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'll only be taxed
once.
From
a legal standpoint, it’s also better to have your corporation own
as little assets as possible if you're in a “high risk”
industry subject to lawsuits. For example, 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're in your name,
or another entity's 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:
Arm's
length transaction - You must draw up a formal and
bona fide lease agreement. You should treat the leasing
agreement just like you would if you were dealing with an unrelated
party.
Fair
and legitimate rental value - The rental amount
you establish must be fair and legitimate. In other words, you
can’t
charge anything you want. It has to be reasonable and in line
with what’s being charged for rental of similar assets
in your area.
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.
This article may be freely reprinted on your website or in your newsletter provided
you follow these instructions.
If
you'd like more information or would like to discuss this
article personally with me, please write to
me at alex@goldminetactics.com
See
below for author information.
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