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Leasing to your company: Save a tax bundle

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in Small Business Tax

Let’s compare the tax results of leasing a business building to a C corporation as opposed to the company owning the property outright.

Option A: Leasing. To avoid liabilities, you set up a new single-member LLC (owned 100 percent by you) to buy the land and the building. The LLC leases the building to your company. After 15 years, you sell the property for a $1 million gain. The entire gain is taxed to you personally. (The LLC pays no tax.) Part of the gain attributed to recapture of depreciation is taxed at a federal rate of no more than 25 percent; the rest is taxed at no more than 15 percent. With an assumed federal tax bill of $200,000, your net after-tax profit would be $800,000 ($1 million less $200,000).

Option B: The corporation owns the land and the building. If it sells the property for $1 million, the company will probably pay a federal income tax rate of 34 percent, which translates into a corporate tax bill of $340,000 (34 percent of $1 million). Assume the company distributes the remaining $660,000 to you as a taxable dividend.

Even if the 15 percent maximum tax rate on dividends is preserved, you still owe tax of $99,000 (15 percent of $660,000). After federal taxes, you would net only $561,000 cash in your pocket ($1 million less $340,000 less $99,000).

Bottom line: You save a whopping $239,000 of federal income tax ($800,000 compared to $561,000) with the leasing arrangement.

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