Many times, when we read about deductions for a home business or a freelancer, we feel like we are reading directions to connect a dishwasher to our washing machine but with three different language translations. When an LLC chooses to file as a C corp or even an S corp, the directions change again. ABS-Carolinas wants to help you bridge the language gap.

Below is just a sampling of what ABS-Carolinas can help you understand. Ready to learn more? Contact Us today!

HOME OFFICE DEDUCTIONS

Can a C corp deduct a home office? Yes, but . . .C corp XYZ Inc’s sole shareholder was a physician who worked in the ER at a local hospital as an IC with a contract. While he performed medical services at the hospital, he used the second story of his residence as a home office. The office, which had a separate entrance, was used exclusively for business: to perform administrative tasks, review patient records remotely on his device, and take continuing education training. He had an assistant who also used the office area.

When XYZ Corp. made the physician’s mortgage payments on the residence and deducted them as office rent on its income tax return, the IRS disallowed the deductions.

Home office deductions under §280A do not apply to C corps—only to individuals using their residences partly for business. For a C corp to take deductions, it must show that the payments for the home office are an ordinary and necessary business expense under §162, Trade or business expenses. By leasing the home office space from an employee or owner, the C corp can deduct the payments. But in this case, the corporation failed to demonstrate that the home office was an ordinary and necessary business expense. For example, it did not show there was a bona fide rental arrangement, there was no written rental agreement or other documentation to indicate the payments were rent and no indication of how the amount of the rent was determined. It simply made the physician’s entire mortgage payment each month.

Further, the physician treated the transactions as a lease. His returns did not include a Sched. E that reported the rent payments and treatment of part of the residence as being rented to the corporation. Thus, while the corporation was paying the shareholder’s mortgage, the shareholder did not include the payments either as salary or rental income, nor did he file information returns reflecting these payments from the corporation.

[Ng MD Inc. APC v. Commissioner, T.C. Memo. 2018-14]