Creating Deductions by Using Your Vacation Home for Business Lodging
Here are some fun facts about business lodging: the properly used business vacation home or condo does not suffer from:
- The vacation-home rules,
- The passive-loss rules, or
- The entertainment-facility rules.
In the modern days of COVID-19, you may have solid reasons to use your vacation home or condo for two purposes only:
- Personal pleasure, and
- Business lodging.
In this article, we will show you how limiting use to the two purposes we stated above can create good tax results with no tax complications.
How Business Use Escapes the Silly Vacation-Home Rules
Do you own a vacation home? Do you use your business vacation home or condo solely for business lodging?
If so, you escape the vacation-home rules and may deduct your business-lodging costs. The law is very clear on this. The vacation-home section of the tax law, Section 280A(f)(4), states that nothing in the vacation-home rules shall disallow any business deduction for business travel.
Example 1. You use your beach home for overnight business lodging 37 times during the year. You have no personal or rental use of the beach home. Your beach home is a 100 percent business asset and deductible as such.
The Loophole to the business-lodging rule. The law does not grant the business-lodging exception to landlords who rent dwelling units. If you have apartment buildings or other residential rentals, staying at your vacation home or condo to look after your rentals does not let you escape the unfavorable vacation-home rules.
In Andrews, the court noted that congressional floor debates discuss homes that qualify for deductible business lodging expenses. The floor debates note that members of Congress may deduct the business portion of their out-of-town lodging expenses while serving in the U. S. Congress.
This means that members of Congress may deduct the business part of their Washington, D.C., homes because they use them for business travel.
Senator Bob Dole stated that the vacation-home rules in tax code Section 280A(f)(4) clarify that personal use of a home does not disallow the business expenses for travel away from home.
In other words, you can have a second home, such as a vacation home, that you use for both business and personal purposes—under Section 280A(f)(4), the personal use will not nullify the business use.
So here is what you have so far, assuming you do not rent the vacation home or condo for even one day:
- Business use of the property does not trigger the vacation-home rules.
- Personal use of the property does not trigger the vacation-home rules or destroy the business deductions.
- When you have both business and personal use of the condo, you must divide the condo into its business and personal components.
Example 2. Fred uses his beach home for 70 nights of business lodging and 30 nights of personal lodging. He has a 70 percent business-use beach home and a 30 percent personal-use beach home.
Planning note. Fred has his tax home where he regularly works, in New Jersey. He travels to his South Carolina beach home location to conduct business in South Carolina. His business activity is what makes his overnight stays at the beach home business stays.
How Rental Use Changes the Landscape
When you rent out your vacation home or condo, you are really changing the tax picture. Let say, if you use the vacation home or condo for personal, business, and rental purposes, you could trigger
- Vacation-home rules that require a split between the rental- and personal-use deductions;
- Vacation-home rules that classify the rental part of your property as either a personal residence or a rental property;
- Loss of tax-favored hotel status for qualified rentals; and
- Passive-loss rules that defer current tax benefits to future years.
Looking at this list, you might ask, “How can I avoid all these additional considerations and still rent out the vacation home or condo?” Answer: rent for 14 days or less. Technically, that works.
But then what happens if you use the vacation home for personal, rental, and business purposes during a year? Neither Congress nor the IRS gives guidance in this situation. We think it’s logical to deduct
- The business portion under the business rules, and
- The personal and rental uses under the vacation-home rules.
But keep in mind that rental of the vacation home or condo changes your strategy. For how this works, see Personal Use of Your Rental Triggers Ugly Vacation Home Rules.
Did you know that in Ireland, the courts ruled any use of the beach home for entertainment, no matter how minor, fatally dooms the claimed entertainment-facility deduction because Section 274(a)(1)(b) operates as an absolute bar to a facility deduction when there is any entertainment.
Under the Tax Cuts and Jobs Act (TCJA), business entertainment is no longer tax deductible. See Helicopter View of Meals and Entertainment After Tax Reform. That’s good, since all entertainment did for your vacation home or condo was kill the deductions. So, don’t entertain at your vacation home or condo.
Business meals are not entertainment and are deductible under the TCJA, and you can serve them during your business use of the vacation home or condo. For some insights on how such meals could work, see Creating More Business Meal Tax Deductions After the TCJA.
Avoid the Good Deed
And then there is the “no good deed goes unpunished” tax code rule that works like this. Say you donate a week at your business vacation home or condo to the local cancer society for its silent auction.
- No matter how much the charitable contributor pays for use of your condo, the rules count that donated week as a week of personal use by you.
- To make matters even worse, the regulations allow no tax deduction for your donation of the business condo for that week—a little tax-law double whammy on this donation.
In addition to keeping receipts for the business condo’s expenses and improvements, you need to prove how many nights you slept in the vacation home or condo for both business and personal purposes.
Notations on your business and personal calendars are helpful but not conclusive. For your business activities, you want proof of why you had to be at the beach home.
Example 3. Sara sells real estate at both her tax and beach home locations. She tracks her prospects and activities at each location.
Do as Sara does. Also, keep your eyes open for third-party and other corroborative evidence of use. Do you have emails, letters, and other proof of why you had to travel to the beach home? If so, print the emails and save them along with the written letters in your tax file.
Do you have evidence of being in the area, such as gas, grocery, and dining receipts?
Proving use of your business condo is easy and takes very little time. Documentation is essential. Don’t pass over this critical step.
Do you own the vacation home or condo in your personal name?
If so, and you operate as a
- Proprietorship or LLC taxed as a proprietorship, no problem. Simply treat the business percentage as business expenses on your Schedule C.
- Corporation, submit an expense report to the corporation to obtain reimbursement. See TCJA Creates New Reasons for Accountable Plan Expense Reimbursements for how this works.
Why not use a rental arrangement with your corporation? Because you are an employee who likely uses the vacation home or condo for more than 14 days of personal use, you want to avoid a rental arrangement that could cost you your depreciation, repairs, and similar expenses.
The reimbursement method works and creates no complications. Use it.
If the corporation owns the vacation home or condo, you should reimburse the corporation for your personal use so as to avoid the monies showing on your W-2 and increasing payroll taxes on both you and your corporation.
Your use of a vacation home or condo for only business and personal purposes creates a straightforward deduction for the business-use percentage with few complications.
If you own the vacation home or condo personally and operate your business as a corporation, you should submit an expense report to the corporation for reimbursement of the expenses.
Make sure you have a handle on the tax home rules. You want to know that your overnight stays at the vacation home or condo are overnight business stays.
When you add rentals to your business vacation home or condo, you can trigger the vacation-home rules and then your tax life becomes more complicated.
When it comes to using the condo for entertainment, forget it. Be a chicken, dodge the courts, and save yourself a lot of trouble.
Finally, gather the proof to protect your business vacation-home or condo deductions. You need to prove both (a) the cost of operating the vacation home or condo and (b) your percentage of business use.