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MyVirtualCPA
MyVirtualCPA, Master's Degree
Category: Essays
Satisfied Customers: 14084
Experience:  I have a Master's Degree in accounting, and always enjoyed writing articles and papers.
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For Megan C. Following is a situation where I have to write

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For Megan C.

Following is a situation where I have to write a client file memo. I am not asking you to write the memo. However, I am the worst researcher and I need help with the facts and the main issues. Some direction would also be appreciated as to the actual tax law(s) that are being compromised. I think the main issue is that the income the Grumpys receive from their C corporations is not considered passive income and therefore they cannot offset their rental losses against the income. However, I could be mistaken.

• Gary and Greta Grumpy are a married couple who reside in Hinderland, USA. Both of them own a separate C Corporations. The corporations operate out of the Grumpy’s home and pay rent for office space in the home. In addition to their C corporations, the Grumpys own five rental properties, which have operated at a loss for the previous five years. Gary and Greta have been using the losses from these rental properties to offset the rental income they have been charging their corporations for operating in their home. On their last three individual tax returns, the Grumpys have shown income from the leasing office space to their C Corporations of $40,000, $24,000 and $22,000. The losses from the rental properties have been in excess of the income from the leased office, thus the couple has a passive loss carryforward of some amount; however, they did offset the lease income with the losses from the rental properties. Please give the tax issues and your advise in a tax memo format for the file.
Submitted: 10 months ago.
Category: Essays
Expert:  MyVirtualCPA replied 10 months ago.
Hey Diana,

Great to hear from you. I will take a look at this, but it will be at earliest tomorrow late night before I'm able to do this. I teach several courses and grading weeks just closed so I'm a little backed up and on tight deadlines. Add to that it's close for many of my clients and it's just crazy busy. Hope you understand :-)

Thanks

Megan
Customer: replied 10 months ago.
ok
Expert:  MyVirtualCPA replied 10 months ago.
Thanks!
Customer: replied 10 months ago.

You are welcome.

Expert:  MyVirtualCPA replied 10 months ago.
I'm working on it. It will prob be tomorrow before I get anything. Thanks.
Customer: replied 10 months ago.
Thanks.
Expert:  MyVirtualCPA replied 10 months ago.
You're welcome.
Customer: replied 10 months ago.

Hi,

 

What is the status?

Expert:  MyVirtualCPA replied 10 months ago.
Hello,

The issue here is whether or not the Grumpys can use their passive rental losses to offset the income that they get from renting out their home to their business. I do not think that they can apply the passive losses against that income. I don't have a code or section or case to cite for this, but this is the issue that you would need to write your memo about.

I hope this helps. Please let me know if you need anything additional.
Customer: replied 10 months ago.

Herein lies the problem. I found a section of the law that says it is okay, however, a tax attorney acquaintance of mine claims the law does not apply to this situation. That is why I needed help.

Expert:  MyVirtualCPA replied 10 months ago.
Diana,

I am not sure on this one. I would think that it would be okay, because it's a rental. But, it could be that there's a situation when you rent to yourself that it's not passive. Had they rented the space out to anyone else there would be no question. I would ask the tax attorney why he says that the law doesn't apply in this scenario. I've never had a similar situation.

Thanks

Megan
Expert:  MyVirtualCPA replied 10 months ago.

.

Expert:  MyVirtualCPA replied 10 months ago.
Diana,

The income from the rental of the home is not passive, because it fails to meet the material participation test. Since the owners are 100% owners it doesn't qualify as passive income. Therefore they could not net against their other passive income.

Also, the rents seem high for a home office. This could be a way for them to save on payroll taxes, to take this instead of taking a distribution from the company. This could create a dividend in some situations, if the IRS does not think that the rent is appropriate.

These are the main issues that I see. The PAL rules do not apply to the rental, as such they cannot deduct their passive losses from that.

Thanks

Megan
MyVirtualCPA, Master's Degree
Category: Essays
Satisfied Customers: 14084
Experience: I have a Master's Degree in accounting, and always enjoyed writing articles and papers.
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