IRC Sec 280A(g) allows taxpayers to exclude from income any compensation obtained by renting the taxpayer’s residence as long as the residence is rented for 14 days or less in a calendar year. This rule has been dubbed the “Master’s rule” in reference to the famous Augusta National Golf Club in Georgia. During the tournament, there would be a high demand for dwellings and local residents would rent out their own homes during the tournament.
In a recent tax court case, Sinopoli v Commissioner (1), the taxpayer looked to take advantage of this tax provision by renting out his home for business use to his S corporation for 14 days or less during the tax year. The S corp would get the benefit of the deduction for rent paid and the taxpayer would be able to exclude that amount from income.
Over a three year period, the taxpayers deducted over $290,000 in rental expenses at the corporation level while excluding all of the income by the taxpayer under the 14-day rule.
In order for the rental deduction to be valid it must satisfy the “ordinary and necessary” requirements of IRC Sec. 162(a) . In its opinion the Tax Court stated, “An expense is ordinary if it is usual or customary in the taxpayer’s trade or business. Deputy v du Pont, 308 U.S. 488, 495 (1940). An expense is necessary if it is appropriate or helpful in carrying on the trade or business. Heineman v. Commissioner, 82 T.C. 538, 543 (1984). Even if an expense is ordinary and necessary, the expense is deductible only to the extent that it is reasonable in amount. Audano v. United State, 428 F.2d 251,256-57 (5th Cir. 1970); Ciaravella v. Commissioner, T.C. Memo, 1998-31. The requirement of reasonableness is inherent in the phrase “ordinary and necessary” in section 162. Fuhrman v. Commissioner, T.C. Memo, 2011-236, slip op. at 6. The reasonableness concept has particular significance in dealings between related parties. Id.”
The rent paid per meeting was between $3,000 and $4,000. The taxpayers were unable to substantiate the reasonableness of this amount. The IRS however, examined local rental rates for meeting spaces and determined $500 to be a reasonable amount for each meeting. The tax court ruled in the IRS’s favor and only allowed a deduction of $6,000 for each year which was far below the originally claimed amounts.
(1) Sinopoli v. Commissioner, TC Memo 2023-105