rent paid by employer

[10SorTAX]

My client's employer wants to pay rent to her for the business to operate in two rooms of her home. I thought the rules for taking OIH expenses were different when rent is paid, compared to working at home for the convenience of the employer, but now I cannot find anything on this. Additionally, another tax preparer has suggested treating this as a reimbursable expense, with client/employee tracking OIH expenses like utilities, insurance, depreciation, etc. so that it would be a rent expense to employer but not taxable income to the employee. Any thoughts on this? Would depreciation still have to be recaptured upon sale of the home if it is considered a reimbursable expense? Client wants to avoid OIH on tax return, but is OK with Sch E, and of course, not reporting at all is appealing, to say the least. Thanks!

[TAXBILLY]

Are you saying that the arrangement is not for the convenience of the employer?

The rules for OIH are the same whether there is rent or home ownership. Lots of people do not own a home.

taxbilly

[jainen]

>>Client wants to avoid OIH on tax return<<

That won't be a problem. She can't deduct expenses when she rents to her employer anyway (at least, if she works in those rooms at all). The idea of using an accountable plan is popular among tax advisors, but nobody seems to ever cite any rulings to support it. Just tell the employer to pony up a few more bucks to cover the extra tax she'll have to pay.

[OldJack]

>>another tax preparer has suggested treating this as a reimbursable expense<<

I don't think there is any way this employee can avoid this income as rent income on 1040 Sch-E. And, like Jainen said rent income from an employer would disqualify her from claiming reimbursement, any home expenses, or OIH deduction. The employer is risking that on audit he could be subject to payroll taxes and penalties if the IRS reclassifies the payments as taxable employee benefits.

>>Code 280A( c)(6): Treatment of rental to employer

Paragraphs (1) and (3) shall not apply to any item which is

attributable to the rental of the dwelling unit (or any portion

thereof) by the taxpayer to his employer during any period in

which the taxpayer uses the dwelling unit (or portion) in

performing services as an employee of the employer.

<<

[joelgilb]

Are you saying that the arrangement is not for the convenience of the employer?

The rules for OIH are the same whether there is rent or home ownership. Lots of people do not own a home.

taxbilly

Agreed. Congress fixed this hole a number of years ago.

[10SorTAX]

Thank you for your replies. I thought the rent income should go on a Sch E, but the other tax advisor made me second guess myself. Thanks for the confirmation.

For clarification, my client does own the home and the office is definitely for the benefit of the employer. The employer (Board of Directors) offered to pay her for the space since the business operates exclusively out of her home. She and other employees work out of this office in her home. She is an employee but not an officer of the corporation. The BOD is suggesting $700/month for the two rooms (the going rate in the area) and taxpayer's family is in the 25% tax bracket, and is aware what the tax hit will be for $8400 of income. Neither the employer, my client nor I want any question of impropriety, or reclassification to payroll, but I also don't want her to pay more tax than is required.

So, she is not allowed to take any expenses on the Sch E? I thought she could take the sq ft % of utilities, just no depreciation. Not so? (I know, I can hear you..."What part of no expenses do you not understand?" I just have to hear, or see, it again.)

[jainen]

>>I just have to hear, or see, it again<<

Scroll back up a couple of messages--OldJack posted the actual tax code. Expenses = zip.

How did the board figure $700 was the "going rate"? Even if those rooms are small, say 10x10, that's only $3.50 per square foot. Call your nearest real estate office and ask what it costs to lease 200 s.f. of commercial space. Including utilities, janitorial, and everything. Tell your client to demand an extra $200 per month gross up to cover taxes. Then she won't need deductions on Schedule E.

[10SorTAX]

Thank you so much!