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.

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Tax Glossary

Deductions

Items directly reducing income. Personal deductions such as for mortgage interest, state and local taxes, and charitable contributions are allowed only if deductions are itemized on Schedule A, but deductions such as for alimony, capital losses, moving expenses to a new job location, business losses, student loan interest, and IRA and Keogh deductions are deducted from gross income even if itemized deductions are not claimed.

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