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Avoid employment tax on rental income

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in Small Business Tax,Small Business Tax Deduction Strategies

Q: I'm interested in the strategy you wrote about regarding collecting rent when you lease personal assets to your company. (See 10/17/05 issue.) If I rent assets to the company, am I then subject to Social Security tax on the net income? J.C.K., Hood River, Ore.

A: No, that's part of the beauty of the deal. Compensation paid out to employee-shareholders is subject to both income tax and employment taxes. But rental income isn't treated as compensation subject to employment tax, even if it's paid by your own company. You're only responsible for income tax on your net rental income (i.e., payments received minus qualified expenses). Tip: You must be able to show a legitimate business purpose for the arrangement. Otherwise, the IRS could call it a sham concocted just to avoid tax.

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