Pay Yourself Rent? The Battle of Schedule C vs E

7 Replies

Are there any rules and regulations from IRS on paying yourself rent if you own an office building and your unrelated business uses that location? By doing that, it would put passive income on schedule E as opposed to schedule C which would decrease self employment tax right? 

Any reason not to do it? 

The payment would need to arm's length as the activities appear to give rise to controlled transactions. The passive activity rules might additionally address related party transactions as well, I'll let the cpas provide input there as appropriate.

@Kyle Scholnick

Do it. Nothing wrong with it. You're transfering business income to rental income and it's legitimate since you own the building and the business or you could just form an S-Corp.

@Kyle Scholnick

Your unrelated business needs office space, so it would be paying for it either way (and reducing its income subject to self-employment tax). It can rent office space from someone else, from you, or it can own real estate for its own use.

Your office building needs tenants, so it would have rental income either way - from unrelated tenants or from your other company. My point is that you're not changing normal business dynamics or somehow reducing your taxes this way, you're simply connecting two businesses that you own.

Yes, there're some tax issues with this arrangement, known as self-rental. They may or may not affect you, it requires a thorough analysis. Here is a somewhat technical article on the self-rental issue:

Originally posted by @Kyle Scholnick :

So if my business is already an S corp, it wouldn't save on self employment taxes by paying myself rent and putting it on Schedule E instead of C right? 

Correct. I would still pay that rent because it's, well, a normal business practice.

PS. If it's an S-corp, there is no Sch C to begin with.  

@Kyle Scholnick

If you pay rent between your Sch C and Sch E, it won't be respected for federal income tax purposes.  You can't pay and receive rent to and from yourself. The real estate asset should be depreciated on the Sch C, regardless of any paperwork form over substance creations.  A good CPA will protect you from yourself here.

You need a regarded tax entity (partnership, S Corp, or C Corp) at the other side of the table if you want a true self-rental for income tax purposes.  Speak to your CPA.

@Kyle Scholnick

Don't overlook the important clarification added by @Eamonn McElroy : for this rent arrangement to work, your businesses need to be organized as separate entities filing their own tax returns, or at least one of them needs to. As in your example with an S-corp.