|
Here's how those who own their own business draw rents from that
business without incurring the tax penalties that apply to dividend payments.
The strategy works for businesses of all sizes.
by Mark E. Battersby
[December 28, 2000]
Are you concerned about getting the profits out of your ISP business without
paying the double-taxation that dividends are subjected to, once at the
corporate level and again when they are included on your personal tax return?
Afraid of incurring the penalty tax that underpaid Internal Revenue Service
auditors often impose on the "excessive compensation" of many ISP business
owners?
Or perhaps your ISP business could profit from an infusion of badly-needed
cash? Are you reluctant to invest additional money in your business? Are the tax
benefits from the business wasted because of the operation's low or nonexistent
profits?and its low tax bracket?
One transaction cures many problems and may be the solution for you. That
transaction is the often neglected and little understood, sale-leaseback.
At its most basic, your ISP business sells its assets, the building that
houses the operation, the equipment used in that operation or even the
computers, servers and routers, that are the business. In return, the business
receives an infusion of working capital. The buyer of those assets (who usually
uses borrowed funds) could be the operation's owner or principal
shareholder?you.
The basic share-leaseback
When the owner or
principal shareholders of an ISP business also own the assets of the operation,
the business pays fully tax-deductible lease payments for the right to use those
assets. An unprofitable ISP business is exchanging depreciable equipment or
property for badly needed capital and immediate tax deductions for the lease
payments.
The new owner of that equipment, whether the business's owner, chief
shareholder or, perhaps, a trust established for the benefit of the owner's
children, will receive periodic lease payments. Thus, with one transaction, the
owner has found a way to get money from the business without the double-tax bite
imposed on dividends or fear of the excessive compensation penalties the IRS
levies where they feel the operation's profits may be paid out as compensation.
Those lease payments are, of course, taxable income to the recipient.
Fortunately, tax deductions offset much of that income before it reaches the
recipient's bottom-line taxable income.
Depreciation write-offs or deductions cost the owner of those assets nothing
out-of-pocket. Somewhere down the road, those depreciation deductions will have
to be paid back or recovered, usually as ordinary income, but that is at some
distant date.
The owner or owners of the ISP business's equipment and assets are also
entitled to deductions for the expense of borrowing the money used to purchase
them. Additional tax deductions such as management fees, maintenance, insurance
and the like, further reduce the tax bill on lease payment received from the ISP
operation.
As a result of a sale-leaseback you, the owner, are receiving a steady-stream
of lease payments that, unlike dividends, are tax deductible by the business.
Plus, as the owner of those assets or equipment, you are entitled to take
advantage of all of the tax deductions associated with it.
Except where the assets of the ISP business are already subject to
restrictions imposed by lenders or other investors, you, the owner of those
assets are enjoying tax write-offs that might not fully benefit the ISP business
entity with its small or nonexistent profits and correspondingly lower tax
bracket.
The mechanics of a sale-leaseback
You'll
probably want to be able to treat the sale as a capital gain instead of income.
Capital gains are taxed at a fixed rate, while income is taxed at a
"progressive" rate that takes a larger percentage from rich people than poor
people. However, you'll probably have to treat the sale as income rather than
capital gains.
The tax rules of the United States are quite clear when it comes to the sale
of any depreciable asset between so-called "related" taxpayers. Capital gains
treatment is denied when depreciable property is sold or exchanged between
related taxpayers. This rule covers sales or exchanges between a person and all
entities that are controlled by that person and between a taxpayer and any trust
in which that taxpayer or spouse is a beneficiary unless that beneficiary
interest is a remote contingent interest.
Any business selling it assets to its owner or principal shareholder may run
afoul of the restrictions preventing capital gain treatment for the proceeds
from those sales. However, only your accountant or banker can advise you whether
that restriction applies and, if so, its impact on the transaction.
Benefiting from a sale-leaseback
It should be
obvious that the sale-leaseback of your ISP business's assets, equipment or
building can be the cure for any number of problems facing you and the business.
However, the complexity of the rules, the requirement that the transaction be
conducted at "arm's length," have a bona fide economic purpose rather
than mere tax avoidance, and be properly structured as both a "sale" and
subsequent "lease," all require professional assistance.
Be sure to consult the appropriate financial and legal advisors.
Securing a Small Business Loan by Mark E. Battersby
5 Stupid Things ISPs Do to Screw Up Their AUPs by Rachel Luxemburg
Management 101: Creating Structures by Jason Zigmont
Protect Your ISP With A Strong AUP by Christopher Knight
Self-Rental, a Tax Strategy by Mark E. Battersby
Tax-Saving Tax Strategies by Mark E. Battersby
Extremely Affordable Worker Magnets by Mark E. Battersby
Reward Yourself With Fringe Benefits by Mark E. Battersby
Turn Your ISPs Business Losses into Tax Benefits by Mark E. Battersby
|
