Any money you make renting your residence for less than 15 days is tax free, but who will you trust in your home? There's a little loophole where you can be the renter and make still money.
The object is to get you 10% more money to spend this year. But most physicians can’t work 10% harder, and it’s for sure they won’t get 10% more for their services from the insurance companies or Obamacare. So the best way to get extra spendable cash is to use the tax laws.
The first article in the series said you needed a small company. You have to have a small company to take advantage of most tax savings laws. There are lots of things you can do to have a small company. If you can, contract your personal work through a company to the hospital, clinic or your own practice. You can set up a company to hold your medical equipment and then rent it from the company. (Good asset protection trick!)
Rent your house?
Once you have a company, a whole new tax world will open up to you. Here’s a cute little tax law you can take advantage of. There are you can use. The general theory is to play your personal tax situation against your company’s tax situation. Here’s how it works.
You have a residence. The Internal Revenue Service defines a residence as a place where a person can sleep and cook. (That’s the layman version of the definition.) In fact, you probably have more than one residence. Can you sleep and cook on a boat or in a motor home?
The object is to rent your residence. The law says that if you rent your residence for less than 15 days in a year, any income you receive is tax free. That’s great. The trick is renting your house for 14 days or less. When you are going on vacation for two weeks, you could advertise your house for rent on Craig’s List. If you get somebody who wants to cook meth for two weeks, they will pay great rent. No, you’re not going to rent your house while you’re on vacation. That won’t work.
What do you do? Let’s use an example. Say I have a beach house. Let’s make it a good beach house on the number one beach in the United States. You’re not going to let some stranger rent your beach house for fourteen days. That’s not going to happen. So who do you rent it to?
At my beach house, I have business associates come visit me at the beach. We actually get a lot of good face time on the beach, and some of my best money making deals have been hatched up at the beach house. I charge the business associate $1,500 per day to visit me at the beach house. NO!
I bill my for the cost of entertaining, housing and feeding my guest at the beach house. My company pays for the opportunity I have of getting a good one-on-one session with the high-powered business folks in my profession. That opportunity over the years has paid my company many times whatever rent it has paid out.
Look at what has just happened. The 14 days of rent I receive is tax free to me. The company doesn’t have to 1099 me or anything. The company shows the rental payments as a tax deductible expense, so the rental payments are totally deducted from my company’s books.
That’s $21,000 per year that leaves my company as a tax deductible expense and ends up in my pocket tax free. What’s this trick worth to you? Between the federal taxes and the state taxes, if you are in a 40% tax bracket, you just took home an extra $8,400 to spend this year.
You may not have colleagues who you want to come to your residence, but the good news is that the possibilities are endless as to why your practice would want to rent your residence. You can have the office retreat at your house. You can use the residence to have the drug dealers (the legal drug dealers) give you a class on using their new drugs. You can hold a CME class at your house and entertain all the other doctors. You could shoot an internet ad at your house.
If you do this for your house in the city and your summer home in the country, that starts to be significant. Are you getting extra money to spend? Without working any harder?
Your accountant knows
Your accountant knows all about 280A(g) in the IRS Code. He has never suggested it to you, because he’s not looking at all the things you can do to cut taxes. It’s up to you to find the good tax tips and take them to your accountant.
The accountants don’t suggest the tax tips, because they aren’t willing to take the liability hit for suggesting things to a client. If anything goes wrong, even if the law changes, they will get yelled at or sued, so they just keep their mouth shut.
Your accountant will say, “Oh, that’s great, but you had better make sure your rent is a ‘reasonable rent.’”
That’s true. The rent has to be reasonable. If you’re holding a class at your residence, just compare the cost to a nice hotel downtown. You have to rent the room and pay for beverages and pay for dinner and pay for parking, and, and, and. You’ll be in the deal $1,500 per day easy.
Anything you can do to cut your taxes is money in the bank. This tip actually lowers your adjusted gross income, which is a lot better than a standard deduction.
This series will continue with other tax tips and techniques.
Lee R. Phillips is a United States Supreme Court Counselor who for the past 30 years has helped high income individuals control their taxes and protect their assets. Call (800) 806-1998 or visit LegaLees.com. For a free copy of Lee’s set of practical tax ideas, go here.