After talking to an owner of a car storage facility, he was previously told that the leasing of his space still constitutes as rental and passive activity. He has a manager, so there is no need for him to have a schedule c. But what I would like to do is to be able to use managerial portion of my business for a schedule c thereby allowing home office deductions and Self Employment taxes for only the portion of Managerial Pay, while all the rest of the business(storage) is then put on my schedule e, and not subject to SE taxes.
Thank you for your response. I guess what I am trying to do seems like it is not possible...having a portion of the business on the Schedule E, and the managerial with home deductions on the Schedule C. That is my ultimate goal...but having everything on the Schedule C will force me to pay Self Employment taxes unless I can structure the company in a way to only pay a portion as income and the rest as profits...maybe an llc as an s corp...any thoughts, because, although I may be performing services on the cars, they may not qualify as "significant" and the grain example would not apply.
I understand. Unfortunately, material participation which creates a business activity also creates liability for self-employment taxes. Passive activity avoids self-employment tax, but eliminates the home office deduction, because your rental activity is not a trade or business. I have reviewed about 50 U.S. Tax Court cases. In each and every case, the court ruled against the taxpayer and disallowed the home office deduction, where the taxpayer was not able to satisfy the 750 hour/50% personal services test. Because of this survey, I believe that you will be stopped dead in your tracks attempting to use a home office deduction for the purpose of managing your storage business -- unless you can satisfy the 750 hour/50% personal services real estate professional test.Hope this helps.
Your last response was one that I was first going to try and do by forming an llc and electing by an 8832 to tax it as an S Corp, even as a single member llc, as FL law allows you to do so. The only problem with that is the paperwork headache to accomplish all of what is necessary to keep it intact...but if that is the only way to do it, then I will have to go that route. The other problem with that regard is that you will still not use the home office, or that it will set off flags with the IRS as my business is mainly used as passive income.
In the end, I may just have to forego the Schedule C and 8829 for home deductions and just set it up as a passive entity. I still have a few months before I set this matter up, and will continue to see what other options I may find.
See this link concerning deducting the cost of using your home as part of an S Corporation. Maybe I'm missing something important, however I don't see any benefit to forming an LLC first, and then electing S Corporation tax status. I would just form a corporation and then elect S Corp status. Hope this helps.
I will look at this option, but I mainly stayed away because of the paperwork nightmare. And the reason I was looking at the LLC and taxing it as an S Corp was to truly benefit from the limited liability of having an LLC. I will do some more research on this subject and see whether or not it is truly worth the extra time and energy of putting all the paperwork together and whether I can benefit from all of my deductions as well as have the Limited liability I was looking for. An S Corp takes more time and costs more to set up, but I might have to go back to my original plan if I am unable to make the sole proprietorship or llc work.
I received an answer from a different expert who stated that the tax courts have allowed individuals from rental business' to add the home office deductions as a miscellaneous deductions and attach the 8829 to the Schedule E under "other:line 19". This would allow me to be a sole proprietorship and not have to deal with the hassle of setting up an S Corp. I would not be able to e file, as tax programs would not allow me to add the 8829, which is mainly supposed to be used for a Schedule C, but the fact that tax courts have allowed home office deductions in this manner would be worth it to me to file it manually...
Thanks in Advance.
I reviewed the other contributor's Answer. Ask him to cite the U.S. Tax Court case that he asserts supports his position. I'm always up for learning something new -- but, until I've reviewed the opinion myself, I'm sticking with my Answer, because I haven't been able to find the case (or any case, for that matter) which would support the position that a person who is not a real estate professional can claim a home office deduction for rental real estate activities.
FYI: U.S. Tax Court opinions, while persuasive, are not binding on the IRS, unless a U.S. Federal Court has affirmed the Tax Court opinion, and the IRS has formally "acquiesced" to the court's opinion (except for a U.S. Supreme Court opinion, of course). Hope this helps.
Here is the response received. I will still seek the advice of a tax professional but want to have a good basis of information and direction before I use that route:
"In Curphey v. Commissioner, 73 T.C. 766 (1980), the Tax Court permitted a home office deduction where the taxpayer owned several rental properties and managed them from his home office. The issue in Curphey was whether the taxpayer's rental activities rose to the level of a trade or business. The IRS conceded that the taxpayer was entitled to a home office deduction if the trade or business issue were resolved in the taxpayer's favor.
The Tax Court's opinion did not express its view with respect to the principal place of business question. However, the language added by the Taxpayer Relief Act of 1997 to Code Section 280A(c)(1) would clearly indicate that such a home office would qualify as the principal place of business as long as there were no other fixed location where the administrative or management activities were carried out.
There are two ways to look at the current legal landscape: Since the IRS has won substantially every single home-office-deduction-non-real-estate-professional case brought to the U.S. Tax Court since Curphey, perhaps the IRS doesn't believe it needs any additional ammo to prevail over anyone it deems is not clearly within the scope of the very complicated and highly discretionary rules created by Curphey and Soliman.
Or, maybe the IRS believes Curphey is good law, so it doesn't bother challenging any circumstance where it appears that a taxpayer appears to have managed to "thread the needle."
From where I'm sitting, you are about to engage in a business that's quite different from any of the previous cases. If you want to go with the Curphey decision as giving you license to deduct your home office as the place of business for your vehicle activities, that's your decision. But, the question may arise as to where most of this business is done -- in your office, or in your warehouse. And, the IRS could turn the entire table around on you and try to show that you are engaged in a non-rental-real estate business, and that this is all ordinary income, subject to self-employment tax.
All of this is way to dicey for me. I would just form an S Corp., pay myself a small salary, and then operate the business as a vehicle storage operation, not as rental real estate.
Choice is yours. I've done my best to explain the law. Best wishes.
Thank you for your information...I think an S Corp is the way to go if I want to deduct the home office expenses.
FYI: The comments from the other contributor concerning Curphey appear to be extracted verbatim from this webpage. I don't know anything about the author, other than that the website identifies him as a CPA. Anyway, I did give some additional thought to the formation of an LLC and then electing corporation and then S Corporation tax status -- and I can now identify a good reason for doing so. An S Corporation requires articles of incorporation, board meetings, bylaws and formal resolutions to operate the business. An LLS, and in particular a single-member LLC does not require any formalities -- it doesn't even require an operating agreement, though it's probably a good idea to have one. But, since it's possible to "pierce the corporate veil" by showing that the formalities of corporate existence were not followed, it does seem that beginning with an LLC form may actually provide an additional layer of protection that I hadn't previously considered. However, you still must keep your business and personal assets, liabilities, income and expenses separate, in order to avoid having corporate existence avoided by a court. Anyway, that's it -- good luck with your business.
Thank you so much for your time and expertise. I have done quite a bit of research on this matter and I am glad you concur with my earlier assessment that I should set up an LLC and then electing S-Corp status instead of going the straight S-Corp route if I could not find a way to simplify it by not going the S-Corp route. I am still in the initial stages of trying to set up this venture and want to make sure that I have done everything correctly in the beginning so I dont have any problems in the future...again, thank you for your expert advise.
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