My team gets asked this question several times a year - is there a way for a VC-backed founder who is either working from home, or who lists their startup’s address as their home to have their startup pay their rent/mortgage and thus give the founder tax free income?
No.
Guess what founders - the IRS isn’t stupid. They’ve seen this game before. And while your personal CPA may try to tell you this is OK, they are used to dealing with small businesses that operate as an LLC or a pass-through entity. But your VC-backed startup is a C-Corp, and executive compensation at C-Corps should be run through payroll and payroll tax needs to be paid. If you want to learn why VCs like this type of corporate structure you can read our post on it here.
Note that the tax rules may be different if you are running a pass-through entity - consult your tax advisor.
Home Office Deductions and Corporate Employees
Employees of a corporation typically cannot claim the home office deduction if they are merely using their home for convenience. This deduction is generally reserved for self-employed individuals or those running a business from home.
There are scenarios where a CEO may lease a separate area in their primary residence as an office to the business. First of all, I’d consult with your lawyers to make sure that this doesn’t require board approval or notice. And if you don’t have a board yet, I’d let your investors know so that they aren’t surprised about this later. To the extent your corporation/board says that this is OK, the startup might recognize part of that space as an office expense. This would have to be invoiced/documented so that the corporation could deduct the expense, and this may lead to different tax implications, possibly involving fringe benefit allocations depending on the use of the space.
Rent Stipends and Startup Executives
Another way that founders think they can get around paying taxes is by getting a rent stipend from the startup. After all, they are working all the time, including from home (maybe 100% of the time from home), so why shouldn’t this be paid for by the startup? Again, the IRS considers this a fringe benefit, and expects taxes to be paid.
But what if the startup directly pays the landlord?
Same thing. It’s a fringe benefit.
Ok, so there is one tax break that I’ve seen occasionally work, but I don’t recommend it. Founders of funded startups should be focused on building a business, not on tax breaks.
But, if you must know, it’s called The Masters Exemption. And yes, it’s based on the golf tournament. The ‘Masters Exemption’, also known as the Augusta Rule, outlined under Section 280A(g) of the U.S. tax code, allows startup founders to rent their homes to their companies for business purposes for up to 14 days annually without needing to report this income on their federal tax returns. However, compliance with IRS regulations is strict, necessitating proper documentation and a legitimate business need for such rentals. You seriously have to use the house for a corporate event. The exemption is applicable only to homeowners, not renters, and all activities must be strictly business-related, avoiding any non-business use such as entertainment. Keep minutes, keep track of what was accomplished at the meeting. Founders must ensure proper pricing aligned with local rates, maintain detailed records of the meetings, and issue invoices. Payments from the company should be made through normal business accounts, and while the founder won’t report this rental income federally, they might still be liable for state taxes. We still recommend letting your board know that you are doing this.
Is this worth it? I don’t think it is. Staying focused on your startup, not on tax avoidance, is your best course of action! And of course, consult with a tax professional, don’t just rely on guidance from the internet.
Want to learn more about what startups do pay in rent? Read our articles on startups and rent.
