As the calender quickly moves towards the end of the tax year, I’m frequently asked what last second strategies entrepreneurs can use to reduce their taxes. Over the next few weeks, we will discuss some ideas you can implement before year end to reduce your tax liability.
December is a busy month for most entrepreneurs. They are usually scrambling around tying up loose ends before year-end, organizing tax documents and setting up year-end meetings. What most people don’t know is that the last of those, your year-end meetings, could offer you a significant tax deduction.
Renting Your Home to Your Business
For a lot of entrepreneurs, the year-end meetings, whether it is with shareholders, your board of directors or your employees, usually means renting out an expensive conference room and catering expensive food. While these expenses can be written off on your tax return, it is still a significant expense you have to pay.
But what if you could have the tax write-off without losing the money for the expenses? By renting your home to your business, you can do exactly that.
Let’s say that instead of renting a conference room at the Four Seasons, you decide to host the meetings in your own home. You buy the food and have it all made up and serve it yourself. It may seem like a hassle at first, but what if you could have your company pay you for the services? And what if you didn’t have to claim that money as income on your tax return? Seems too good to be true, right? Fortunately, the IRS lets you do exactly that.
So how is it possible to be paid by your company for renting your home and not claim it as income on your taxes? Because of a little known rule that allows you to rent out your personal residence for less than 15 days per year and claim none of the income on your taxes.
But as with any great strategy, there are clear rules that must be followed to take advantage:
1. Your Home has to be Rented for Less Than 15 Days
This one is pretty straight forward. Rent it for one day over 14 and you lose the tax break. But what the 14 days allowed means is that if you have a board meeting every month, you can host all 12 in your home and still get the deduction!
2. You Must Rent Your Home at a Fair Rate
The IRS does not allow you to just make up an arbitrary number to charge your company when renting your home. It must be in line with what you would pay to rent another location.
The best advice here is to call around and get actual quotes for other places and then charge the average of those prices for your home. Keep the quotes they give you as proof.
3. You Must Issue Yourself a 1099 From Your Company
Have your CPA send a 1099 from your company to you with the total rent amount paid. You will then claim the 1099 on your personal taxes, which will then be offset when you list the rental as less than 15 days.
4. Record Minutes
If you are hosting a board meeting, you are used to keeping the minutes. But regardless of the event you are renting your home for, make sure someone is recording everything that is discussed and goes on.
If the IRS questions the validity of the meetings, you want proof of the business that was discussed.
Reap the Benefits
As you get set to hold your year-end meetings, keep this tip in mind. It could save you thousands of dollars on your tax return this year.