Single Member LLC

[Rae]

Is it 'legitimate' for a Single Member LLC to pay rent to the member. The business is using an outbuilding 100% for the business. The outbuilding is owned by and is on the property of the sole member. Can the LLC pay the 'person' rent?

Thanks!
RJ

[BHoffman]

Is it 'legitimate' for a Single Member LLC to pay rent to the member. The business is using an outbuilding 100% for the business. The outbuilding is owned by and is on the property of the sole member. Can the LLC pay the 'person' rent?

Thanks!
RJ

Hi RJ - If the SMLLC is taxed on Sch C I think it would be better to just use the home office form 8829.

Otherwise the rent expense is going to wash against the rental income and there will be no deduction at all.

Self rentals losses are disallowed and carry forward.

[Rae]

But by paying a fair rent there will be less self-employment tax and the Sch E would most likely show a profit.

[BHoffman]

But by paying a fair rent there will be less self-employment tax and the Sch E would most likely show a profit.

You have a point. But the home office deduction also decreases the SE tax. I guess it depends on whether the fair rent will exceed the home office deduction.

[veritas]

a taxpayer

paying payments to himself is not rent.

This is assuming the LLC is not a corporation.

[Gretel]

Agree with Veritas. A two member LLC would be different either for the business or the rental property.

[BHoffman]

In Vino Veritas, and he is right.

[jimmcg]

paying payments to himself is not rent.

This is assuming the LLC is not a corporation.

Therefore the LLC needs to be structured differently (perhaps minority interest) to accomplish the desired result.

[Rae]

See, THIS is why I asked the question.... Single Member LLC (didn't say anything about being a Corp - it isn't). Is it legitimate for the LLC to pay rent to the owner... I thought I read somewhere it isn't. Can't ever find the source when you need it!! I know, in the long run, it would be much more advantageous for the owner if he could collect fair rent from the LLC.

[DaveinTexas]

See, THIS is why I asked the question.... Single Member LLC (didn't say anything about being a Corp - it isn't). Is it legitimate for the LLC to pay rent to the owner... I thought I read somewhere it isn't. Can't ever find the source when you need it!! I know, in the long run, it would be much more advantageous for the owner if he could collect fair rent from the LLC.

It would be handy if the taxpayer was married. The SMLLC could pay his wife rents; this may solve the separate owner problem; this arrangement is more difficult to pull off in a community property state though.

Here's a quote from the IRC and the latest edition of the EA Journal,

"Next, examine Sec. 162(a)(3) which allows
deductions for “rentals ... for purposes of the
trade or business, of property to which the
taxpayer has not taken ... title or in which
he has no equity.” In other words, a business
(whether a sole proprietorship or a single
member LLC disregarded entity) cannot deduct
rent to itself or to its owner, who is one and
the same as a Schedule C business."

You'll need to sign up as a member of NAEA to get the rest of the article, or pay me a small fee; Only joking!

If it makes good business sense the TP can elect S Status for the SMLLC (as mentioned by the other posters) to create separation of ownership interests (separate legal and tax entity).

Hope that helps.

[Rae]

THAT'S what I thought. Thank you, thank you, thank you for the quote!

Here's payment - $$$$$$

PS - He's not married YET!!

[DaveinTexas]

You're welcome, welcome and welcome

THAT'S what I thought. Thank you, thank you, thank you for the quote!

Here's payment - $$$$$$

PS - He's not married YET!!

I wonder if I have to pay taxes on funny money?

Have a great tax season and try to stay sane!