Business Owners Tax Tips and Strategies Your CPA Isn’t Telling You About (Part 1)

April 24, 2018

Wait, what? My CPA isn’t telling me about all the deductions I could be taking or strategies I could use to reduce my tax bill? Then why am I paying him/her?

Frankly, you’re paying to produce a tax return so that you can file it with Uncle Sam and not get in trouble for not filing. Because, we all know what happens when you don’t file, right Wesley Snipes (I love that case, so funny, I mean really, did he think he was going to win)?

Also, your CPA doesn’t have time to really coach you on your taxes. You show up once a year to get everything done. Maybe you talk to him about closing out your books monthly, quarterly, but you’re certainly not paying him to be creative with your tax situation. That’s where I, and these posts come in. I’m going to teach you how to save taxes (and stick it to Uncle Sam.) Don’t get me wrong, I served in the Army and I worked at the IRS for several years, I agree that everyone should pay their fair share and if you don’t pay I’m certainly not paying your share, but I believe that everyone should have access to decent representation before the IRS and take advantage of every loop hole there is just like those suits in Washington. I want to make those loop holes accessible to every business owner, not just the Fortune 500. Don’t forget to share this post for that reason.

So, let’s get to it.

Tip #1. You can rent your whole house (or part thereof) to your Business for no more than 14 days annually and not have to report the income paid to you by the Business, and the Business gets to take a deduction, reducing its income. Literally, the best of both tax worlds.

Let’s break it down. Your Business rents your house, for fair market value, to throw a party for its customers, potential customers, suppliers, board members and their families, employees, etc. The Business pays you money for renting the house, say $1,000. The Business takes a deduction of $1,000 as a necessary and ordinary business expense, thereby reducing the taxable income that either flows through to you or it pays tax on. Secondly, you do NOT report this income to the IRS and it is not considered income by the IRS. Crazy, I know, this loop hole is large enough to drive an 18-wheeler through.

This all comes from Section §280A, which generally governs the renting of residences. Where the above loophole resides is at the very, very bottom. Don’t believe me, here it is, verbatim:

“(g) Special rule for certain rental use. Notwithstanding any other provision of this section or section 183, 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 §61(which defines income, sort of.)”

I should clarify that you are not allowed to deduct expenses associated with renting the house, like repairs, maintenance, electricity, etc.

So how do we actually use this loophole? I tell my clients to hold monthly meetings in the residence to discuss sales figures, general business, etc. I’d would throw a holiday party and a summer, team building party, just for fun. That gets us to 14 days. I would document this by having perhaps some corporate minutes drafted and signed by the company authorizing the rental and the payment thereof, and authorizing the inherent conflict of interest between the business and one of its owners (if more than one). I would also have a simple rental agreement between the Business and the home’s owner. So, when the IRS comes knocking you’ve got all your ducks in a row and it’s harder to challenge.

There will be a question of fair market value, and you will have to argue with the IRS on this point. The IRS might say the Business paid too much. In either case, you, as an individual still don’t report it as income.

Don’t forget to share this post so everyone can benefit. Remember, if you need help Bay Area Corporate Counsel has your B.A.C.C. Until next time.