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Kelly Bliss: Get tax breaks for owning a commercial building

Kelly Bliss

This is for business owners out there. If you own real estate that your business occupies and your business is taxed as a regular C Corporation, you will love this column.
The IRS will force you to pay taxes twice on income from a C Corporation. First when the business makes a profit, and again when the owner withdraws the money (called a dividend). pain! However, for rent payments, the business is deducted (reduced taxable income) and the owner reports rental income. Bonus, owners can deduct depreciation from their rent. That might be enough to wipe out all your taxable rental income! This works for all assets used in business, not just real estate. But for today’s example, we’ll focus on real estate.
Suppose your company purchased a property many years ago with little or no remaining depreciation. Also, suppose your company needs working capital for an expansion project. In this example, your property is currently worth $1.5 million. Note that the company can try to borrow from the bank and the interest paid on that loan will be tax deductible, but the building no longer offers depreciation tax benefits.
Solution: Buy real estate from your company at arm’s length prices. (Get an appraisal.) Borrow from the bank to help the purchase as much as possible. Your company is currently injecting $1.5 million in cash, but you have to pay taxes on the proceeds from the sale. Let’s assume a fixed corporate tax rate of 21% and a profit of $1.2 million. Taxes will be $252,000. This leaves about $1.3 million for the expansion project. (Probably about the same amount a bank would lend you.) You are now renting the property to your company at a fair rate. (Again, use a third party to determine that.)
Rent is an expense and reduces a corporation’s taxable income. Your rent is income to you, but it now has depreciation of about $33,000 a year, which reduces the amount you personally report as taxable income. Also, the interest paid to the bank can be deducted, so the rental income is usually tax-free in the end. Voila! Your business is infused with cash, you are withdrawing money from the company without paying double taxes, creating an additional $33,000 annual depreciation charge between you and the company.
If you decide to sell your business property in the future, its value is likely to be appreciated, and the non-depreciated portion of the gain will be taxed at a favorable capital gains tax rate. What a bargain!
Did we mention earlier that this isn’t just real estate? Large business equipment can do this too.
are you listening? Proverbs 24:27 says: Do all the preparations in the field, then build your house. “
Kelly Bliss is a CPA of Carson City. Please contact him at 882-4459. On his web at on facebook too.