If you’re part of a network of smart eCommerce business owners, you’ve probably heard about the possibility of renting your home to your business
Renting your home to your business is the DREAM for many entrepreneurs. Your business benefits from the tax write-off, meaning you benefit financially from something you were doing anyway. Sounds too good to be true.
But it isn’t, with one caveat. You must do it legally. If you’re not, you could run into some serious tax trouble. The IRS even says explicitly that this move sends up a red flag for an audit
Two Ways to Rent Your Home to Your Business
There are two legit opportunities for renting your home to your business.
Rent out your personal residence for up to 14 days per year without declaring the income.
This rule was created for the benefit of those living near places where major events are held, such as the Superbowl or the Masters golf tournament.
With an increase in demand for somewhere to stay, many people who would not normally rent their home, open it up to renters. In turn, they aren’t required to pay taxes on that “side hustle” income. Thanks IRS!
What does this mean for you? Essentially, this rule allows your business to rent your home for 14 days out of the year without triggering taxable rental income.
The key to doing this legally is to prove that the rent charged is reasonable. To do this, you can get rates for meeting space from local hotels and events centers for comparison. Document these and hold on to them as evidence.
Once you have your documentation, hold your meeting or event for up to 14 days annually. It is crucial to document the business activities that took place, maintain a sign-in sheet, and keep copies of your training materials.
Be careful not to include a 15th day, or the full amount of rental income will have to be reported.
Finally, have your corporation issue a 1099 for rents paid to you. You will report the 1099 amount on your personal income taxes on Schedule E, showing a deduction under other expenses for non-taxable income.
If you are incorporated as a C-Corp and can no longer claim a home office deduction, you can rent your office to your business.
In the past, you could take the home office deduction as an unreimbursed business expense on Schedule A. However, with the tax changes brought about in 2018 by the Tax Cuts and Jobs Act (TCJA), these expenses became non-deductible.
The only way to deduct them was to file a Schedule C for your business as a disregarded entity.
However, there is hope for the incorporated individual who does not file a Schedule C.
Enough tax lingo, what does this really mean?
If you’re a corporation and your home office is your regular and exclusive principal place of business for work activities, then your employer can rent the office space from you.
The big key is that the rent amount you’re charging to yourself should be reasonable. If it’s not, the IRS is likely to see the rent payments as non-deductible dividends.
Important to note here, the benefit may be lessened if you have a controlling interest in the business. This creates a “self-rent” situation, in which you cannot reduce other passive losses with the self-rental gain generated.
The Bottom Line
Renting your home to your business isn’t exactly “free money,” but it can be a legitimate strategy to make the most of your tax write-offs. As always, consult with your tax professional about your particular situation when considering these or any other tax planning strategies.