If you are considering using a previously established business employee entertainment facility as your own somewhere down the line, you’re probably asking yourself IF and HOW you can make it happen.
The good news is, it is certainly possible. But there are some simple rules that apply:
Imagine that your Schedule C business buys a home at the beach, uses it solely as an entertainment facility for business, pays off the mortgage, and deducts all the expenses.
Next, say, 10 years later, without any tax consequence to you, you decide to start using the beach home as your own.
The tax rules state that the entertainment facility that you establish must be primarily for the benefit of employees other than those who are considered highly compensated or otherwise officers, shareholders, or other owners who own a 10 percent or greater interest in the business. In this situation, you create:
- 100 percent entertainment facility tax deductions for the employer (you or, if incorporated, your corporation)
- tax-free use by the employees
As a small business owner, the employee facility deduction is straightforward and has three excellent benefits:
- You deduct the facility as a business asset.
- Your employees get to use the facility tax-free.
- You own the property and can use it personally without tax consequence once you no longer need it for business use. (Note that when you sell, you will have a gain or loss on the sale and some possible recapture of depreciation.)
You could achieve the same result if you operate your business as a corporation. However, the corporation needs to reimburse you for the facility costs, including mortgage interest and depreciation, because you want the title to always be in your name, not the corporation’s name.
If you think an entertainment facility would be beneficial for your small business, give us a call at (732) 566-3660 and we’ll help make it happen.