I’ve had a slew of folks argue with me that their business has no office but the one in their home.  If their business is unincorporated (and if your net income is $ 25K or higher- shame on you for being unincorporated) or a disregarded LLC, I agree that they have the ability to claim part of their home’s expenses for business purposes, using Form 8829.  

But, if the operate a C corporation, there is no provision anywhere within the 1040 to accommodate a home office deduction.  And, for  those folks whose business is an LLC and S entities, it is still a good practice to use a Schedule E. Because the IRS Code,  Section 280a, stipulates that employees of S or C corporations are not entitled to take a home office deduction. 

So, by having a written rental agreement, and using Schedule E (which is part of one’s personal tax filing) to complete the documentation for that rental, there is a business relationship- which is really not a home-office deduction.  Now, the business deducts the rental costs for that “home” office, while the shareholder reports the rental income (on schedule E), along with the associated expenses a rental would entail.

The IRS Tax Court seems to be in agreement with my recommendations.   In this new case (Christopher CL Ng MD, Inc, APC versus Commissioner [the original case has disappeared; here’s a link to the information]), the issues included an actual rental agreement. And, the reporting of the income on Schedule E.  Exactly what NG hadn’t done at the start of his travails with the IRS.

Ng, a sole shareholder of the C entity, was really an independent contractor for Good Samaritan Hospital in LA.  He used his home as his business address- in particular, the entire second story of his home.  (It even had a separate entrance, a lavatory, and a converted bedroom-office.)  He performed the normal business functions there- even accessing Good Sam’s medical record systems to effect his required entries and updates.  Oh, and he did all his CPE’s (Continuing Professional Educational) courses in this home-basedtaxco office.  But, no patients ever came to the office- just a paid assistant and his lawyers.

Ng produced his 2012 and 2013 Form 1120’s (the corporate tax returns.)   And, now it gets cute.  He deducted 100% of the mortgage interest as rent on his business return.  (What a jackass!  As was his tax advisor.)

The key factors are that transactions between an employee (or shareholder) and a business must be ordinary and necessary for the business.  A close relationship does not obviate the lease- but it does require documentation and validation.  Ng did neither.  Oh, yeah. He also didn’t list any income on a Schedule E of his personal tax return.

(Are we also betting that Ng initially deducted the mortgage interest on his personal tax return?  That was not discussed in the tax case, since it’s only the business that had this tax problem.  But, I’ll bet dollars to donuts that Ng played just as fast and loose with his personal tax return as he did with the business return.)

We do know he didn’t initially include the rent his company “might have” paid.   Because after the IRS called him on this baloney, Ng filed amended personal tax returns (1040X).  And, on those amended tax returns, he included the rental payments.  But, the IRS felt this response was too little, too late. (Not the least of which is that the amended returns were filed after 15 April 2016, when the 2012 tax year was officially closed.  [The 3 year rule.] )

Oops.   The tax court found that his corporation owed taxes ($ 77360 and $ 71166, respectively) on that non-approved mortgage interest.  Oh, yeah.  The IRS also saddled him with accuracy related penalties (Section 6662(a)) of some $ 29,705.

Looks like I have been providing y’all with the proper advice.  

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