Watch Out for This Tax Change If You Rent a Building or Other Assets to Your Business


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It’s a common asset protection strategy to separate out your fixed assets like a building or vehicles from your operating business.

Here are two recent examples from my clients:

Company #1 had a successful medical practice. The Dr decided to buy a “medical condo” in which he could see clients. For legal reasons, it made more sense to have the condo held in an LLC that he owned personally (single member LLC) and have his medical practice pay rent. The LLC collected the rent and paid the mortgage, property tax and other expenses.

Company #2 was a large national retail store. The owner had a pilot’s license and it made sense for her to have a plane so she could fly to the various stores. The company bought a plane that was used mainly for business purpose. For legal reasons, the plane was held separately from the business. The company paid a fair market rent when the plane was used for business purposes. That was income for the single member managed LLC that owned the plane. The amount of plane expenses was pro-rated based on business use in relation to total use. The personal use portion of the plane was not deductible.

Company #1 sometimes had some income from the LLC and sometimes it equaled zero. Income = expenses.  And also, it’s possible that there could be a loss.  As a self-rental, the income was taxed like active trade or business income. If it was a loss, the loss was not allowed, not matter what. That’s because it’s a self-rental. If it’s zero, that is the best result.

Effective in 2018, rental income generally is assumed to have a 20% income deduction. (Some restrictions may apply)

The 2019 tax regulations, effective for 2018 if you so choose, clearly state that self-rental income that is paid by a C Corporation would not receive the 20% income deduction.

You have a choice of using the 2018 regs or the 2019 regs for your 2018 tax return.

Company #2 likely does not have a loss since the expenses are pro-rated. However, if there is a “business loss”, it also would not be allowed because it’s a self-rental. And the income would not be eligible for the 20% income deduction if the company paying the rent was a C Corporation.

The rule change regarding income and C Corps also applies to intangible property. Intangible property would typically be royalties paid for use of Intellectual Property.

The big changes regarding self-rentals with the 2019 tax regulations are:

  • The self-rental rule for income does not apply if the lessee is your C Corporation.
  • The renting of BOTH tangible and intangible (in other words, Intellectual Property) is covered by this rule.

The strategy here is to have the net result (income less expenses) be as close to zero as possible. You can’t deduct a loss and income won’t get the 20% income deduction.

For more actionable strategies just like this, please join our next coaching class. You can find out more information at https://www.ustaxaid.com/coaching-program/.

Or give Richard a call at 888-592-4769.



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