Tax Service Regarding Equipment Rentals in Scottsdale, Phoenix, or Paradise Valley

Renting Equipment to your Corporation:  What is the correct way and the incorrect way?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!  Phoenix , Arizona tax preparer

Rent equipment to your corporation or your business?

Never buy equipment with a personal check! Why? Because you could be “shooting yourself in the foot”. You could make what should be a wonderful tax deduction into a non-deductible tax deduction.

Wrongly, some CPAs are trying to help business people avoid taking payroll and paying payroll taxes out of your business. This is clearly a mistake because although you could save some payroll taxes, you could lose big tax deductions on the equipment or a vehicle you purchased to rent to your business whether it is a corporation or partnership.

Another common mistake that CPAs make is that they think they can produce “passive” taxable income by your renting equipment or a car to your business. They think that this “passive income” can offset “passive losses” that are frozen until passive income can be used. The problem is that taxable income from rentals to businesses is not “passive income” and cannot be used to offset “passive losses”.

Here is what could go terribly wrong and here is why!:

As an individual taxpayer, you may not automatically claim a Section 179 deduction when you buy Section 179 property that you rent to another (third party or not).

Instead, you must qualify for the Section 179 deduction by meeting the following three
Requirements:

The lease term, considering options to renew, must be less than 50 percent of the
Property’s class life. So if you fail to prepare or have an attorney prepare the lease, you have just allowed the IRS to argue that you failed this test and you cannot take the fast Section 179 depreciation in one year on your rental to your business.

Here are some other tests for you to be able to write off the equipment in one year using Section 179:

1. Your business deductions in the first 12 months of the lease must exceed 15 percent of the rental income. It is too easy to fail this test.
2. Your equipment rental activity may not involve holding property simply for the
“Production of income”. By simply having a lease between you and your business, you have failed the “production of income” rule.

Let us look at the class life to make sure that your lease is not for over 50% of the life of your equipment you are renting to your business.

You have to go to IRS Pub and then go to Table B-1 which gives three lives, the first of which is the class life that you use for the 50 percent test.
For example, with furniture and equipment, 10 years is the class life for the 50 percent test.
As you see, the table clearly sets out the class life.

You must have a rental term of less than 50 percent of the class life.
Since furniture has a 10-year life (120 months), you need a rental period of less than 60 months. Your lease has to be for less than 60 periods to be able to take the fast Section 179 depreciation on your equipment rental schedule.
You must consider renewal options. Your best bet: Don’t have any renewal options in the leases
Your next test is that your business deductions in the first 12 months of the lease must exceed 15 percent of the rental income.

If the rental income you receive from your corporation during the first 12 months of the lease is $9,000, your business expenses must exceed $1,350 (15 percent times $9,000) for you to qualify for Section 179 expensing.

On furniture and equipment, you might be hard-pressed to spend 15 percent of the rental income on business expenses.

The active involvement test in your rental of the equipment or vehicle to your business is very hard to pass. If you have lathe or machinery that you are leasing to your business, I cannot think of how you would be able to pass the active test.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

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Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com