Can you imagine taking money out of one of your pockets, deducting it as a business expense, and then putting it back in your other pocket tax-free? That’s pretty crazy, right? What if it were legal? Actually, this tax strategy is so common that the IRS issued a private letter ruling on the matter. So what is this tax gem I’m talking about? You can rent your home to your business for business meetings! This even goes beyond the standard home office deduction found in IRC 280A tax code. Let me explain how the “14 day rental rule” can work for you.
Please note that the information in this article is not tax advice. I am merely giving you information about tax strategies you might employ. This information does not take the place of advice from your personal tax advisor or planner. If you think the strategy in this article applies to you, contact your financial planner, CPA, or tax advisor.
“Why not rent your home to your business and get BOTH the expense deduction AND the rental income?” – Justin Goodbread, CFP®, CEPA®, CVGA®Click to tweet
Now, whenever you rent the space from a restaurant, hotel, office suite, or event center, not only are you getting a tax deduction, you are generating income to that other business, perhaps in the form of rental income. That only makes sense. Yet, let’s say that instead of renting rooms in an event center, you rent rooms in your home. You see, you have WiFi and audiovisual equipment (computers, laptops, TVs, phones, etc.) in your house. You have drinks, food, tables, and chairs. Essentially, you have all the things an event center would have. So why not rent your home to your business and get BOTH the expense deduction AND the rental income?
However, what does the IRS have to say about renting your home to your business? Well, Section 280A of the Internal Revenue Code allows you to use your home as an office. That’s fairly common knowledge. By having a home office, you receive a tax deduction. However, what I’m talking about goes beyond that standard home office tax deduction. I’m talking about renting your home to your business for meetings, not using your home as your office. Section 280A(g), specifically, expands upon the rules of renting your home to your business. The code says, “If a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then- (1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and (2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.”
Okay, so what does that mean?
Section 280A(g)(1) means that you cannot deduct the expenses from your personal taxes. Yet, your business can deduct the expenses. Even though you can’t claim the expenses on your personal taxes, your business can claim the expenses, and if you own an S Corporation, a Sole Proprietorship, or an LLC taxed as an S Corporation, then your business tax deductions “pass through” to your personal taxes.
Section 280A(g)(2) goes on to specify that the rental income you personally earn is tax-free IF you rent your home to your business for less than 15 days during the taxable year! Therefore, as long as your business rents your dwelling for 14 days or less each year, none of the income you earn for renting your home to your business is taxable. Thus, not only does your business receive tax deductions for ordinary business expenses, you receive tax-free income!
Just how does this work? How do you do this provision properly and legally?
If you’ve never heard of IRC 280A(g) or if you only concentrate on other parts of IRC 280A, you may think this tax planning idea is too ludicrous to be true. But it’s not! Using this tax code as a means of earning tax-free income while deducting business expenses is completely legal and completely legitimate. However, let me address skeptics’ concerns.
Whew! That sounds crazy, doesn’t it? Yet, it’s actually not radical. This is what financial planning is all about. The Internal Revenue Code is written in such a way that it can help you reduce your taxes. All you have to do is read it, but so many CPAs and tax preparers have become nothing more than number crunchers. You walk in, hand them your data, and they input it through their software. If their software doesn’t ask particular questions, you’re missing out on tax planning ideas, and you could be missing out on opportunities the IRS and the IRC have provided you. Don’t miss out, friends. Find a CPA, a tax preparer, or a tax advisor who knows the tax code and utilizes it for your advantage. I personally use a tax advisor for my business and I sit with dozens of different tax advisors per year. I have to tell you, a good tax advisor makes all the difference in your net worth.
If you don’t have a great tax person, reach out. We might be able to suggest one of the forward-thinking teams we or our clients work with.
You see, if you rent your house out for $10,000 a year, and you’re in a 30% tax bracket, you could be saving $3,000 a year in taxes. That’s a weekend getaway or even a nice purse… heck, it’s even 4-wheeler, folks! $3,000. Imagine taking that $3,000 and placing it in your kids’ ROTH IRA because, remember, you hired them after reading through Hiring Your Child in Your Business – More Than Just Tax Advantages. Now, if you couple the kids’ planning and this type of planning together, you could be sheltering large sums of money from unnecessary taxes. What business owner wouldn’t want to do this?