This is the first post of our series on Business Planning Strategies for corporations.
Internal Revenue Code Section 280A(g) provides an opportunity to reduce business income and also reduce individual income and payroll taxes. Under this provision of the Code, individual homeowners may rent out their personal residence for up to 14 days annually and pay no taxes on the rental income. And when the home is rented out for business, the strategy becomes even more effective. For example, hypothetical Company X will receive a deduction for the rental payments paid to its employee/owner, even while the rental payments are non-taxable to that employee.
The Seattle residence can be rented to the business as long as the residence is used for a business purpose. A clear example would be to conduct a shareholder meeting at the owner’s residence. All corporations are required by state law to hold at least one shareholder’s meeting annually, at a minimum. Indeed, most businesses need to hold so-called “special meetings” of the board of directors (or shareholders) on a frequent and periodic basis. Thus, Company X can conduct monthly meetings to discuss ongoing operations of the Company.
In most circumstances, corporations rent space at a local hotel or conference center for a meeting of board memebrs or shareholders. They pay the hotel a reasonable amount of rent – a figure typically determined by local market conditions. The payment is deductible by the company as an ordinary and necessary business expense under section 162. However, instead of renting the meeting space at a local hotel or other facility, Seattle Business X could rent owner’s home for the meeting. Provided all the conditions of the Code are met, Section 280A(g) provides that the rent received by owner is not taxable.
Please note that a shareholder meeting is only a single example of a valid business purpose. Depending on the circumstances, other valid business purposes may include meetings with CPAs, attorneys, insurance agents, company picnics, holiday parties, or short-term storage of company equipment.
So for your next shareholders meeting, consider renting an employee’s home (preferably one with a nice view) and enjoy the tax deductions.
For more information about Small Business Law in Seattle, consider contacting a Seattle Business Attorney.