Business Tax Loophole:
Leasing Assets To Your Corporation.
By Alex Goumakos
While there are many equally valid reasons to
incorporate, saving money on taxes is a consideration that can yield
relatively immediate results. Leasing assets to your corporation
is a tax strategy you should absolutely consider if you already
have a corporation or are thinking about forming one. Here’s
how it works.
Just because you incorporate doesn’t mean that the corporation
must own all of the assets it uses. In fact there are many legal,
tax and financial considerations for NOT having your corporation
own its own assets.
Leasing assets to your corporation is a perfectly legal and advantageous
way to reduce your overall tax liability. When you lease assets
to your corporation, the business pays a lease or rental payment
and you in turn claim the lease or rental income. By doing this,
you as the lessor get to deduct items such as acquisition interest,
depreciation, repairs and maintenance, insurance and administrative
costs.
When interest and depreciation deductions are exhausted you can
then transfer the assets to a family member in a lower tax bracket
or you can sell the assets to the corporation. A sale to the corporation
would give it a higher tax basis (cost) than it had in the hands
of the lessor (you). This would increase the corporation’s
depreciation deductions, thereby reducing its tax liability.
If you haven’t noticed already, leasing assets to your corporation
is a fabulous way to pull money out of the business instead of through
payroll. When you take a paycheck, you’ve got payroll deductions
to consider. Not so when you take a rent check.
Another reason to lease assets to your corporation has to do with
double taxation. If your corporation sells appreciable assets for
a big gain, and you try and take the money out of the company, you
will get clobbered with taxes…twice. This will not
be the case if you lease the asset to the corporation. Under this
scenario, you will only be taxed once.
From a legal standpoint, it’s also better to have your corporation
own as little assets as possible if you are in a “high risk”
industry subject to lawsuits. If you lease assets to your corporation
and your corporation gets sued, it’s tough for a hostile party
to seize the assets if they are in your name and NOT the corporation’s.
You may rent almost any asset to your corporation. Examples include,
office space, machinery and equipment, vehicles, computers and peripherals
and real estate.
Besides renting the assets personally, you may use a multiple entity
arrangement such as partnerships, S corporations or limited-liability-companies
to rent the assets to a corporation. However, you shouldn’t
use another regular corporation because it may be deemed a personal
holding company (where most of its income is from passive income
such as rents and royalties, etc.). Personal holding companies
are subject to a penalty that would defeat any tax savings rental
strategy.
The requirements for leasing assets to your corporation are as
follows:
So there you have it, more good reasons to operate your business
as a corporation. My final piece of advice is this: Make sure
you consult with your attorney and tax advisor before making any
important legal or financial decision. As with most things legal
or tax-related, there are many exceptions and special rules that
apply. Your attorney or tax advisor will be able to advise you
correctly based on your own unique circumstances and objectives.
Alex Goumakos is a CPA, business advisor and guest consultant
of Active Filings LLC, a professional incorporating company that
provides services in all US. (http://www.activefilings.com).
You have permission to publish this article electronically or in
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