Discussion:Single member llc paying rent to member

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Discussion Forum Index --> Tax Questions --> Single member llc paying rent to member


Rhondak (talk|edits) said:

6 December 2006
I have a single member llc. Member operates business from home. He has a separate building on homestead that is used 100% for business. We want to pay a reasonable amount of rent from the LLC to reduce SE tax.

I understand that if a sole proprietor pays rent in this situation that only 50% of the rent is deductible on Sched C and then 50% of the direct expenses, such as r.e. tax, depr, maint, etc. would also be deductible on the Sched C.

Would this same rule apply for my client since the single member llc is a disregarded entity in the eyes of the IRS?

Taxref (talk|edits) said:

6 December 2006
Sole proprietors, including LLCs taxed as such, cannot deduct rent they pay to themselves. Any deduction for business use of the home follows the same rules as for any Schedule C.

Rhondak (talk|edits) said:

6 December 2006
The rent to be paid is not for business use of the home. It is for a separate structure on the homestead.

Dennis (talk|edits) said:

7 December 2006
A separate structure is not subject to the home office rules, but you still can't pay yourself rent. The deduction is actual expense.

There is no 50% rule.

Taxref (talk|edits) said:

7 December 2006
Unless I am missing something in Publication 587 (always a possibility)I would have to disagree with the part of Dennis' answer regarding no home office rules for separate structures. While it may be possible to identify more direct costs for a separate structure, Form 8829 would still be needed. On a side issue, using a separate structure for a home office can cause problems at sale time. If a home office is in a separate structure, the portion of the sale allocated to the home office is ineligble for the 121 exclusion.

Dennis (talk|edits) said:

7 December 2006
Yeah. I could have phrased that better. No principal place of business reuirement but loss limitations apply.

Rgtaxservice (talk|edits) said:

7 December 2006
What would preclude the taxpayer from filing a 8829 and deducting the appropriate percentage of indirect expenses (taxes, mortgage, etc..) and 100% of direct expenses (repair, utilities - if separate, etc...)?

Although the business structure would be ineligble for the 121 exclusion, any deductions gained over the years may offset the gain.

Lhhesscpa (talk|edits) said:

7 December 2006
I agree the advice given & approach described by Taxref & Rgtaxservice is correct. For tax purposes, there is no difference between a sole proprietor & owner of a single member LLC. An individual renting to themselves has no substance. They are only taking money out of one pocket & putting it in another pocket in the same garment.

-- Larry Hess, CPA - Albuquerque, NM

Dennis (talk|edits) said:

7 December 2006
The problem with the Form is that while useful for loss calculation and carryforward the mechanics don't work well for a separate structure because the area used percentage is irrelevant to indirect expense. Assume, for example that you have a 1500 sq. ft. house and a 200 sq. ft. converted garage. Would your basis for depreciation be 12% of the $300,000 you paid for the house or the $2000 the garage was worth before you fixed it up?

Taxref (talk|edits) said:

7 December 2006
I think Dennis and I both agree on that; the initial confusion was just the result of terminology issues. I only brought up the 121 issue because that's something you don't want the client to be surprised by in the year of the sale. I haven't had a client with a separate structure home office in about 15 years; back then converting the structure back to personal use in the year before the sale year would avoid the business-portion being taxed (assuming replaced by a more expensive home). Obviously that was before 121, but without looking it up I don't know if such pre-planning is available today.

-- Larry Hess, CPA - Albuquerque, NM

Death&Taxes (talk|edits) said:

7 December 2006
Those were the days; the 'miraculous conversion!' Why shouldn't 2 of 5 years work for separate structure? I have a residence which holds my office; in back is a separate shed on a slab which now holds mower, blower etc. If I move these out and put my file cabinets and old record storage boxes in there, as long as I can show 2 of last five years use of this structure as part of residence, am I not safe? How to prove two of five is another matter, but that problem was always inherent in the old days. It was worth a chuckle to think of Revenue Agents back then insisting the taxpayer had a home office, when every other time they were trying to throw it out.

Taxref (talk|edits) said:

7 December 2006
From Death & Taxes above: "...as long as I can show 2 of last five years use of this structure as part of residence, am I not safe?" Finally looking it up, I find that D&T is correct. The 121 problem would only come up once you have used the separate structure for business for more than 3 out of 5 years. The sale allocation can be avoided by making sure you know when to switch the structure back to personal and for how long.

Lhhesscpa (talk|edits) said:

7 December 2006
Taxref: Are you referring to Regs. Sec. 1.121-1(e)?

-- Larry Hess, CPA - Albuquerque, NM

Taxref (talk|edits) said:

7 December 2006
Although I made mention of looking it up I wasn't that thorough. I used my Quickfinder.

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