C-Corporation pays rent to its shareholder for use of offices in shareholder's primary residence.  Can the C-Corporation deduct these payments as rent expense?  The shareholder reports the rental income on 1040 schedule E.  What expenses can the shareholder deduct on 1040 Schedule E?  If expenses are allowed to be deducted on Sch E and the rental activity results in a net loss, is the loss deductible?

Would the treatment be any different if the business paying the rent was an S-Corporation?

Dear rvd71:

Congress, being skeptical of transactions between related parties, has typically limited or denied tax treatments that would otherwise apply to the transactions executed between related parties (essentially impunging any detached motives that might otherwise support the arrangement involved).

Such is the case for rental of a residence to an employer (related by ownership or not).  Section 280A of the Tax Code defines the treatment of Business Use of a Home.  Subsection (c)(6) generally denies any business treatment to "the rental of a dwelling unit (or any portion thereof) by the taxpayer [employee] to his employer during any period in which the taxpayer [employee] uses the dwelling unit (or a portion of it) in performing services as an employee of the employer".

Under these circumstances, in the case of Leslie A. Roy, a Tax Court decision, the court held that under these rules, the rent paid to Roy was reportable as income and NO deductions are allowable against it.

Hope this helps in preparing your returns!

Mark H. Misselbeck, C.P.A., M.S.T., Tax Principal

Katz, Nannis + Solomon, P.C.