For many small business owners, renting or leasing equipment to yourself can be a good way of taking some edge off your tax payments. The process is simple on the surface: buy, lease or rent a piece of equipment your business needs, then rent it to the business and pay yourself monthly. This turns some business profit into rental income for you, rather than self-employment income. You can even do this with a second house by following the steps below.
Things You'll Need
- Second home
Make sure all your business paperwork is in order. You can't do this as an independent contractor, only with a business that is independently incorporated from you.
Make certain your second home is an appropriate location for your second business. As location is an important consideration in many business models, don't put your business someplace where it will lose more income than you'll save.
Determine the rent you want to charge for use of your second home. Although it's reasonable to charge yourself high rent (if the business can afford it), if the rent is too high the IRS can choose to consider some or all of it self-employment income (and subject to self-employment tax).
Draw up a lease agreement between you (an individual) and your business (a corporation). If possible, have another corporate officer sign for your business.
Set up automatic payments from your business account to your personal account.
Tips & Warnings
- Keep in mind that tax laws are complex and the penalties for making mistakes can be severe. Check with your tax professional before starting this or any other tax-savings strategy.
- Interview with Celia Havranek, Independent Lawyer, Portland, OR
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