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You may not realize it, but your real tax benefits from having a home office is not the home related deductions. The true tax benefits are related to the deductible mileage that you will be taking for your business activities. But what about renting an office to my corporation? Prior to the tax reform act of 1986, it was legal, but the IRS plugged the hole in the law.
The Tax Reform Act of 1976, added IRC 280A, which provided that no deduction will be allowed with respect to a dwelling unit, which is used by such taxpayer as a residence, unless specifically excepted. Taxpayers here are defined as individuals, trusts, estates, partnerships and S-Corporations. Here, in the present case, the taxpayer that owns the residence is an employee of the C-Corp and also a shareholder. The Corporation is not deducting or excluding anything under IRC 280A, because it does not own the property.
The individual shareholder is a secondary issue. Prior to TRA 1986, a taxpayer’s use of his or her home could give rise to a deduction for the business portion of expenses, as an employee, if a further requirement that the business use for the residence was for the convenience of the employer (280A(c)(1).
However, the general business use requirement was not required to be met in the case of a rental use of a part of the home to a lodger. This rental exception was applied in Feldeman v Comm, 84 T.C. 1 (1985), where the general requirements for the deduction was held inapplicable, where the employer normally rented a portion of the employees home used by the employee in performing services to the employer. In Feldman, the taxpayer was allowed to deduct expenses, without regard to the “regular” and “exclusive use” tests being satisfied.(Big loss for the Service) and the income received was compensation. In yet another case, Scott v Comm, 84 T.C. 683 (1985), a net loss was allowed to offset other income of the taxpayer (another big loss).
The interpretation of IRC 280A by the Tax Court in Feldman and Scott, caused congress to change the statute to prohibit this treatment under the law, TRA 1986 (IRC 280A(c)(6). The deduction for the employee/employer rental arrangement went away, but the income remained, primarily because of the employee relationship with the employer. However, the expense is still a IRC 162 deduction at the corporate level for the rent paid, and 280A does not apply. The only taxpayer to whom § 280A(c)(6) refers is the employee who is the owner of the residence. Thus, for example, an S corporation's deduction under § 162 for rent is not affected by § 280A(c)(6).(Chief Counsel Advice Memoranda 200121070)