm pretty sure you should be reporting that income from the corporation that's paying you rent.

I'm not a tax professional, but I have successfully defended myself against multiple IRS audits. The red flags which triggered the audits in my case were nowhere near as eyebrow-raising as what you're proposing.
If it's setup correctly (which I grant you is certainly not a given) it's a reimbursement of an employee's expenses, and thus not taxable income as a working condition fringe. If you're looking for the corresponding income to the corporation's expenses, it would be to the employee's landlord.

I don't know much about 1099 requirements, but I've never seen expense reimbursements to employees reported on a 1099. Either way, the liability there would be failure to file a 1099. My understanding is that those penalties aren't substantial for missing one 1099.
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neverpanic
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Re: Less common one-person S-corp deductions

Post by neverpanic »

hotscot wrote: Wed Oct 20, 2021 5:43 pm I always leave some items off my deduction, forgetting them, in case I'm ever field audited and then I can point to the additional deductions that I didn't take.
That's not really how it works. The IRS concerns itself with income that wasn't reported and deductions that weren't allowed. If the taxpayer had allowable deductions that were unclaimed, that does not lay to rest the matter of the disallowable deductions that were.

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clevername
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Re: Less common one-person S-corp deductions

Post by clevername »

I’m a CPA and I’ve seen some of my colleagues deduct thousands or tens of thousands of dollars from single owner S Corps for “rent expense” paid to the shareholder for use of their home for fourteen days. Rent income from your primary residence for 14 days isn’t taxable, so this effectively creates a tax deduction by shifting money from one pocket to the other. It is a very clever “loophole” exploiting that 14 day rule, I’ll give it that. Personally I find it way too aggressive for my taste and I wouldn’t do it or encourage it. But it’s technically legit if you do it right, so if you want to roll the dice and be super aggressive then, well, there it is.
hachiko
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Re: Less common one-person S-corp deductions

Post by hachiko »

clevername wrote: Fri Oct 22, 2021 11:51 am I’m a CPA and I’ve seen some of my colleagues deduct thousands or tens of thousands of dollars from single owner S Corps for “rent expense” paid to the shareholder for use of their home for fourteen days. Rent income from your primary residence for 14 days isn’t taxable, so this effectively creates a tax deduction by shifting money from one pocket to the other. It is a very clever “loophole” exploiting that 14 day rule, I’ll give it that. Personally I find it way too aggressive for my taste and I wouldn’t do it or encourage it. But it’s technically legit if you do it right, so if you want to roll the dice and be super aggressive then, well, there it is.
Would you sign a return that reports these deductions for a one person operation (i.e., $1k in rent for a "meeting" with 1 person) without disclosing?
Last edited by hachiko on Fri Oct 22, 2021 12:24 pm, edited 1 time in total.
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hotscot
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Re: Less common one-person S-corp deductions

Post by hotscot »

neverpanic wrote: Fri Oct 22, 2021 11:30 am
hotscot wrote: Wed Oct 20, 2021 5:43 pm I always leave some items off my deduction, forgetting them, in case I'm ever field audited and then I can point to the additional deductions that I didn't take.
That's not really how it works. The IRS concerns itself with income that wasn't reported and deductions that weren't allowed. If the taxpayer had allowable deductions that were unclaimed, that does not lay to rest the matter of the disallowable deductions that were.

Signed,
Audit Survivor
I'm a fellow audit survivor. I've been audited three times in 20 years.
My strategy has helped. Auditors are not always cut from the same cloth.

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fyre4ce
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Re: Less common one-person S-corp deductions

Post by fyre4ce »

neverpanic wrote: Fri Oct 22, 2021 12:57 am
fyre4ce wrote: Wed Oct 20, 2021 11:30 pm When we were renting, the home office deduction was simple. The corporation wrote a check to our personal account for a square footage percent of our rent and utilities, and it didn't appear anywhere on our personal return.
As described, how is this self-dealing legal?

If your corporation wrote a check to cover a business expense, then that paid expense was a revenue item for someone else.

You didn't state the amount, but I'm assuming the rent was at least $50/month. That means at least $600/year, so your business would have issued a 1099 to their landlord.

As the landlord receiving those payments, I'm pretty sure you should be reporting that income from the corporation that's paying you rent.

