Reduce your taxes by renting your building to your business

Did you know about this tax planning strategy to reduce self-employment tax by increasing the rent charged to your business by your rental property? by Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC., a CPA and CFP Firm. 602-292-2009
Business owners who own their own buildings can withdraw money from their closely held business while dramatically cutting their self-employment income by simply leasing property they own to their closely held business.

Taxpayers who own closely held businesses can maximize their tax savings by taking advantage of the self-employment tax “rentals exception” under which rentals from real estate and from personal property leased with the real estate (and the corresponding deductions) are excluded in determining net earnings from self-employment. The tax savings can be significant.

In most cases, a Cost Segregation Study can increase depreciation on the business owners building and allow the business owner to charge their building higher rents!

Many states give the business owner an exemption from rental tax which helps the business owner retain more cash flow.

The Social Security wage base for FICA Social security tax will increase from $110,100 for 2012 to $113,700 in 2013. Please see IRS Website if you need more information.
From PPC: For tax years beginning after 2012, an additional 0.9% Medicare tax is imposed on taxpayers (other than corporations, estates, or trusts) receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). (Code Sec. 3101(b)(2)) The tax only applies to the employee portion of Medicare tax. An additional 0.9% tax also applies to net earnings from self-employment. This tax was added by the 2010 Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), which was largely upheld by the Supreme Court.

From PPC: In addition, for tax years beginning after Dec. 31, 2012, an unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. (Code Sec. 1411(a)(1)) MAGI includes wages, salaries, tips, and other compensation; dividend and interest income; business and farm income; realized capital gains; income from a variety of other passive activities; and certain foreign earned income. (Code Sec. 1411(d)) The threshold amount is $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others. (Code Sec. 1411(b)) The tax generally doesn’t apply to an active (i.e., nonpassive) trade or businesse conducted by a sole proprietor, partnership, or S corporation. (Committee Report) This tax was added by the Health Care and Education Reconciliation Act of 2010.
IRS has ruled that an individual who merely holds real estate for investment or speculation and receives rentals from the property isn’t considered a real estate dealer. Thus, an office building owner who provided normal building services and who was an investor, not a dealer, wasn’t subject to self-employment tax on the rentals. (Rev Rul 55-559, 1955-2 CB 315). 602-292-2009

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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.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009