Rent Equipment to Your Company & IRS Section 179 Expensing

May 3rd, 2016 at 11:01 AM

Here’s how you qualify for IRS Section 179 when you buy equipment that you want to rent to your corporation:

  1. The lease term, considering options to renew, must be less than 50% of the property’s class life
  2. Your business deductions in the first 12 months of the lease must exceed 15% of the rental income
  3. Your equipment rental activity may not involve holding property simply for the production of income

Finding the Class Life

You find the class life in Table B-1 of IRS Publication 946–How to Depreciate Property.

The class life is not the life over which you depreciate the asset–it is the life that puts the property into a depreciable period under the law.

Rental Period

You must have a rental term of less than 50% of the class life.

For example, if you were going to rent furniture to your corporation, you would first note in Table B-1 that the furniture has a 10-yesr class life. Therefore, the rental period must be less than 59 months.Planning Note: Don’t have renewal options in the leases with your corporation–this eliminates the the renewal option problem

Business Deductions

Your business deductions in the first 12 months of the lease must excess 15% of the rental income.

Example: If the rental income you receive from your corporation during the 1st 12 months of the lease is $9000, your business expenses must exceed $1350 or 15% of $9000.

If you rent an SUV vehicle to your corporation the insurance alone may cover the 15% threshold.

Active Business Status

Consider the SUV–here’s how to achieve business involvement:

  1. You actively are involved in washing the vehicle–car wash
  2. You take the vehicle for its scheduled maintenance
  3. you collect the lease payments and deposit them in the bank

When you operate your business as a corporation, you often look for ways to get money out of the corporation without it being classified as a salary–the strategy described in this brief article is one way to achieve it. 

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