179 Deduction S corp shareholder

[Unregistered]

This may be an easy one, but here goes....

I am a 50/50 shareholder in a corporation. I own equipment; trucks and other machinery, that I rent to the corporation, and not to avoid compensation(wages). I report the rental income on my personal return and the depreciation of the equipment on the 4562, yadda yadda...

If this equipment is purchased for business use, used over 50% for business, not from a related party, am I able to take the section 179 deduction for the equipment?

Yes, the equipment was purchased this year.

TIA

[OldJack]

Yes, you claim §179 deduction on form 4562 (deducted on form 1040 Sch-C) and you can also pay self-employment tax on the net income from the rental business that you must report on your 1040 Sch-C. No, you may not report any of the rental income or expenses on 1040 Sch-E as that is only for real estate operations.

[Unregistered]

But, I am not in the business of renting property to produce income. The corporation simply needs the equipment to operate and I happen to own the equipment, for liability reasons only.

The business is landscaping and the purpose of buying the machinery was not to rent it to the corporation, but the corporation needs equipment in order to earn income.

[Bird Legs]

Equip. Rent

Old Jack is right. It doesn't matter what you are in the business for. If you are renting
personal property to your corp. then it is Sched. C Income.

[veritas]

"But, I am not in the business of renting property to produce income. The corporation simply needs the equipment to operate and I happen to own the equipment, for liability reasons only."

If it is not a trade or business Sec 179 is not allowed for rental property.

[OldJack]

But, I am not in the business of renting property to produce income. The corporation simply needs the equipment to operate and I happen to own the equipment, for liability reasons only.

If you are leasing your personal property, you are in the business of renting your personal property to produce income.

[veritas]

I don't see how renting only to your own corporation could be defined as a trade or business which you must have in order to expense personal property. But I'm open to persuasion.

However as a side note it would not be a passive activity.

[OldJack]

I don't see how renting only to your own corporation could be defined as a trade or business which you must have in order to expense personal property. But I'm open to persuasion.

I don't believe one customer has much to do with it being a business. Especially when it is a continuing lease as this case appears since it was stated the S-corp could not operate without the equipment.

Personal property.

Do not use Schedule E to
report income and expenses from the
rental of personal property, such as equip-
ment or vehicles. Instead, use Schedule C
or C-EZ if you are in the business of renting
personal property. You are in the business
of renting personal property if the primary
purpose for renting the property is income
profit and you are involved in the rental
activity with continuity and regularity.

[veritas]

I agree personal property rents do not belong on Sch E. But the fact is the rent structure has nothing to do with a profit motive. He said it was done for liability reasons. So I would conclude we do not have a trade or business activity. Another thought comes to mind in that leased personal property is specifically excluded from Sec 179 unless some requirements are met. One is the length of the lease if memory serves.

[Snaggletooth]

Banty Roosters

Guest, you drop a topic, and two of our most prodigious folks go after each other like Banty Roosters. You deserve REAL advice, and not just a ringside seat for this ping-pong game. Sit back and listen to a REAL tax pro enlighten you just by walking in the room.

Actually, I am quite meager with my professional claims - the above paragraph is a response you might expect from Jainen - (he's always lurking around somewhere and will probably chime in with his usual utter brilliance before this is over).

At any rate, here goes. Let's say you own a Ditch-Witch, Pickup Truck, Utility Trailer, Three Riding Lawn Mowers, etc. and you buy them in your initial year for $60,000. Yes, this is schedule C stuff, but this is also where you can deduct your depreciation, interest, personal property taxes, insurance (for equipment), etc. For purposes of discussion, let's assume the S corp also buys $25,000 of equipment which qualifies for section 179. Neither the $60,000 nor the $25,000 are over the section 179 limit, but the deduction is on your PERSONAL return. The schedule K for the S Corp reports income net of the $25,000 and reports the $25,000 as a separate line item. Reason being, the S Corp does not have visibility to what is being deducted on the invididual's return.

You will see a separate box on the back of Schedule E to deduct this $25,000. The total s.179 used on your personal return is $85,000 and you are thus under the limit. But it is possible to exceed this limit, even though none of the sources are over the limit taken by themselves.

I'll say something else about your situation if the equipment is bought with borrowed money. The equipment may qualify for s.179, but I very seldom use this if it is financed. Reason being, you are taking the whole deduction and no doubt creating this huge loss on your Schedule C. But what about Years 2,3,4,?? You now have profit on schedule C and are having to pay SE tax big-time because there is nothing left to deduct. Not a big deal if you've got plenty of cash, but if you are still having to pay debt service on this stuff PLUS self-employment tax then you've really created an unbalanced economic situation with your tax planning.

I'll close now. Trust me, Jainen is not far behind, and will not only illuminate you further but also tell you how dumb the rest of us are. But ignore that -- he gives very, very good advice. If you're lucky, Black Bart may also post - King of homespun humor and erstwhile tax guy.

[jainen]

an easy one

As our guest said in his first sentence, this is an easy one. Because he leases the property long-term to a single client, it is not eligible for Section 179.

The more interesting question is, what kind of liability issue would make you hold trucks and machinery outside a corporation so that you are personally responsible?

[Snaggletooth]

Good Question

...by my much-maligned colleague Jainen.

It would seem that equipment such as lawn mowers, trucks, excavation stuff if you have a backhoe or ditch-witch invite big-time liabilities for injury. Why on earth would someone prefer to own this personally instead of having this stuff in the corporation?

...which incidentally would also solve ALL of the problems discussed in previous posts.

Jainen, what disqualifies this equipment from s.179 by virtue of it being rented?

[jainen]

veritas mentioned

>>what disqualifies this equipment from s.179<<

It's one of the requirements that veritas mentioned above. Equipment that you rent to others is not Section 179 property unless the term of the lease (including options to extend) is less than 50% of the class life. I suppose that rule closes some loophole, but I can't figure out what. No, wait--it's this exact situation!

[WhiteOleander]

Well, I'll jump in here too.

If you are not engaged in the business of renting personal property, I believe you report the income on line 21 "other income". Then you take expenses on the last line of the adjustments section on the front page of the 1040.

But, since he is an owner/shareholder of the S-Corp he rents to, isn't this a "related party" transaction? No loss is allowed?

Just my two cents.