Business Tax Question--Can I write off my personal bathroom???

Question

Alright all, we followed the advice of everyone on here and started an S-Corp back in 2017 for tax purposes when flipping homes. Additionally, we own a duplex in the company name but that is not the basis for my question...

As the company has grown, we developed a following for our interior design. Therefore, we've morphed into giving advice, spec'ing out homes for people, and the purchase/staging of home goods for people around Columbus, Ohio. It's been a blessing so far, but herein lies the question.....in 2018 we completed a complete bathroom remodel in our PERSONAL home to the tune of about $35k. As such, we used our social media platforms to promote our newfound business of selecting different styles and matching them together to form a cohesive look for others. Through the promotion of our renovation and the finished product, we now have 3-4 clients that came straight from paid ads on Instagram and Facebook.

I'm wondering if a portion or all of the 35k renovation can be used as a tax write off because it was used for a business purpose (promotion). Our tax pro says no, but she had to seek out advice as well so I figured I would throw it out to my BP community.

Thank you in advance!

Justin

Michael Plaks · Answer

Can't miss a chance to disagree with my favorite sparring partner, Eamonn. No, not on the deductibility of the $35k rehab - it does not fly, no argument here.

I disagree with your rather strict interpretation of "ordinary and necessary." Just because there is a cheaper alternative, it does not automatically disqualifies an expense. Ordinary and necessary does not mean the most cost-effective way of spending money.

Example: a Realtor could buy a used Corolla to take her clients to appointments. Or she can buy a brand new Land Rover. Both would qualify as ordinary and necessary.

That said, if I was asked to defend this $35k rehab in an IRS audit, I would pass.

And now to Eamonn's mention of paying a royalty. Your corporation can pay a reasonable (i.e. not $35k) Royalty to yourself for using your personal home for marketing. This one I would totally volunteer to defend as ordinary and necessary, even against Eamonn.

Eamonn McElroy · Answer

@Justin Chappelear

As @Natalie Kolodij said, ordinary and necessary...

You did not need to spend $35k to get those 3 or 4 clients. You could have gone to a model house and snapped some pictures or paid a royalty to use someone else's picture that you like.

At best the camera, social media, and associated costs are deductible.

Capitalize the improvements into the basis of the building. It will reduce your potential gain upon sale or increase your depreciable basis if converted to a rental.

Natalie Kolodij · Answer

Nope not at all related to legal protection.

A rental in an S corp changes the nature of lots of normal transactions. Lots of things that would be tax free if in a SMLLC- can be taxable since the property is owned by a corporation.

Whole different set of tax rules. Do a google of "why not to keep rentals in S corps".

Natalie Kolodij · Answer

I would lean toward no as well.

Ordinary and necessary. You would need to PROVE that the renovation was the only reason you got those clients, and you wouldn't have acquired them if you used...photos or some other flip.

Also- 99% chance that rental should not be held in that flip. If your tax pro did that and needed advice on this question...I'd look for one that's specialized in REI instead.

Ned Carey · Answer

totally understood @Natalie Kolodij. My point was there are many new investors that get confused on who they should ask what.

Natalie Kolodij · Answer

I was just saying that my response was not based on legal protection.

I'm not an attorney so I don't comment on things related to it.

Ned Carey · Answer

@Justin Chappelear

@Natalie Kolodij wrote

It is generally a good idea to separate various types of assets from each other. An active business should be in a different entity than rental properties for example.

No disrespect to Natalie, but don't ask accountants legal questions and don't ask attorneys accounting questions. They come at issues from different perspectives and may even give conflicting advice.

Justin Chappelear · Answer

Awesome, thank you both for the replies. We've obviously got some more homework to do but this gives me some direction. Thank you!

Justin Chappelear · Answer

That was essentially the same question that she posed, which I understand. Additionally, we do own the rental within the S corp and, especially now, I've been considering starting another LLC to hold this rental and future rentals. With the growth of our business, I don't want to run the risk of the business assets being taken in civil litigation from a tenant. Is that what you're getting at?

Lastly, I think we're going to switch this year to a more REI focused tax pro. Thank you for your reply!

Business Tax Question--Can I write off my personal bathroom???

Business Tax Question--Can I write off my personal bathroom???

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