If you own a corporation, you can withdraw cash and gain a tax deduction by renting a portion of your home to the corporation for office space or storage, without incurring payroll tax. To do this, the office or storage space must be physically separate from the home and used exclusively for the corporation, such as a separate room or building. A valid lease must be established between you and the corporation, detailing the legitimate business reason for the rental.
This lease must be approved in the annual minutes of the corporation’s board of directors at the beginning of the year. Additionally, the rental payment must reflect fair market value, determined by the average rent in your zip code or a local property management firm’s analysis.
The rental income must be reported on your personal tax return (IRS Form 1040) with related rental deductions. However, the only allowable rental deductions for a home office space leased to the individual’s employer are those that would be deductible as an itemized deduction without any business use, typically mortgage interest and real estate taxes.
A fully documented valid lease at fair market value for a legitimate business reason, such as providing office space for the corporation at a reasonable cost, can offer a legitimate way to withdraw cash from the corporation as rental income rather than as salary or a distribution.
Photo by Annie Spratt on Unsplash