February 28, 2018 9:38 pm

No Corporate Deduction for Home Office Rent

A doctor who incorporated his practice worked as a contractor in a hospital emergency department. He used the second story of his residence to access patient records remotely and to do continuing education training and medical board certification activities; he did not treat any patients there. His C corporation deducted 100% of his mortgage payments, referring to them as “rents.” On his personal return, he claimed an itemized deduction for the mortgage payments.

The Tax Court denied the corporation a rent deduction (Christopher C.L. Ng MD Inc. APC, TC Memo 2018-14). The doctor failed to prove that the arrangement, which he claimed was to provide workspace for the corporation’s sole shareholder, was a valid rental arrangement. The court noted that “[a] close relationship between a lessor and lessee does not mean that a valid lease agreement between them cannot exist,” but there’s going to be close scrutiny. In this case, the doctor did not treat the situation as a rental arrangement: there was no written rental agreement and he didn’t report rental income on his personal return.

Note: Had his practice been conducted in any other entity, such as a sole proprietorship or an S corporation, then a home office deduction under Code Sec. 280A would have come into question. However, this section does not apply to C corporations.

Tax Glossary

Capital asset

Property subject to capital gain or loss treatment. Almost all assets you own are considered capital assets except for certain business assets or works you created.

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