Author: Leon Clinton

Do you have a beach or mountain home that you rent out?

If the average period of rental is less than 30 days, you likely have a choice—either

• claim the income and expenses on Schedule C, or
• claim the income and expenses on Schedule E.

When Is Schedule C a Good Choice?

If you show a tax loss on your rental property, Schedule C is a great choice because it allows you to deduct your rental losses against all other income (assuming you materially participate in the rental property).

If you show taxable income on the rental property, Schedule C is not good because it causes you to pay self-employment taxes.

When Is Schedule E a Good Choice?

If you show taxable income on the transient rental, Schedule E is best because you don’t pay any self-employment taxes on Schedule E income.

If you show a loss on your transient rental and you materially participate, you can deduct your losses against all other income, but those Schedule E losses do not reduce self-employment income.

Okay, now you know how to play the game.

IRS in Summary Mode

In recent advice, the IRS stated that rentals of living quarters are not subject to self-employment tax when no services are rendered for the occupants.

But if services are rendered for the occupants, and the services rendered

1. are not clearly required to maintain the space in a condition for occupancy, and 
2. are of such a substantial nature that the compensation for these services can be said to constitute a material portion of the rent, 

then the net rental income received is subject to the self-employment tax.

If you would like to discuss the transient-rental rules, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 27, 2022

Imagine this: 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. 

Now say, 10 years later, without any tax consequence to you, you start using the beach home as your own.

Is this possible? Yes. Are there some rules on this? Yes. Are the rules difficult? No.

Okay, so could you achieve the same result if you operate your business as a corporation? Yes, but the corporation needs to rent the property from you or 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.

The beach home, ski cabin, or other entertainment facility must be primarily for the benefit of employees other than those who are officers, shareholders, or other owners of a 10 percent or greater interest in the business, or other highly compensated employees. In this situation, you create

• 100 percent entertainment facility tax deductions for the employer (you or, if incorporated, your corporation), and 
• tax-free use by the employees. 

The employee facility deduction is straightforward. It has three splendid benefits for the small-business owner:

1. You deduct the facility as a business asset.
2. Your employees get to use the facility tax-free.
3. You own the property and can use it personally without tax consequences 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.)

If you think the entertainment facility could work for you, please give me a call on my direct line at 408-778-9651, and I’ll help you put this facility in place.

• By Leon Clinton
• March 23, 2022

These days, some IRA owners and investors may be worried about being overexposed to equities. That could be you. 

But the safest fixed income investments (CDs, Treasuries, and money-market funds) are still paying microscopic interest rates.

For example, when this was written, the 10-year Treasury was yielding about 1.92 percent. Ugh! 

Meanwhile, the pandemic might or might not be coming to an end, the economy might or might not be okay, and inflation might or might not be controlled. Who knows? 

In this uncertain environment, investing some of your IRA money in gold or other precious metals such as silver and platinum may be worth considering. Ditto for holding some precious metal assets in taxable form. 

Precious Metal Assets in Your IRA

At first blush, our beloved Internal Revenue Code appears to throw cold water on the idea of holding physical precious metal assets in an IRA. 

As a general rule, a physical IRA investment in any metal or coin is treated as the acquisition of a collectible for federal income tax purposes. As such, the transaction is characterized by the tax code as a taxable distribution from your IRA to you (the IRA owner), followed by a purchase of the metal or coin by you. 

In effect, this general rule appears to prohibit you from using an IRA to invest in precious metals or coins made from precious metals. 

But there’s a great big exception to the preceding general rule. Under the exception: 

• You can use your IRA to invest in certain gold, silver, and platinum coins and in gold, silver, platinum, and palladium bars (bullion) that meet the purity standards. 
• Your IRA trustee or custodian, rather than you, must hold the coins or bullion.

These rules apply equally to traditional IRAs, Roth IRAs, SEP accounts, and SIMPLE-IRAs. 

Your IRA Can Buy Precious Metal Coins and Bullion

Thanks to the exception, IRAs can own certain precious metal coins and bullion. Examples include

• American Gold Eagle coins; 
• Canadian Gold Maple Leaf coins; 
• American Silver Eagle coins; 
• American Platinum Eagle coins; and 
• gold, silver, platinum, and palladium bullion that meets the purity standards. 

For example, gold bars must be 99.5 percent pure or better, and silver bars must be 99.9 percent pure or better. 

If you would like to discuss precious metal investments, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 20, 2022