03 May Rent Equipment to Your Company & IRS Section 179 Expensing
Here’s how you qualify for IRS Section 179 when you buy equipment that you want to rent to your corporation:
- The lease term, considering options to renew, must be less than 50% of the property’s class life
- Your business deductions in the first 12 months of the lease must exceed 15% of the rental income
- 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.
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
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:
- You actively are involved in washing the vehicle–car wash
- You take the vehicle for its scheduled maintenance
- 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.