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azw
Frequent Contributor *

Does a sole proprietor need to charge rent for office the owner and wife own?

First the background:

My business is a sole proprietorship (just me), and it's not an LLC.

My business grosses about $60,000 annually and nets around $35,000

My wife and I own the office space (which is not in the home) jointly and we paid cash for it, so there's no debt..

The business is paying for all expenses related to the office besides rent. (That includes furniture, insurance, utilities, minor maintenance, upgrade of the lighting, cleaning supplies, etc.)

Reasonable rent in this office condo would be about $800/month or $9600/year.

 

I understand that self-rental is often denied by the IRS when it is used to avoid self-employment taxes. I see advice in how to do self-rental legally, but am not sure it's worth the hassle.

 

1. Is it worth going through that hassle?

2. Do I have to charge the business rent? Wouldn’t it be simpler to not pay rent, given that the same income would still be taxed as a result of it being on Form C? Thank you in advance for your thoughts and advice!

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Best answer 07-24-2019

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Established Community Backer *

Re: Does a sole proprietor need to charge rent for office the owner and wife own?

You should consult your tax accountant on this.  If the business pays rent it would reduce the business income, however you would have to pick up the same amount as rental income on your tax return.  Rental income is passive income and can only be offset by passive losses.

 

Your tax accountant is the best person to seek advice since he/she is privy to your entire tax situation.

1 Comment
Established Community Backer *

Re: Does a sole proprietor need to charge rent for office the owner and wife own?

You should consult your tax accountant on this.  If the business pays rent it would reduce the business income, however you would have to pick up the same amount as rental income on your tax return.  Rental income is passive income and can only be offset by passive losses.

 

Your tax accountant is the best person to seek advice since he/she is privy to your entire tax situation.