Personal Rentals for Business: What’s Considered Taxable Income vs. a Deduction, or Neither?

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The Internal Revenue Code provides guidelines for what activities constitute income or deductions for individual residences.  Below is a high-level overview for consideration.

Residence rentals:  If an individual rents out a dwelling they use as a residence for fewer than 15 days per year, neither income nor deductions relating to rents received for that residence are included in calculating taxable income.

Example: Shareholder A hosts Corporation B’s annual shareholder and quarterly director meetings at her home, a total of 5 meetings per year. A receives a daily rental rate of $500 per day from Corporation B for use of her home. The $2,500 in rental fees is not included in A’s taxable income, because she rents her home for fewer than 15 days per year.

Secondary/vacation home rentals:  The Code does not require that the dwelling be the individual’s primary residence, so vacation homes may be rented in a similar manner, as long as the individual also uses the home as a dwelling during the year.

Potential Opportunities to Consider:

Business meetings at a personal dwelling:  Consider whether an individual hosts business meetings (such as board or shareholder meetings) for their closely-held business at their home or vacation home. If so, is the individual getting paid for it?

Individuals working from home:  If the individual worked from home in 2020 for two weeks or less, consider whether the business should pay a rental fee for the individual’s home office space. If they worked from home in 2020 for more than two weeks, consider whether the home office deduction or a rental agreement with the business is more beneficial.

Documentation needed for deductions:

  • Establish the fair (daily) rental value of the property. Preferably, retain documentation demonstrating the value.
  • Retain documentation (ideally an invoice) demonstrating that the corporation or other business (but not a single-member LLC or Schedule C or F business) used the home, and the rate charged.
  • Document the business reasons why the individual’s home was used to host these meetings, to support the business’s deduction of the rental fee.

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