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Tax Benefits of Leasing to Yourself

When you lease personal property to your own company, the company can write off the lease payments as ordinary and necessary business expenses. Of course, the rent represents taxable income to you personally, but you can shelter it from tax through deductions for depreciation, repairs and the like. In a recent case, an enterprising taxpayer was even permitted to claim a tax loss on the deal.

Facts of the case: An attorney began leasing equipment he owned personally—computers, furniture and audio-visual equipment—to his law firm. Over a six-year period, he received rental payments from the firm totaling approximately $1 million. During this time, the attorney claimed depreciation deductions on the leased equipment.

In two of the tax years, the law firm had no income and was unable to pay rent, generating a loss from the leasing activities. Ultimately, the leasing activity did not prove profitable, primarily because of those losses.

The IRS said the losses were “hobby losses” that could not be deducted in excess of income from the leasing activity. However, the Tax Court disagreed. Reason: The attorney followed his tax adviser's advice in setting up the arrangement, used the equipment exclusively in the law practice, maintained a high degree of knowledge about the equipment and collected rent consistently. Result: The deductions were allowed.

Caution: These types of arrangements are filled with tax traps for the unwary. Be sure to consult with a tax professional concerning your personal leasing agreements.

 

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