A tax-saving rent scheme backfires on the three owners of an S corporation.
Each man owned one-third of a firm that operated fitness center franchises. The S corp didn’t have a central office, but instead paid rent to each shareholder for use of their personal residences as executive office space for monthly meetings.
The corporation deducted close to $300,000 in rent expense over multiple years for a total of 21 meetings at the homes (12 in 2016 and 9 in 2017).
The shareholders who received the rent treated the income as nontaxable under the rule that proceeds from a residence rented out 14 days or less in a year are nontaxable. The Tax Court agreed with IRS that only $10,500 of rent is deductible.
This type of criminality, I hope is not common, but expect it is very common. We try to steer clients away from doing business at home if possible. If they do so to use the Safe-Harbor approach.
Sinopoli, TC Memo. 2023-105