Subleasing your business office space

1 Reply

Hi, I have a consulting business (professional Corp). I pay $600 to lease my office. It turns out that it is common practice to sublease other days to offset my lease. I sublease at $250/day in this market. So I can get positive cash flow on leasing if I sublease three days, which I have. So I have active income where I see clients. I have a rent expense, and I have income from subleasing (passive income?) my question: is the passive income is separate from my (active) consulting business? So it’s a completely different business in itself (sole proprietor?) Should I deposit the passive income into a different account or can I deposit into the same account or is that considered commingling? Is it a schedule E? Seems like a hassle to organize it separately but I see the tax advantages. Kinda want to just clump it together... Also... can I invest the business income into funds that give a dividend (like ahpfund), or will the earnings be taxed as ordinary? Or is it better to pay yourself and then invest from personal account? Advantages and disadvantages? Thanks for your insight.

@Manuel Lam

  • The subleased income will be the rental income, but there are ways actually you can just lump this together with the operation of the business if that gives you better tax advantages. meaning the income can absorb the loss of your consulting business or vice-versa. 

Generally, you cannot lump rental activity with any other trade or business.  Notwithstanding the general rule, a rental activity may be grouped with a business activity if either

 (1) the rental activity is “insubstantial” in relation to the business activity or 

(2) the business activity is “insubstantial” in relation to the rental activity.

 The tax code/regulations do not define or illustrate when one activity is insubstantial in relation to another. There was a withdrawn temporary regulation contained a similar rule that prohibited the aggregation of rental and business operations unless one operation generated less than 20 percent of the combined gross income from both operations.  If your rental income is less than 20% of your operation, maybe it's worth taking the tax position. 

If not, the rental is separate passive income. Depending on how you sign the sublease agreement, it can be on schedule E or report via your pro-Corp. Doesn't matter how it is reported, it is still a passive income. You might wanna structure it in a way that limits your personal liability. 

  • If the dividend is a qualifed dividend, there are special lower rates maxed at 20% (Plus .3.8# NIIT if your modified gross income is above 200k ). If you invest in the funds via business entity, it will flow through and retain the same character (Qualified Dividend )as if you invested individually.  But, there are other considerations based on your business goals and risk. 

Hope that helps. 

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