Imagine a scenario where your Schedule C firm purchases a beachfront property, utilizes it exclusively for business purposes, pays off the mortgage, and deducts all costs.

Then, say, ten years down the road, you may start utilizing the beach as your own without paying any tax penalties.

Is it even feasible to do this? Yes.

Is there a set of guidelines I should follow? Yes

Is it tough to follow the rules? No

So, if you run your firm as a corporation, would you get the same results?

Yes. Consider the following scenario: a corporation requests to utilize your facilities. Alternatively, you can charge them a rental fee or require them to reimburse you for the total cost of the facility, including any mortgage interest and depreciation that may have accrued. The title should be in your own name, not the names of the firms you work for.

Basic Rule For Your Entertainment Facility 

This will only work if the beach home or ski chalet, or similar amenities, are primarily for the use of employees other than executives or shareholders or other owners with a 10 percent or more interest in the firm, or other highly compensated employees, in order for it to be successful. It is critical that you come up with new thoughts and notions in this situation.

• Employees can enjoy this perk tax-free.
• The employer is entitled to a full deduction for entertainment facility taxes.

For those who are not interested in purchasing a beach house or a ski chalet, you could want to consider investing in a swimming pool, baseball diamond, bowling alley, or golf course.

Entertainment Facility Only For Your Employees 

The greater the time your employees spend in your facilities, the greater the amount of money you may claim as a tax deduction for employee entertainment costs. According to the Internal Revenue Service, the building must be designed to meet the needs of your employees as a collective whole.

As a result, lower-level employees are required to utilize the facility more regularly than the owner and other highly rewarded members of the company.

Order and Sequence Of Your Employees For Your Entertainment Facility 

Your workers, other than those who are executives, stockholders, or other owners with a 10% or higher interest in the firm, or highly compensated employees, are exempt from this rule.

Employees are treated as having a ten percent ownership share in any firm in which any member of their tax-law-defined family has an interest, regardless of whether or not that stake is really owned by the employee in question.

Members of your extended family who are specified by tax law include your siblings and sisters, spouses, parents, parents’ parents, children, and grandchildren, among other members of your immediate family.

The facility exemption is only available to employees who earned more than $135,000 the previous year in order to be qualified. In order to be eligible for this accolade, they must have been in the top 20% of their respective departments when rated by salary the previous year in order to be considered.

Entertainment Facility Should Avoid Corporate Ownership 

Should the entertainment facility be owned by the company? No. making the entertainment facility your personal property has several advantages.

Incorporated businesses may take advantage of this strategy in several ways.

Two options are available:

• Request reimbursement from your company for the facility you’re renting as a tax-free employee business expense to avoid paying the rental fee yourself. Business owners can reimburse employees for a variety of expenses, including mortgage interest and depreciation, under Sections 161 through 199 of the Internal Revenue Code.
• However, you may choose to lease the entertainment facility to a business rather than owning it. In this circumstance, the self-rental restrictions are applicable. It is possible that by following the recommendations in Avoiding the Self-Rental Trap, you will be able to avoid having to deal with any of these laws.

This occurs when your company reimburses your costs promptly.

The corporation is entitled to deduct all expenses to the greatest extent authorized by law.

• It is as if you deducted depreciation yourself and record gains and losses based on the beach house.
• You, as an employee, are exempt from paying taxes.

Usage of Entertainment Facility Should Be Proven 

A record of when and who is utilizing the facility must be kept on file. An easy way to achieve this is to use a guest book, the most basic option.

Allow for a column for each guest’s number of hours or days, depending on the nature of the facility, and ask them to sign the book after their stay.

Takeaways

Taking a deduction for a company’s facilities is a simple process. Small business owners can expect three significant advantages from this strategy.

• The facility is available to you and your staff at no additional cost.
• You own it once you no longer use the property for business purposes. You are free to utilize it whatever you like.
• Your company considers the rent or employee reimbursements business costs and not personal expenditures.

When selecting whether to sell or not to sell, it is essential to examine the profit or loss on the sale and the possibility of recovering depreciation. Keep the facility till the end of your life, and you may be eligible to avoid paying federal income taxes on the amount you get.