Leasing assets to your corporation
Leasing assets to your corporation is a tax strategy which you have to consider if you already own a corporation or just thinking about forming one. Let`s see how it works.
Business doesn`t have to own all operation assets. Giving for a rent your personally owned assets to your corporation is absolutely legal. Leasing your property to your business is good strategy for tax saving. Likewise, another corporation, family business where you have ownership, they also can lease assets to your corporation. Aside from potential tax saving, you may not want your corporation to own many assets, because your business is subject to constant lawsuits. And it is good solution to have a shield against potential creditors, to rent instead of owning an asset.
In order to avoid potential problems with IRS, leasing conditions between you and your corporation have to be fair for both sides. Contract have to be legal and payments must be set at the same rate as any other.
Renting your assets to your corporation is advantageous, here is why;
Reduce overall tax liability;
Leasing payments are expenses, that are deducted from the tax base, while rental income is taxed by you. In turn, you will be able to deduct ownership costs such as mortgage interest, maintenance, repairs, depreciation, purchase interest, insurance, and administrative costs.
When interest and depreciation charges are depleted, you can transfer assets to your family member with lower tax rate or sell them to a corporation. Selling a corporation will give it a higher tax base (value) than the landlord (you). This would increase the corporation’s depreciation expense, thereby reducing its tax liabilities.
Double taxation is not a scenario
Another reason why you should rent your asset to your corporation is double taxation. In case if your company sells assets for receiving high return and you will take money out of the company then you will be punished with taxes twice. But this is not the case if you lease the asset to the corporation. Under such circumstances you will be taxed once.
Legally it is better for your corporation to own little assets if you are in a high risk and having more chances to be subject for lawsuits. Imagine a situation where your company is being sued and the opposing person suing your company will not confiscate assets if they belong to you and not the company.
What kind of assets can be rented by corporation?
Any assets can be rented by your corporation. For instance, machinery, office space, real estate etc.
If you decide to rent assets for your corporation then you have to consider following requirements:
- You have to make up formal and fair legal leasing agreement. As mentioned earlier, it is important to treat two sides fairly as you dealing with unrelated party. And the rental amount which you determine must be fair, therefore you cannot charge any price you want. It should be reasonable and consistent with what is charged for renting a similar property in your area.
When self-rental makes sense
The ideal form of self-lease is a legitimate business. For example, suppose you have a hairdresser and also a building that operates a business. This is the ideal scenario when it is profitable to separate the building from the real business.
Because rent is both an allowable business deduction and taxable rental income, you will not create phantom income or losses. Instead, you simply convert a portion of your profits from business income to rental income. This will not only lower the self-employment tax, but also limit your liability.
If you separate the business from the rental property, you create a separation of responsibility (liability). If the business falls apart, you can defend the building. Conversely, if there is a lawsuit or lien on the leased property, they will not be able to come forward after the business assets.
So, it is good idea to operate your business as corporation. You should take legal consultation before taking any financial decision. If you deal with legal and tax related issues, there are many exception and rules that have to be applied.
Besides renting the assets personally, instead you can use multiple entity arrangement. Partnerships, limited liability companies etc. are appropriate entities for renting assets to a corporation.