I'm not a tax professional, but I have successfully defended myself against multiple IRS audits. The red flags which triggered the audits in my case were nowhere near as eyebrow-raising as what you're proposing.
I don’t think this is as legally dubious as you imagine. The IRS allows a deduction for a percentage of one’s home expenses as a home office deduction, under certain conditions. Let’s put those conditions aside and assume we are entitled to a home office deduction. It seems there are three ways to handle the payments (or any other split expenses):
  • The business can write checks for all home expenses (rent or PITI, utilities, maintenance, etc.), and at the end of the year, the personal portions of these can be categorized as distributions rather than deductible business expenses. The main issue is that the business must have enough free cash flow to cover the entire cost. This was possible when we rented, but is definitely not possible now given the size of our mortgage payment.
  • Pay for housing expenses out of personal accounts, and have the business periodically reimburse us for the business percentage. This is what we do now and it’s fairly easy. But the checks from the business have to be non-taxable on our personal return, otherwise we’re not actually getting the deduction, just shifting income from the business to personal returns. This is analogous to getting a mileage reimbursement for a business trip from your employer, and not having it appear on your W-2. Our accountant (CPA), not a fly-by-night operation, recommended this approach. If anyone has any sources, case law, etc to say that this is NOT an acceptable way to divide expenses, please let me know.
  • Pay for all housing expenses with two checks, one from the business account, and one from personal. I’m not sure our lender would be happy about accepting two checks each month from different entities. Even if they were, this seems like a huge pain, because (a) our interest amount is different each month so they split would be different, and (b) this would also apply to each of our utilities, our housekeeper, etc. so we would be writing tons of checks. This seems like a ton of effort to get the exact same result as what we do now, and to my knowledge, not necessary.
My focus for taxes is more on the substance (whether actual deductions meet letter and spirit of IRS regs) than form (whether expenses were paid by business, or paid by personal and later reimbursed). If anyone knows of the IRS disallowing otherwise legitimate business expenses because they were paid from a personal account and later reimbursed, please let me know.
hachiko
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Re: Less common one-person S-corp deductions

Post by hachiko »

fyre4ce wrote: Fri Oct 22, 2021 4:20 pm My focus for taxes is more on the substance (whether actual deductions meet letter and spirit of IRS regs) than form (whether expenses were paid by business, or paid by personal and later reimbursed). If anyone knows of the IRS disallowing otherwise legitimate business expenses because they were paid from a personal account and later reimbursed, please let me know.
Yes, if you don't have an accountable plan, expense reimbursements may be treated as wages. That's why I already said you need to institute and follow and accountable plan... (that said, I do disagree with the person whose post you quoted)

MAYBE if you just screw something up in form, an examiner may be willing to look the other way. Basically, you plead ignorance and ask for leniency. But if they see that you're trying to also take all of these super aggressive positions, they will almost certainly nick you on everything they can.

But, you already have a tax professional, so just consult with them. It seems like you aren't really willing to accept the problems with your strategy, so there's nothing else anyone here can provide.
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soxfan10
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Re: Less common one-person S-corp deductions

Post by soxfan10 »

SuzBanyan wrote: Fri Oct 22, 2021 7:40 am
hachiko wrote: Fri Oct 22, 2021 12:08 am
fyre4ce wrote: Thu Oct 21, 2021 11:27 pm
soxfan10 wrote: Thu Oct 21, 2021 10:23 pm The bigger problem with the home gym... is even if you win the argument that it is an incentive to retain an employee (i.e. your self), then you also have to win that it should be excluded from wages.

Maybe there is an argument for that, but given you (and perhaps your wife/children) are the only people using it (as compared to a large employer gym that is generally accessible on premises), I think you would have a hard time winning both that it should be deductible as an employment incentive and that it was not taxable wages to you.
As far as I know, businesses can buy anything they want to compensate their employees- vacations, golf clubs, Ferraris, etc. - and deduct the cost, as long as it's included in the employee's taxable compensation. This isn't evading taxes, it's just shifting the taxes from the business to the employee (plus the employer pays payroll tax on it). The question is, what benefits can a business provide that are deductible to the business and non-taxable to the employee? Pub 15-B contains a list, which includes athletic facilities:
Athletic Facilities

You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, hasn't attained the age of 25. The exclusion doesn't apply to any athletic facility if access to the facility is made available to the general public through the sale of memberships, the rental of the facility, or a similar arrangement.
It seems if they wanted to put in an exclusion for S-corp owners or similar they could, as they have for other fringe benefits.
There already is the limitation in the 274 regs. The IRS publication isn't authority. Even if it was, the failure of the IRS to list out all disqualifying activities doesn't mean there aren't additional disqualifying activities.
With regard to the gym, there is a distinction between the use of the gym — non-taxable fringe benefit— and a deduction for the cost of setting up the gym. I believe that the latter is not tax deductible unless the gym is available to non-highly compensated employees, which it appears do not exist. So buy that treadmill, bit don’t deduct the cost. But no need to increase the salary each time the shareholder or family uses it.
The bigger problem is that in the context of a single employee S corp - there is no business purpose to the gym other than the owner's personal use. You cant argue that its the same as a gym facitlity that is provided to 50, 100, or choose your number employees. That becomes especially clear if it is in the owner's home. So the payment either needs to be a distribution (i.e., no deductible) or compensation for the services rendered by the owner-employee.

I have generally seen the IRS just say personal expenses of single or two shareholder S corporations are compensation and look for all withholding taxes.

The broader point of the above is if all you are accomplishing is deduction on the S corp return with income inclusion on the personal return, you have done nothing (any are likely worse off due to payroll taxes).
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