It's bad enough when you have to pay tax once to the IRS. But C corporation owners are hit with a double tax whammy: first, when the corporation pays tax and, second, when Uncle Sam taxes them personally on dividends paid out by the company.
Strategy: Buy property and assets personally and lease them back to your company.
That technique works particularly well with real estate and other assets that are likely to appreciate in value. In fact, if your company already owns a business building, you can buy it from your company now and then lease it right back.
Example: Sale-Leaseback Deal:
Solution:
Fly under IRS radar. This technique can be perfectly legal, but the IRS often casts a skeptical eye on such deals.To make sure your deal is legit and satisfies IRS standards, meet these five requirements:
That way, the company pays you deductible lease payments instead of nondeductible dividends, and you can offset the income with depreciation or amortization deductions.
Suppose your company bought its building years ago and has since depreciated it down to zero. You estimate that the building and adjacent land are currently worth $1.5 million. Your company needs a quick cash transfusion for proposed expansion, but money is tight.
Buy the building from your company for $1.5 million-using mostly cash you've borrowed-and lease it back. Then you begin depreciating the building all over again, using a 39-year write-off period. Your company pays the going rate for rentals in your area, but the rental income is offset by the depreciation and other related expenses.
Your company now has the cash it needs for expansion. Also, it can now deduct rental payments for a building that had previously been fully depreciated.
In comparison, your company receives no tax deduction for money paid to you as dividends. The downside is that the company must pay tax on the gain.
