Business owners should buy the real estate and the machinery and rent it to the business. Here is why.
A few reasons exist that supporting the strategy of a business owner purchasing the real estate the business occupies and then renting it to the business for whatever price makes sense within the fair market range:
Income generated through a distribution or from profits, if it’s taxed as a partnership (within an LLC or as a partnership), even an S corporation with pass through profit, with a portion resulting in taxable income and requiring the self employed tax, as much as 15% collectively, from all sources, which can be a sizable amount and is worth avoiding if possible.
If instead of taking this income in this taxable format, if one substitutes rent income as opposed to self employment taxable income, the self employment tax is avoided, saving approximately 15% which is a significant saving.
This also works if the property is already owned by the business owner, and instead of just not renting it at all, not taking cash, to save the cash flow for the business, please rent and re-invest the capital if necessary but exchange taxable self employment income for rental revenue, save 15% tax its a better deal, and then reinvest if you choose.
In addition rent is an expense to the business, thus allowed to be taken as a deduction and reduces taxable income accordingly for the business.
The real estate is then out of play protected against any claims against the business as it is no longer a business asset that can reached or attached by creditors in a law suit against the business, which is a very good idea in view of the huge number if corporate law suits filed every year.
Further by adjusting rents within fair market constraints, according to the availability of taxable income for offset, this allows for some valuable tax planning opportunities.
Considering the depreciation, the interest write off and the additional expenses deduction for insurance, maintenance and repair, it may be a very valuable asset for the owner to take against his personal income.
Thus for stability purposes and protection from possible claims and law suits, it makes additional sense for the owner to purchase the real estate the business operates out of. It should be purchased by the owner directly and rented to the business with full deduction of all costs by the owner to take full advantage of the the benefits.
The same applies to expensive equipment, which rather then being owned by the business and thus vulnerable to attachment as well as wasting potential tax benefits, it too can be isolated in a separate LLC owned by the business owner and leased or rented to the business. Safer and more valuable for the owner.
New autos also work in this scenario, especially with the .48 per mile business deduction, better the owner should own the car himself and take the mileage deduction, it will pay for the car in one or two years if you have adequate income to absorb the huge write 0ff available.
Its about maximizing the potential tax benefits and protecting the property from attachment, two good ideas that aught to be maximised. Think about it if you find yourself in this position. Call me for help 413-549-2966.
