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The corporation can pay you for the "out-of-pocket" costs of

a home office under an...
The corporation can pay you for the "out-of-pocket" costs of a home office under an "accountable" plan for employee business expense reimbursement.

I am a C-CORP. I currently reimburse my husband for rent. I have been paying my husband for years rent reimbursement. He does not claim the income. The rent charged has been calculated based on rent in our area. How am I suppose to be figuring the proper rent rate?
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Answered in 2 minutes by:
8/2/2012
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
Verified

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Stephen E. Grizey :

Your problem isn't how you figure the rent, it is the fact that your husband doesn't report the income.

Stephen E. Grizey :

Do you file a joint return with your husband?

Customer:

My accountant said he did not have to report the income due to it being a reimbursement of rent. However....I just always based rent on current rental rates. I never really looked into it.

Customer:

Yes...it is a joint return

Stephen E. Grizey :

What do you mean a "reimbursement"?

Customer:

Problem is a little of both. I always worried about not reporting the income but my accountant said he did not have to.

Customer:

I am reimbursing my husband for out of pocket expenses to rent the room in our home.

Stephen E. Grizey :

Who owns the home?

Customer:

Both of us

Customer:

My husband pays the mortgage out of his checking

Stephen E. Grizey :

who owns the C-Corp?

Customer:

I am the president and I run the business. I have him as an officer just in case something happens to me.

Stephen E. Grizey :

Who owns the corp?

Customer:

It is under my name......I am not sure how to verify this.

Customer:

Well....it is really under my business name.

Stephen E. Grizey :

Your husband & you have rental income and the expenses allocatable to the portion of the home that the C-Corp rents would be deductions against that income. Your accountant probably feels that those expenses would at least offset the rental income, so that's why he's saying it doesn't have to be reported.

Customer:

I read that "being reimbursed under an accountable plan, provides the greatest tax savings. It is an excellent way to get money out of your closely-held corporation tax-free. The corporation can deduct the amount of the reimbursement and you do not have to report the payment as income."

Stephen E. Grizey :

Anyway, if you were attempting to reimburse your home expenses, the expenses would be allocated to your "office" based upon square footage & then you would reimburse that amount & that portion of the expense that was reimbursed would not be deductible on your personal return; ie. the mortgage interest & real estate tax expense would be reduced by a portion of the reimbursement.

Stephen E. Grizey :

I don't know where you are getting that quotation, but it wouldn't pertain to mortgage interest & real estate tax reimbursement. Where's the "accountable plan" in your case? Is your husband an employee of the C-Corp?

Stephen E. Grizey :

How much are you reimbursing your husband for the expenses of the office?

Customer:

About $550 a month

Customer:

My husband does not get paid by the C-Corp. He is just an officer in case something happens to me.

Stephen E. Grizey :

If you are reimbursing otherwise deductible expenses, obviously you can't deduct the expenses that you are reimbursed. If you were actually reimbursing expenses, the amount wouldn't be the same every month.

Stephen E. Grizey :

Apparently you have an accountant who is going along with this arrangement. If you were to be audited, I think the IRS would tax a different view of the arrangement.

Customer:

I am not interested in deducting mortgage interest or real estate tax. I would use this deduction for person taxes. What else could I consider a reimbursement.

Stephen E. Grizey :

correction : IRS would have (not tax)

Stephen E. Grizey :

For 550. a month?

Stephen E. Grizey :

Your deduction is "rent". Your personal deductions on Schedule A would have to be reduced by the mortgage interest & real estate taxes allocated to your office.

Customer:

I do not understand

Stephen E. Grizey :

Nothing else would come close to to that much a month.

Customer:

So...am I doing this wrong?

Stephen E. Grizey :

I think so, but evidently your accountant doesn't. I'm confused as to what prompted your original question?

Customer:

I was never told how to figure out the reimbursement to my husband from my corporation.

Customer:

I would like to start reimbursing this way so my husband does not have to claim the income. What do you suggest so I can get on the right path?

Stephen E. Grizey :

If your husband isn't reporting the income now, what's the problem?

Customer:

If he gets audited for not reporting the income

Customer:

Thats a problem. I want to do it legal.

Stephen E. Grizey :

There's no 1/2 way position. Either you are reimbursing expenses properly allocated to your office in which case he can't deduct the reimbursed expenses, or you are paying him rent which he reports as income and deducts his allocated expenses against the rent.

Customer:

Ok.....I will get this information to my accountant to see what we need to do.

Stephen E. Grizey :

Personally, I wouldn't do it at all. Why are you worried about him getting audited for not reporting the income? It is your return too; if he is responsible for reporting the income, so are you.

Customer:

Which one would you not do.

Stephen E. Grizey :

I guess I don't understand why you are concerned all of a sudden if you think you have some type of accountable plan. Why is it a problem all of a sudden?

Stephen E. Grizey :

I wouldn't do either one, but if you are going to do it, then either one of those two methods would be acceptable & proper.

Customer:

Because as I get further in years in my business....I get a little wiser. When I started doing this....I did not know much. But now I am just wondering if what I was doing is correct.

Stephen E. Grizey :

What you were doing is not correct. You would need to switch to either of the two methods that I describe.

Stephen E. Grizey :

Both of those methods involve either reporting the payment as rental income, or reducing the expenses by the amounts that are reimbursed.

Stephen E. Grizey :

Questions?

Customer:

Yes

Customer:

I would like to know why you would not do either one?

Stephen E. Grizey :

Because in my experience over the years, when you have these kinds of transactions between yourself & your company, they usually cause more problems than the "benefits" that they purport to have; Essentially if you do it correctly, there is no benefit as all you are doing in your case is reducing the deductions on your personal return & increasing the deductions on your corporate return. That is the opposite of what you are trying to do as your personal income tax rate would generally be higher than your corporate tax rate. That's why I wouldn't do either.

Stephen E. Grizey :

Taking $6,600. out of your corporation & not reporting it on your personal returns, will add up fast if you were ever audited; you'd be dealing with the tax on 19,800. of income (minimum of 3 years) plus penalties & interest; that could easily cost you $8,000.+ in tax, penalties & interest.

Customer:

Ok....I will address with this my accountant. Thank you.

Stephen E. Grizey :

Please remember to rate my answers in order that I can get credit for my work.

Stephen E. Grizey :

Thanks for using justAnswer.com

Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
Verified
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