All income is taxable unless excluded by law.
One of those exclusions is rental income received by you from the rental of your personal residence for 14 days or less.
That means that 14 days of AirBnB rental income is tax-free.
That means that your business can pay you to rent out your home for a company christmas party, company meeting, etc and create a deduction on your business tax return with no corresponding income on your personal tax return. Imagine your business renting out your home for $2,000. You can deduct the $2,000 from your business tax return and still keep the money.
This is a tax freebie. But if you rent your home for 15 days or more, then the entire tax break goes away.
Membership dues (which let you use the golf course) you pay to a county club are never deductible.
…but “golf outings” are deductible if, before you committed to spend money on the golf outing, you:
- expected to generate income or other specific business benefits other than goodwill at some point, and
- you engaged in the discussion, negotiation, business meeting, or other bona fide transaction
- you kept your receipts from the golf expenditures and documented the business purpose within a week (the IRS safe-harbor)
If you purchase a “corporate golf membership that allows you to play once a day with up to three guests of your choosing”, then you have a deductible “season pass”. No food discounts, no social memberships…nothing but golf. That is how you can turn your non-deductible membership into a deductible pre-paid series of outings.
You can exclude up to $250,000 ($500,000 if married) of gain from taxation when you sell your home. Your home, for this exclusion, is the place where you reside for a 2 year period out of the last 5 years.
Problems arise when you move out of your appreciated home and convert it to a rental. If you rent it for more than 3 years after moving out, then you no longer meet the 2-out-of-5 rule and will now need to pay tax on all of the price appreciation that your home has enjoyed since the day you bought it.
How can you preserve this valuable exclusion and convert it to a long-term rental?
Form an S Corporation and sell the home to the S Corporation within 3 years of moving out of the home. The sale triggers the gain to be recognized, and since you would meet the 2-out-of-5 rule, you can exclude the gain. You then have your S Corporation rent the property for whatever duration is necessary.
You can hire your child and compensate them for their labor. If your child is under age 18, and your business is not a C Corp or an S Corp, then the wage payments to the child are not subject to employment taxes. When you pay the child, you will be deducting the payment at your higher tax rate (assuming 33% Federal and 4.3% Indiana) and the child will be taxed on the payment at their lower tax rate (which likely will be 0% for Federal and 4.3% Indiana).
Suppose it is time for the child’s first car which costs $6,000. You employ your child, pay him $6,000, and deduct it. Child then pays close to $0 tax on the $6,000 of wage income and uses the money to buy a car. You have effectively deducted the cost of your child’s car – a personal expense – in your business.
If the child does not need to spend the money, then the money can be put into the child’s ROTH IRA to grow tax free for a very long time. You have essentially created a deductible ROTH IRA contribution. $5,000 put into a ROTH IRA when the child is 18 will be worth $212,000 when the child turns age 65 if growing at 8% per annum.
The US Government allows a taxpayer who is over age 70 1/2 (don’t ask me why it can’t just be age 70) to donate up to $100,000 from his IRA to charity.
Why is this a good thing?
A taxpayer who is over age 70 1/2 is required to take money from his IRA and include it in his taxable income. If that same taxpayer makes a donation to a charity and doesn’t itemize, then he doesn’t get to enjoy a deduction for that donation. Thus, he would have income with no offsetting deduction.
This provision allows that same taxpayer to send the money directly from his IRA to the charity and avoid putting the IRA income on his tax return (because he never touched the money – it went directly from his IRA to the charity) In effect, the amount that goes from his IRA to the charity is deducted from his income, as if he had itemized.
In addition, when the money goes directly from the IRA to the charity, it potentially could allow the taxpayer to pay less tax on their social security earnings, and well as enjoy other positive tax effect.
…something worth considering if you are over age 70 1/2.
Schaaf CPA Group was just named a 2015 Angie’s List Super Service Award recipient! This honor goes to the top 5% of accountants and tax consultants on Angie’s List.