Schedule E Rental Vs. Accountable Plan Reimbursement

Technical topics regarding tax preparation.
#1
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North Shore, Oahu
New client is a solo practitioner with an s corp.

For years, he has owned his own office in a separate SMLLC.

He rents 100% of this space to his s corporation and reports the rental the activity on his personal tax return as a rental property on Schedule E (page 1).

In Hawaii there is a renters tax (an excise tax) on all gross rents.

I do not plan to change the way he does it. He's an older guy and I don't want to stress him out or recreate the wheel on him.

But for most of my clients, I simply help to set up an accountable plan reimbursement in situations like this. This provides the same net deduction, but it does not invoke renter's excise tax and the bookkeeping is easier.

Is there anything wrong or superior when comparing these methods in these situations?
 

#2
JAD  
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I think the Sch E reporting is cleaner. I've seen many discussions on whether an accountable plan can reimburse depreciation - and have looked for guidance myself - and have never found anything definitive. That isn't an issue with Sch E reporting.

With a reimbursement through an accountable plan, you are only reimbursing costs. With a rental arrangement, the S corporation pays FMV rent. There could be some play here with reducing the income allocated on the K-1 and therefore reducing audit risk on the reasonable compensation issue.

I have no issues with my individuals reimbursing business expenses, but for something like a whole office building that the individual owns, I set it up on a Sch E. I think that's the better disclosure.
 

#3
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I've seen many discussions on whether an accountable plan can reimburse depreciation - and have looked for guidance myself - and have never found anything definitive.


Depreciation IRC 167 follows IRC 161.

IRC § 62(a) defines adjusted gross gross income as gross income minus, under paragraph (2)(A):

The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer.
 

#4
LDCPA  
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CA
I think sch E reporting is appropriate here. I assume the office is a standalone building or a commercial condo unit. In other words it's not a "dwelling unit" referenced in sec §280A(c)(6).
The only issue I can think of with reporting on sch E is the self rental rule, but if that's not a concern in your situation then I agree with JAD, that sch E would be a cleaner presentation.
Expense reimbursement is a preferred choice when renting a "dwelling unit" (home office) to an S corp as sec §280A(c)(6) disallowance would apply.
 


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