Andrew Tucker, JD, CFP, CPA
John K. McGill, JD, MBA, CPA
Section 280A of the tax law covers the tax treatment of income and expenses related to the business use of doctors’ residences and vacation homes. Section 280A(g) provides favorable tax treatment for rentals of fewer than 15 days.
Under the rule, if a dwelling unit is used by a doctor as a residence and is rented for fewer than 15 days during the year, the rental income is tax-free. These rental days do not have to be consecutive. While no related rental expenses (depreciation, utilities, etc.) can be deducted, a doctor can continue to list itemized deductions, such as home mortgage interest, property taxes, and casualty losses related to the residence. Dwelling units include condos, apartments, or mobile travel units.
© Andrii Yalanskyi | Dreamstime.com
The dwelling unit must be considered a personal residence to be deductible. That requires using the unit for personal purposes during the tax year for either more than 14 days or 10% of the days rented out, whichever is greater. For example, if a doctor lives in her main home for 10 months, her mountain cabin for 30 days, and her beach home for the other 30 days, each one would qualify as a residence under the law and could be rented out to receive tax-free income for up to 14 days each year.1
Note, this strategy does not work for Schedule C practices, either a sole proprietor or a single-member LLC. There must be a separate “identity” of the entity. This strategy relies on the concepts of corporate personhood and corporate autonomy from its individual shareholders.
Determining fair market value
The number-one issue with taking this deduction is identifying a reasonable value for the specific use of the home. The easiest way to find a value for the use of the home is to use a vacation or short-term rental website to find homes of a similar size and location and use the cost per square foot to identify a reasonable rental rate. Alternatively, contact a local hotel to determine the daily cost of a boardroom if the meeting was conducted at the facility. Doctors can use these quotes as the documentation needed to defend the amount paid, since self-dealing is the biggest threat toward the legitimacy of the deduction.
Documenting business use
The key to showing appropriate business use is that the doctor’s corporation must use the residence for business meetings, not entertainment. The corporation may use the doctor’s residence for all types of business meetings, including board of director and shareholder meetings, business planning meetings, practice budgeting meetings, practice planning meetings, meetings with practice advisors (CPAs, attorneys, consultants, etc.), retirement plan or investment meetings, staff meetings, and even holiday parties for office staff. Doctors should document the actions taken during these meetings with minutes, which will not only benefit the practice, but also provide support for the business usage.
Reporting the income
Some doctors feel hindered when their CPAs tell them the rental income the corporation pays the doctor must be reported on Form 1099. The law requires that rental amounts paid in excess of $600 to individuals must be reported to the recipient (and IRS) on Form 1099-MISC. However, while the income must be shown, the doctor can avoid taxes by reporting that income on the doctor’s rental income schedule (Schedule E, Form 1040) by (1) reporting the income, (2) zeroing out the rental income amount through “other deductions” in the same column, and (3) footnoting the deduction as “no taxable income due to IRC 280A(g).” This is the same way income should be reported if the home is rented through a vacation rental website.
One parting word of warning: in a world of vacation rental websites, be mindful that 14 days is the limitation of the property, not the corporation. This means if a home is rented using a vacation rental site for 10 days, the corporation may only rent the same property for four days before the tax treatment is different. For this reason and many others, it’s important to discuss this strategy with your CPA before executing it.
1. Topic Number 415 - Renting Residential and Vacation Property. IRS website. https://www.irs.gov/taxtopics/tc415. Updated January 18, 2018.
Andrew Tucker, JD, CFP, CPA, and John K. McGill, JD, MBA, CPA, provide tax and business planning for the dental profession and publish The McGill Advisory newsletter through John K. McGill & Company Inc., a member of the McGill & Hill Group LLC and a one-stop resource for tax and business planning, practice transitions, legal services, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com or call (877) 306-9780.