As long as the tax code is in place, people have been looking for ways to defer income, reduce liability and increase cash flow. And as a small business owner, rental fees were an area that allowed for creative accounting. However, the IRS became aware of this area and began to examine the rent paid to related parties. If you pay rent to a related unit or someone related to you, here`s what you need to know. Reasonable costs: Only the regular expenses required for the management or maintenance of the property are included. Avoid claiming deductions for any expenses that could be considered personal expenses. Reduce your deductions by a percentage of personal use. If your property has only been rented for six months, you will deduct only half of your real estate expenses. Avoid reporting expenses that would be inappropriate in the event of a transaction with a weapon length. It is very common for real estate rental companies to be leased by a shareholder or another related party. In fact, we advise clients not to own real estate within companies, but to maintain real estate in an LLC with a lease agreement with their companies. Holding real estate within a business can create potential tax traps that can be avoided by owning individual real estate or in an LLC.
We will discuss this further in a future article. As a general rule, transactions with related persons are subject to increased control by the tax authorities. This is particularly the case for leases. If the IRS considers the rent paid to a nearby party to be “unreasonable,” the deduction is reduced. “Excessive” rent can again be characterized as a distribution of profits or a gift. If, at the beginning of the tenancy agreement, you take concrete steps to support the rent rate and conditions, the related parties will be in a better position to defend the lease when questioned by the tax authorities. These are areas that we take into account when we help clients implement effective tax planning strategies. However, agreements with close parties are more likely to face “derkundism” and skepticism on the part of the IRS.
It is advisable to exercise caution when reviewing transactions with close parties, such as assistance. B to a family member or employee with affordable housing. Some of the possible pitfalls of an IRS investigation into a transaction with related parties are the re-characterization of rents, including taxable wages paid to an employee or non-authorization of a deduction. It`s a formal lease. Make sure your rental agreement is established and properly executed in a formal written rental agreement. Companies should also take all appropriate formal measures in connection with the transaction. Formal lease agreement: any lease transaction with related parties should have a signed lease agreement. The tenancy agreement should include standard tenancy provisions, including the term of the lease, regular payment of rent, reasonable rent and provisions regarding non-payment of rent by the tenant. The terms of the tenancy agreement must be strictly adhered to, including appropriate non-payment of rent. Can the same person be the sole signatory of both parties to a lease agreement? (If he is one of the owners of the company owner and one of the owners of the tenant company.) In cases where fair rental values set by independent parties are less than the amount you want to set for your transaction, please carefully document why your particular property should be valued above.