02/06/2024
For those of you who own your own business and have to pay a monthly rental fee, you know that fee is deductible as an “Ordinary and Necessary Business Expense” (§162). So, how do I do I rent my house, boat, car, or ADU and not drive my CPA Cuckoo for Coco Puffs?
It is not quite as simple as cutting yourself a corporate check, deducting the amount at the corporate level, and ignoring the income at a personal level. First, to be ordinary and necessary the meetings need to be for legitimate purposes. Second, even if the meetings have a legitimate purpose, the rental amount must be ordinary. As I tell all my clients about any deductible expense, substantiation only counts if you end up in front of an IRS auditor. Failure to follow the rules can be very nasty and costly. So then, how do you substantiate the deduction? The real answer is that it depends on the IRS Revenue Agent, their experience, and what they had for breakfast.
Substantiation
You need a written plan. Such a plan demonstrates your intent. The plan should be supported by independent [comparables] within a 100-mile radius. A plan should include a professional appraiser to value the rental rate every three years. In an actual Tax Court Case, Judge Vasquez wrote (in part) “In determining whether the payments in issue are deductible under Section 162, the basic question is whether the payments were in fact rent and not something else disguised as rent. *** Only the portion of an expense that is reasonable qualifies for deduction under Section 162(a).” Not only should you have a plan, but you might want to have a professional review the plan, if for no other purpose, to protect other parts of your return from the auditor.
