Business Tax Loophole: Leasing Assets To Your Corporation
by Alex Goumakos, CPA
Here's another way to slash your tax bill using
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
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
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
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
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
You may rent almost any asset to your corporation.
Examples include: office space, machinery and equipment,
vehicles, computers and peripherals and real estate.
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
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
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Why Incorporating Can Mean Amazing Tax Savings
There can be considerable tax savings waiting the sole trader who decides to go down the road to incorporation. But, one needs to proceed with caution and careful planning. And donít forget the biggest advantage of incorporation, which is Protection from Personal Liability.
Copyright 2004 Alex Goumakos, CPA
Alex Goumakos, CPA has over 20 years of experience helping entrepreneurs
start and grow successful businesses. If you're ready to earn more money, pay
less tax and generate more wealth, visit his website for FREE tips,
strategies and tools to help turn your goals into results. http://www.goldminetactics.com
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