Leasing Question

[OldFaithful]

Hello Folks,

I've got a question regarding a home office/shop. Has anyone tried leasing the location that you already own to your business?

A local business owner told me that he personally owns the location that his business operates from, and he leases the space to his own business. That appeals to me. I own the space I'm planning to use for my office/shop and leasing it to the business has it's own benefits. Anyone else doing this, and if so, were there any legal issues to work out?

Thanks!

 

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[gottheworm]

Hello Folks,

I've got a question regarding a home office/shop. Has anyone tried leasing the location that you already own to your business?

A local business owner told me that he personally owns the location that his business operates from, and he leases the space to his own business. That appeals to me. I own the space I'm planning to use for my office/shop and leasing it to the business has it's own benefits. Anyone else doing this, and if so, were there any legal issues to work out?

Thanks!

I think this is more of a tax issue than a legal one in most locales. If you are in the US, the tax authorities don't like "free" transactions. They assume everything has $ value and should be reflected as such, so they can tax you on it (where applicable). If your business is leasing space in your own home you can also use this as a tax deduction.

 

[OldFaithful]

As I understand it, the rental income has to be reported as regular income and taxed accordingly on the personal filing. However the business considers the rent a business expense which is just subtracted from total revenue. I don't think there are any other taxes paid on that money.

 

[OldFaithful]

No one has any experience with this??? Well anyway, I've been doing a little research and gleaned the following. Just thought I'd share this anyway, since it seems like it could be quite helpful.

THIS POST IS ENTIRELY OPINION AND SHOULD NOT BE TAKEN AS FACT. NO LEGAL/TAX ADVICE IS BEING GIVEN. DO YOUR OWN DUE DILIGENCE!!!

It appears to be perfectly acceptable to lease your space to your business. It works best if your business has been formally declared as a business entity (LLC, S-Corp, etc.) to make the delineation more clear. (This should help reduce the likelihood of an audit.) It is also acceptable to personally buy the equipment your business will be using and lease it to the business.

In each case, a formal lease agreement needs to be drawn up and signed. The usual details need to be worked out, such as who performs maintenance, who buys insurance, paying utilities, renewals, etc. In addition, the lease amount needs to be realistic and competitive with the open market, or you're asking for an audit & a fine. I've read that you, as the owner of the property/equipment, can also deduct the depreciation of the property/equipment...but I'm not really clear on how that is done.

The $ that the business spends on the lease is subtracted from the top/gross and is paid directly to you the owner of the property/equipment. That $ is then reported on your taxes as income and you pay Income tax on it. However, you don't have to pay the Payroll tax on that $. That means you don't have to pay the ~15% Payroll tax (~7.5% is the employee's portion and ~7.5% is the employer's portion) on that $. If instead you simply paid yourself the $ as a wage, then you'd have to pay both halves of the Payroll tax.

This might not be of much benefit to those of you in eCommerce, but for those of us in Physical Products (or B&M), this could be significant.

Please do let me know if my interpretation of this is incorrect.

 

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