Corduroy Frog Posted March 5 Report Share Posted March 5 Self-Rental is subject to Self-Employment Tax. One common thing businesses are doing: Create an LLC with their building or real estate - pay at least FMV rent to the building, and take a deduction for rent against their self-employment tax. And then the LLC reports rental income not subject to self-employment tax. If the building is rented to no other party, how does this strategy stack up to the self-rental doctrine? JohnH has a tax-preparation and consulting business in North Carolina, which makes $100,000 per year. He and his wife own a building and decide to open up an LLC filing as a partnership. He pays enough rent such that the LLC makes $20,000 profit, and the LLC reports its income on Form 8825 meaning there is no self-employment tax. The LLC has no other customers paying rent. Eureka!!! JohnH still makes $100,000 per year, but pays self-employment tax on only $80,000. But has he violated the "Self-Rental" doctrine?? 1 Quote Link to comment Share on other sites More sharing options...
JimTaxes Posted March 5 Report Share Posted March 5 I had a car wash client.. owned a laser car wash.. two single member LLCs set up. one for the car wash itself/ equipment and one for the building. The car wash LLC paid rent to the real estate LLC.. it was overturned in audit, saying self employment tax was skipped out on.. I have been subsequently told the IRS audit could have been challenged. This was my one and only time I sumitted a claim to my professional liability insurance in 30 years. 1 Quote Link to comment Share on other sites More sharing options...
JohnH Posted March 5 Report Share Posted March 5 Sorry, I lost you at “JohnH has a tax-preparation and consulting business in North Carolina, which makes $100,000 per year.” 2 2 1 Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted March 5 Report Share Posted March 5 10 hours ago, JimTaxes said: I had a car wash client.. owned a laser car wash.. two single member LLCs set up. one for the car wash itself/ equipment and one for the building. The car wash LLC paid rent to the real estate LLC.. it was overturned in audit, saying self employment tax was skipped out on.. I have been subsequently told the IRS audit could have been challenged. This was my one and only time I sumitted a claim to my professional liability insurance in 30 years. SMLLCs are disregarded, so the IRS was correct. Now if the operating LLC was taxed as an S corp, then the S corp could pay rent to the other disregarded LLC. 3 Quote Link to comment Share on other sites More sharing options...
Corduroy Frog Posted March 6 Author Report Share Posted March 6 14 hours ago, JohnH said: Sorry, I lost you at “JohnH has a tax-preparation and consulting business in North Carolina, which makes $100,000 per year.” JohnH, sorry I couldn't resist! I remember the Pablo restaurant on Polk Place years ago.... Quote Link to comment Share on other sites More sharing options...
JohnH Posted March 7 Report Share Posted March 7 23 hours ago, Corduroy Frog said: JohnH, sorry I couldn't resist! I remember the Pablo restaurant on Polk Place years ago.... So do I. It was an enjoyable meeting. It’s closed now, although there are 3 or 4 in the area that are just as good. Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.