LEASING PROPERTY TO A CLOSELY-HELD CORPORATION
Shareholders of closely-held C corporations routinely lease real estate, equipment, and other property to their corporate entity. These leases can be held directly by the shareholder or through a separate entity, such as a partnership, LLC, or S corporation.
Of course, the corporation could directly purchase the item or lease it from an independent source. However, advantages that can motivate these leasing arrangements include the following:
- Avoiding Payroll Taxes. Rental income from real estate is not subject to self-employment (SE) tax. A lease of real estate to a closely-held corporation represents the ability to withdraw funds from the corporation without incurring social security or Medicare (FICA) taxes.
- Avoiding Corporate-level Gain. Retaining ownership of real estate and other valuable tangible or intangible assets outside the corporation avoids the potential for triggering a gain within the corporation at either distribution or liquidation of the assets. If appreciated assets (those with an FMV in excess of adjusted tax basis) are distributed from a corporation, whether in liquidation or other form of distribution, gain must be recognized.
- Retirement Cash Flow. Retaining valuable assets outside a controlled corporation allows the shareholder-lessor to continue to receive a cash flow stream in the form of rent or royalties even though the shareholder is no longer actively employed by the corporation. This can allow a portion of the corporation income to flow to a retired shareholder or a shareholder who is uninvolved in the business operations.
- Business Transition. Retaining assets outside the corporation provides a natural segregation between the ownership of the business and the ownership of the business assets. For example, a controlling shareholder-lessor may want to divert ownership and control of the business operations by disposing of some or all of the corporate stock, but retain a portion of the business assets for lease to the entity. This can help transfer ownership and control to a successor by minimizing the value of the corporation (e.g., when the corporation contains only operating assets, such a receivable and inventory, with fixed assets retains by the founder).
As you plan your business operations, keep these potential advantages in mind. It is also important to understand that, as with most areas of tax law, some restrictions and limitations apply to shareholder-to-corporation leasing transactions. Therefore, please contact us to discuss the details of how these arrangements should be structured before you sign the lease.