My LLC owns a business property where I've run another LLC business for the last 17 years. I'd like to start renting to myself (my LLC commercial prop renting to my LLC business running out of it full time). This seems like a perfectly legit thing to do in the eyes of the IRS but here are my IRS audit concerns…
By renting (at fair market value) to my LLC, my tax bill will suddenly reduce to almost half of its current amount (Yay! But we've been paying a similar amount for the last 17 years and renting to myself would be the only changed variable – red flag?)
I’m hoping to apply this change to last year’s taxes but we do not have a paper trail for one year yet. Perhaps we should start from here onward with lease written, account open, and monthly paystubs to avoid audit nightmare?
Accountant · Franklin, TN · Member since 2023 · 204 posts · 91 votes
3y
Income shifting to a related entity can be a good tax strategy. Simply charge yourself fair market value rent and the IRS will be satisfied. It will hopefully allow you to be taxed on rental income and avoid self employment tax (I am not sure of your situation). My advice would be to use this strategy moving forward instead of going backward due to a lack of paper trail.
Accountant · Franklin, TN · Member since 2023 · 204 posts · 91 votes
3y
Income shifting to a related entity can be a good tax strategy. Simply charge yourself fair market value rent and the IRS will be satisfied. It will hopefully allow you to be taxed on rental income and avoid self employment tax (I am not sure of your situation). My advice would be to use this strategy moving forward instead of going backward due to a lack of paper trail.
Your tax bill will not suddenly be cut in half, nice try though.
Your business gets a tax deduction for the rent, and you personally get an equivalent increase in taxable rent income. It's basically a wash, except for the potential implications in self-employment tax but not income tax.
You cannot rewrite the past. Not because there's "no paper trail" but because there was no such arrangement in place. Going forward it may be beneficial or it may not be.
I'm grateful for your reply, but let's not jump to conclusions. The fair market value for commercial rent in my area is $27 a square foot and my business would be paying $3000/month rent to the LLC. That would reduce the taxable self-employment income we earn at the property by $36000/year! The property itself depreciates at $21,000/year and if we add rent loss, every little penny of the remaining rent income is deducted. With the reduction of AGI, I would also quality for a lower tax bracket. Of course there's depreciation recapture later on down the line, but that's a different story. My final payment to the IRS would be almost half of what I'm paying now. This isn't wishful thinking, its IRS math.