Wednesday, July 2, 2008

Home office? No deduction for Thighmaster.

Hello June!

Thank you so much for your blog! The pieces of information that you put together for us are always extremely helpful for us! Thank you, thank you, thank you!

I am a Graphic Designer -- 5 years -- from Huntington Beach, CA.

I was hoping to ask you a question today about setting up a home gym for my sole proprietorship.

This comes after I found this piece of information on the Internet: 3. Your Corporate Gym: Unfortunately, the IRS won’t let you directly deduct the cost of your gym membership. However, under section 132 (h) of the tax code, you can deduct the cost of the Gym equipment. So that Nautilus set, your Bow Flex machine, even the Gazelle Trainer that you’ve seen on television – not to mention free weights, a work out bench, etc – are all tax deductible through your company. Source: http://articles.webraydian.com/article1204-Ten_Golden_Tax_Deduction_Secrets.html

Now, my question is this: I see that a corporation is able to take an expense for gym equipment that they purchase for its corporate gym for employees. Is the same deduction allowed for a sole proprietor setting up a home gym for its owners? I am not in the business of fitness, and the home gym is solely to maintain my physical fitness and well being. I also have a couple follow up questions assuming that the answer above is "not deductible." If I were to convert my sole proprietorship to a LLC, would I be able to take the home gym that I create as a deductible business expense?

Thank you again for your blog, and your considerations on this tax question.

Kind regards,
Hiro


Hiro sent the above question to me quite a while ago. Researching for the correct answer took much time and reading and analysis. The answer may seem simple, seems simple to me, too, now. But, as with so much of the tax code, there is rarely an uncluttered path to a clear understanding.


Here's the scoop:

Whether you are a corporation or a sole proprietorship, the same rules apply regarding the deductibility of gym and exercise equipment or athletic facilities, such as pools and tennis courts, for the use of your employees, their spouses, and children. If the equipment or facility is in a building owned or leased by the employer and there are no residential facilities connected to the gym, then the costs are deductible business expenses.


Here's some examples:

Callous Corporation has a gym and pool for employees in the basement of corporate headquarters. Deductible.

Callous Corporation has a gym and pool for employees in a building a block away from corporate headquarters. Deductible.

Callous Corporation owns a resort where guests may stay overnight. On the premises is a gym and pool for the exclusive use of the employees back at corporate headquarters. No deduction because the gym is adjacent to residential facilities.

Let's use those same examples for an indie with a sole proprietorship.

Victor Visual owns or rents a building in town where he has his studio and a gym for employees. One of the employees is his wife. Deductible.

Victor Visual has a home studio. He owns a building down the block where he stores supplies and also has set up a room with gym equipment for his employees. Deductible.

Victor Visual has a home studio. He set up a gym in basement for his employees. No deduction because of the proximity of residential facilities.

Under no circumstances may Victor deduct the costs of gym equipment or facilities if he has no employees.

If the setup allows for Victor to take the deduction for the gym, then that is a non-taxable benefit to his employee(s).



There were 10 "Golden Tax Deduction Secrets" on the site Hiro refers to. There are problems with a number of them. Take note that one of the two ads on that site is for home athletic equipment.

Indies, be careful. So many tax tips, tax secrets, save thousands, make millions are just a lot of hogwash -- especially on the web. There is no quick fix to low taxes any more than there is a quick fix to fat thighs.

Best,
June


PS to Hiro: Read my posts on LLCs

9 comments:

Jason said...

Does this concept apply to fixing up a home office as well? If I am converting a guest bedroom into a home office (it's sole use/no more guest space), can I deduct expenses such as paint, flooring, etc.? Or are my deductions limited to equipment & furniture type expenses?

June Walker said...

Oh my goodness, Jason. You MUST read my posts on home office.

In short, all costs regarding home office are deductible -- sometimes expensed sometimes depreciated.

Office equipment has no relationship to home office.

-- June

Anonymous said...

Hi June,

Can you tell me which irs tax codes advise 'no residential facilities connected to the gym'? I'd like to know where i can verify that information as I haven't been able to find it on the IRS website.

Thank you Nikki

June Walker said...

Hi Nikki,

Good question. Since you don't say whether you are a tax pro or not I am not sure at what level I should respond. So I am going to play it down the middle hoping that I can give the layman an idea of the complexity of the IRS tax code.

It's not as easy as, "oh, where can I find that answer?"I wish one could just ask a question of the IRS and then get the response: Well, IRS Code Section 1111111 says yes you can or no you can't.

Often finding the right answer takes a lot of research and a lot of time. That was the case in getting the answer on the gym. And, I really shouldn't say "get" an answer. it is more like interpreting, analyzing and amalgamating in order to come up with the correct interpretation. For instance, it is often from a regulation for employees that one must extrapolate to come up with a situation that fits indies. Or, one rag leads to the next and then by putting them together one can get to a conclusion or answer.

My notes on the research for this question cover 10 pages. If you are going to research it yourself start by looking at at Reg §1.132-1 Exclusion from gross income for certain fringe benefits. Final, Temporary & Proposed Treasury Regulations.

Also check out Tax Treatment of Athletic Facilities. And here are other places I checked for info:

Code Sec. 132(j)(4)(B)(i).

Code Sec. 132(j)(4)(B)(ii).

General Explanation of the Tax Reform Act of 1984 (P.L. 98-369), as prepared by the Staff of the Joint Committee on Taxation.

Temporary Reg. §1.132-1T(e)(2).

Temporary Reg. §1.132-1T(e)(4).

IRS Letter Ruling 9430029, May 3, 1994.

Code Sec. 132(h)(2)(B).

Code Sec. 132(j)(4)(B).

House Ways and Means Committee Report on the Tax Reform Act of 1984 (P.L. 98-369).

Code Sec. 132(j)(4)(A).

Temporary Reg. §1.132-1T(e)(5).

Code Sec. 274(e)(4).

Code Secs. 162

Best,
June

Moby said...

Hi June,

Just a quick question -- I have an LLC, and I am the only employee (owner). I work primarily out of my home office which I have deducted in the past. Can I buy and deduct a small treadmill to put in my home office for my use?

Thanks!

Jeremy

June Walker said...

Hmmm, let's see, Jeremy. You really think the IRS has a special reg for a treadmill?

To the IRS a thigh is a calf. No deduction.

-- June

Anthony said...

Hello there, thank you for the helpful post. One question, though... where is the dividing line between "connected to a residence" and not? Does a freestanding office building sitting on the same lot as one's home count as 'connected'?

Tony

Anthony said...

Hi there, thank you for the useful post. One question, though... would a freestanding office building on the same lot as the business owner's house count as "connected to the gym" for the purposes of this deduction?

Thanks,

Tony

June Walker said...

Anthony --

I need to check my research. I'll get back to you when I find an answer.

-- June