Here's a LEGAL LOOPHOLE that will allow you to take up to a half million
dollars out of your small business corporation --- TAX FREE!
Let's assume that you've outgrown your principle residence and want to move
into another one. Instead of following the normal routine of putting your house
up for sale and waiting for a Buyer, why not consider selling your house to
your corporation?
Selling your personal residence to your corporation is one of the smartest tax
decisions you can make. Not only is it an excellent way to pull money out of
your corporation TAX FREE, but it's also a great way to give yourself a
tax-sheltered investment. Here's what I mean:
If you want to sell your personal residence and you own either a C or an S
corporation, selling your home to the corporation gives you the following tax
benefits:
You can pull money out of your corporation TAX FREE! - This is because the gain
on the sale of a principle residence can be excluded if the gain is $250,000 or
less ($500,000 for married couples filing jointly) as long as you meet certain
requirements.
Your company can rent out the house and generate BIGGER tax deductions - Since
you sold your personal residence to the business, it now has a stepped-up basis
(higher value) and can generate larger depreciation deductions than if you
rented out the house yourself. If your corporation is an S corporation, these
deductions can be used to offset your other income.
We just used this strategy much to the delight of one of my clients. Here are
the facts and circumstances of this particular case:
My clients, Eric and his wife (not their real names and situation used by
permission), are the 100% shareholders of a small and very successful printing
company. The printing company is a Subchapter S corporation. Eric and his wife
are expecting their fourth child in less than six months. They have both
decided that they will need a bigger home. Instead of putting their current
home up for sale, Eric and his wife have decided to keep it for investment
purposes.
However, instead of keeping the home personally, they have sold it to the their
corporation for its fair market value of $285,000. Since the cost of the home
plus improvements is $175,000, Eric and his wife have a gain on the sale of
their residence of approximately $110,000.
Since married couples filing jointly can exclude up to $500,000 of gain on the
sale of a principle residence (subject to certain restrictions), Eric and his
wife will NOT pay any federal tax whatsoever on the transaction.
In addition, the corporation now has an investment worth $285,000 that it will
depreciate as a rental property. If, at the end of the year, the expenses are
greater than the rental income, the owners of the S corporation (Eric and his
wife) will have a rental loss that they can use to offset their other income.
Can you see the beauty in using this tax strategy?
In addition, if your corporation generates adequate cash, you can structure
your own financing. Of course, everything has to be documented and executed as
if you were selling it to a stranger. In other words, you can't sell your
$200,000 home for $700,000 (unless that's the market value).
This strategy works even better when you have a C corporation. You can avoid
the double taxation trap completely. Also, you can even use this tactic when
you don't completely own your corporation. However, you'll have to consider the
risks of losing control of the home to a fellow shareholder.
Nevertheless, if you're looking for a way to pull out money from your small
business corporation TAX FREE, consider using this strategy. As always, be sure
to consult with your professional tax advisor before considering this or any
other tax or investment strategy.
As a Small Business Owner or Self-Employed Person, there's one especially
lucrative tax break. It's actually an expansion of a tax rule that's been
on the books for years. Known as the Section 179 deduction, the new legislation
takes this loophole and turns it into a deduction big enough to drive a fleet
of SUV's through.
The Section 179 deduction enables the Small Business Owner to deduct 100% of
the cost of most business equipment, in lieu of depreciation over several
years.
What's so great about that?
Think about it like this: I've got a dollar and I'd like to give it to you. You
have two choices -- I give it to you now, or I give it to you 5 years from now.
Which do you prefer?
Obviously, you'd rather have it now, right? And why is that? Because of what
you learned way back in Finance 101: something your banker calls "the time
value of money." I'll spare you a boring textbook definition. Instead, let's
just assume we agree on this simple point: Is a dollar worth more today or 6
years from today? It's worth more today.
And that's why the Section 179 deduction is so valuable. Huh?
Let's use an example to bring all this financial theory into reality.
You Buy $5,000 worth of office equipment in 2003. Under normal depreciation
rules, you wouldn't get to take a deduction for $5,000 in 2003. Instead, you'd
write off the $5,000 over 6 years -- part in 2003, part in 2004, etc.
If you're in the 35% tax bracket, you get your $1,750 in tax savings over 6
years. Yawn. That's a long time!
You'd get your deduction, and the resulting tax savings, but you'd have to wait
6 years to realize all the benefits.
Section 179 says that if you meet certain requirements, you can deduct the full
$5,000 in 2003. You reduce your taxes by $1,750 in Year 2003.
So let me repeat my rhetorical question: Uncle Sam has $1,750 he'd like to give
you. When do you want it? All at once, or spread out over 6 years? That's the
beauty of Section 179. But you have to meet certain requirements to benefit
from Section 179.
One requirement concerns the total amount of equipment you can deduct rather
than depreciate. In 2002, the amount was $24,000. And for 2003, the amount was
originally set at $25,000. Then Congress and the President passed the new tax
bill in May 2003 that raised that amount to a whopping $100,000.
Never liked depreciation? Well, you can pretty much kiss it good-bye now. If
your business Buys more than $100,000 of equipment in a single year, it ain't
so "small" any more! So this new law should cover all small businesses.
Be sure to consult with your tax professional
to get the scoop on all the Section 179 rules. A very nice deduction just got
expanded to monstrous proportions! Take advantage of it.
