Business properties for employee use - deductible?

Technical topics regarding tax preparation.
#1
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Hi, I have a business client who has started paying rent from business accounts for an apartment that "is for employee use, at the discretion of the owners".

My initial thought is that it is a personal expense that they are trying to deduct/not ordinary or necessary.

The business is IT related, and has about 10 employees.

The prior CPA allowed it.

Any thoughts?
 

#2
CathysTaxes  
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Is this apartment close to the office for employee use during extra hours? When I worked in IT during installs, we were onsite 24/7 and employees sometimes didn't go home for awhile.
Cathy
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#3
Big E  
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Who is the "tenant" on the apartment lease? The business entity or the owners of the business entity?
Is there any official policy established by the business entity as to the usage of the apartment unit?
How is the insurance policy written - does it include usage of the business's employees necessary for
the employer convenience when circumstances like COVID conditions dictate 24-hour availability?
 

#4
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Housing expenses paid by the employer for the benefit are employees are generally taxable fringe benefits - ie wages to the employee. As wages they would of course be deductible to the business, but included in the employees income.

Housing qualifies as a non-taxable fringe if certain tests are met - namely:
1) Housing on the business premises
2) Lodging offered for the convenience of the employer
3) Housing provided as a condition of employment.

See 1.119-1(b)
https://www.law.cornell.edu/cfr/text/26/1.119-1

Based on your brief post, it doesn't sound like this would qualify as a non-taxable fringe.
 

#5
Big E  
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I thought the question was really if the business entity could legitimately take the deduction for the apartment, not whether or not if it's a taxable fringe benefit to the employee.
 

#6
KoiCPA  
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I would focus on this from two directions:

First, the business purpose and whether it can be excluded from wages of the people who use it. Is it cheap enough to use the de minimis rule? (Probably not). Anyway, this doesn't affect the business's deduction so much as the question of whether it's taxable to the employees or not.

Second, we don't know the entity type or how often the owner(s) use it. If it falls under Sec 280A, that's a whole new set of limitations that might prevent the business from taking a full deduction.
 

#7
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Thanks for the responses.

It is an LLC taxed as a C-Corp.
I will follow up with the client regarding names on the lease etc...

My question was regarding whether the rent expense could be deducted by the business, I didn't consider whether it would be taxable to the employees. I don't think I want to open that can of worms, I would most likely allow the deduction, or tell them it is a personal expense that cannot be deducted.
 

#8
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TaxMonkey wrote:Housing expenses paid by the employer for the benefit are employees are generally taxable fringe benefits - ie wages to the employee. As wages they would of course be deductible to the business, but included in the employees income.

Housing qualifies as a non-taxable fringe if certain tests are met - namely:
1) Housing on the business premises
2) Lodging offered for the convenience of the employer
3) Housing provided as a condition of employment.

See 1.119-1(b)
https://www.law.cornell.edu/cfr/text/26/1.119-1

Based on your brief post, it doesn't sound like this would qualify as a non-taxable fringe.


Thanks for the link taxmonkey. That is interesting the part about it being "for the convenience of the employer". e.g. if the lodging allowed the employee to work long hours on an urgent project - I would consider that for the employer's convenience and non taxable to the employee. But, if it were for the employee to use on a vacation then I would consider that a taxable fringe benefit.

Does that sound correct?
 

#9
Nilodop  
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e.g. if the lodging allowed the employee to work long hours on an urgent project - I would consider that for the employer's convenience and non taxable to the employee. . It has to meet all 3 of the criteria.
 

#10
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Big E wrote:I thought the question was really if the business entity could legitimately take the deduction for the apartment, not whether or not if it's a taxable fringe benefit to the employee.


No, housing is generally considered a personal expense, and the business could not deduct per IRC 262.
 

#11
Nilodop  
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"Generally" being key. It can be deductible as compensation under the appropriate facts.
 

#12
JR1  
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No one wonders what the business purpose is?
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#13
JAD  
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I could see claiming a deduction in a situation such as what Cathy mentioned. Let's say it is near the office and employees use it when they need to sleep a few hours during intense work schedules. That sounds fine.

Let's say it is in Hawaii and employees vacation there. Then of course the value of the benefit is compensation income.

I would obtain a clear understanding of how the property is being used and who is using it. I would make sure that the client knows that he needs to keep very detailed records of use.
 

#14
rkrcpa  
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JR1 wrote:No one wonders what the business purpose is?


Just one of several questions. It's hard to give answers without better information.

I am familiar with a situation where an employer kept an apartment in D.C. for the use of an employee who traveled there frequently. It was easier and cheaper in the long run to have an apartment rather than book a hotel every time travel to D.C. was required.

Bottom line.... maybe yes, maybe no, definitely need more info.
 

#15
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At my old work there were cabins and various other properties that the company would allow employees to use for vacations etc. Sometimes it was used as a reward/perk for doing well.

It would never be included on an employee's W2 as earnings/compensation.

Is that situation allowed under any specific circumstances? or were they cheating the IRS?

Would they be required not to deduct any property expenses (i.e. take it as a non-deductible expense) if they didn't put it on the employee's W2?
 

#16
KoiCPA  
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So many possible answers to the latest question...

If the cabins and other properties were regularly rented out to the public for profit, then allowing an employee to use one when it's vacant might fit the "no additional cost" exception.

If the FMV of the cabins was low enough, it might be excludable as a de minimis benefit.

But if it primarily serves a compensatory purpose and there's not another exception, then the value should be included in wages. Using it as a reward for good performance sounds exactly like taxable compensation to me.

It's possible that they would treat it as nondeductible on the income tax return, but that doesn't necessarily fix the situation. If I fail to report your income correctly, I can't fix it just by increasing my income.
 


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