Looking for ways to draw tax-free cash from your business? Rent your home to your corporation. In general, you won't pay any tax on the rental income, and your company will get a business deduction for the rental payments.
If you do business as a corporation, you can get the same double tax break for setting up a home office. A convenient loophole in the tax law gives you a chance to generate enough passive income to offset passive losses.
Instead of going to a hotel for your next conference or shareholder meeting, rent out your home. As long as you rent it for less than 15 days a year, you don't have to pay taxes on rental income. This can work perfectly for people in multi-level marketing who hold a monthly sales meeting in their home. And as long as you follow some basic rules, your company can deduct the rental payments. Just charge a reasonable amount of rent and make sure there's a bona fide business purpose for the use of your home. Find out what a hotel would have charged for sleeping and meeting rooms, then bill that amount to your company. That way, the IRS won't question the deduction, even though the rental isn't an arms length transaction.
Most taxpayers take advantage of the 15-day rule only when they rent out their vacation homes, but the rule applies to your principal residence too. That's not all. Keep in mind that for tax purposes, boats and motor homes are also considered dwelling units as long as they have plumbing, kitchens, sleeping quarters, and living rooms. If you're already taking mortgage interest deductions on your boat as a second residence, you can host a business cruise on your boat and have the IRS pick up the tab.
If you have unused passive losses, you can work an even better deal with your corporation...
Basically, income from tangible property rented to a corporation in which you have an interest is considered passive income. But thanks to a loophole that Congress unwittingly opened in the 1986 tax law, you might have more passive income than you realized to soak up your passive losses.
Here's what happened. The 1986 tax law stopped the practice of deducting passive losses against regular (nonpassive) income. But the IRS still feared that corporation owners who rent property to their companies would take too many deductions up front. So Congress changed the 1986 law. Now it says you can deduct only mortgage interest, property taxes, and casualty losses from the rental income you get from your company. You can no longer deduct other expenses, like maintenance and repairs. But that means you'll have more rental income that isn't reduced by expenses. And the more rental income you have, the more passive losses you can deduct.
Ideally, you can charge your corporation rent for setting up an office in your home. The only restrictions are that you must charge a fair market rental rate and provide a business service to your firm. (For instance, renting out storage space wouldn't qualify.) As a result, your company deducts the rental payments, and you get tax free rental income by deducting your passive losses.
Don't try this with a Subchapter-S corporation, a partnership, or a joint venture. In such cases, the rental payments are considered regular income.
This is just one of the many money angles available if you have your own corporation. If you don't already have a corporation, a highly recommended national incorporation service is: Inc. Plan USA, Attn: Incorporation Information Package, Trolley Square, Suite 26C, Wilmington DE 19806.
Adam Starchild has written over a dozen books and hundreds of magazine articles. The above article is reprinted with permission from his book How to Save on Your Taxes Without Cheating.References to specific firms in this text are editorial recommendations, and are not advertising for the firms mentioned.
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