Q&A: Two More Reasons NOT to Rent Equipment to Your Corporation

Question

Two questions about renting equipment to your corporation.

1. Does the taxpayer incur self-employment taxes on this rental of personal property?
2. Do I need to consider potential sales tax that the state might charge?

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Answer

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The rental of equipment, could rise to a level where it could trigger the self-employment tax, according to IRS Chief Counsel Advice (CCA 1996-13).

The tax code exempts from self-employment taxes both (a) the rental of real estate and (b) the rental of real estate that includes personal property, such as when you rent a furnished apartment. There is no such exemption for the rental of personal property only.

We should note that the chief counsel requested some specific equipment cases from the field to which he could apply the contents of the advice. We found nothing beyond this 1996 advice that indicates anything from the field.

But when we consider the hazard of incurring the self-employment tax on top of the difficulty of obtaining the Section 179 deductions, the rent to your corporation strategy becomes even less appealing than we deemed in the original article. The self-employment tax possibility adds to the negative issues of renting to the corporation and makes the positives of a corporate purchase of the equipment or an accountable plan reimbursement to the owner employee a lot more appealing.

Now to your second question: yes, the rental can generate a state sales tax depending on state law, and if it does, that sales tax adds another hefty negative to the strategy of renting equipment to your corporation.

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Takeaway

When you consider how difficult it is to qualify for the Section 179 deduction by renting equipment to your corporation, and then add on top of that the possibility of self-employment and sales taxes, you have to believe that it’s just easier to have the corporation

• buy the equipment, or
• reimburse the corporate owner-employee for the Section 179 deduction using an expense report (accountable plan).

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