Kelly Bullis: Get tax relief by owning your commercial building

This is for the business owners out there. If your business owns real estate and your business is taxed as a regular C corporation, you’ll love this column.
The IRS will tax you twice on C corporation income. First when the business earns it, and again, when the owner takes money out (called a dividend). Oh! But wait, when it comes to paying rent, the business takes a deduction (reduces taxable income) and the owner reports the rental income. Bonus, the owner deducts depreciation from that rent. This could be enough to wipe out all taxable rental income! This applies to all assets used by the business, not just real estate. But in our example today, I’m going to focus on real estate.
Let’s assume your company bought the real estate years ago and the remaining depreciation is low or zero. Let’s also assume that your company needs some working capital for an expansion project. In our example, your real estate is now worth $1.5 million. The company may try to borrow from the bank, and the interest paid on this loan will be a tax deduction, but remember that the building will no longer benefit from the depreciation tax.
Solution: Buy the real estate at arms length from your company. (Get an appraisal.) They borrowed from the bank to help with the purchase as much as possible. Your company now has $1.5 million in cash flow, but must pay taxes on the profit on the sale. At a 21% corporate tax rate, let’s assume the profit is $1.2 million. The tax would be $252,000. This will be approximately $1.3 million for the expansion project. (Probably as much as a bank would lend.) You have now leased the real estate to your company at an affordable price. (Again, use a third party to determine this.)
The rent is an expense, it reduces the taxable income of the company. The rent is income to you, but you now have about $33,000 in depreciation expenses per year, which will reduce the amount you report as taxable income. They also deduct the interest paid to the bank, so in most cases, your rental income is tax-free. Voila! Your business is held in cash, you are taking money from the corporation without paying double taxes and there is an additional $33,000 in depreciation expense per year between you and the corporation.
When you decide to sell that commercial real estate down the road, the value will appreciate greatly and the undeductible portion of the gain will be taxed at the appropriate capital gains tax rate. What a deal!
Remember earlier that this isn’t just for real estate? You can do this for larger commercial devices as well.
have you heard Proverbs 24:27 says: “Prepare your work abroad.” Prepare everything in the farm for yourself and then take care of your house.
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.