Can I deduct what I pay my brothers?

by Martin G. Laffer, CPA 

I own a triplex rental income property. My brothers help me with bookkeeping, upkeep and dealing with tenants. Can I pay them at fair-market value for their services and claim the expense as tax deductible?

Yes. The Internal Revenue Code permits a taxpayer to deduct ordinary and necessary expenses attributable to operating a trade or business, including property held for the production of rental income. "Ordinary and necessary" deductions clearly include bookkeeping, maintenance and dealing with tenants.

Nevertheless, you should document that the payments are not beyond the amount that would reasonably be paid to an unrelated third-party. This does not mean that the payments to your brothers must be lower nor would you be precluded from paying more than to a third party. If you believe your brothers would do a better job than a stranger and you want to pay them at the upper scale of reasonableness, then you should be able to do so.

If you hire your brothers as independent contractors, you will need to file a Form 1099 with the IRS for each one. If your brothers are your employees, you will need to withhold federal and state taxes as well as Social Security and pay the appropriate employment taxes.

Martin G. Laffer, CPA, is a partner in the firm of Laffer & Gottlieb, CPAs. You can reach him at (310) 274-7600.

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