Q:

Subject: S Corps & Rentals

Kerry

 

    I read with interest the e mail about short term housing being a Sch C business. I currently have plans to turn

a vacation home into a short term rental. I approached my tax guy about this problem and he said I could

include the rental in my already existing S Corp (retail) and file Form 8825 on the rental income thus avoiding FICA.

I receive a hefty pay check from the corporation. Can this dual purpose exist in a single corporation?

 

    Later I got to thinking about the liability issue. Wouldn’t the corporation have to own the rental property? On the other hand,

my original corporation operates out of my home. Is my home at risk because the business operates out of it? My tax person

didn’t seem sure on these points. What’s the best setup?

 

    Thanks  

A:

I can’t possibly know enough about your unique circumstances to advise a specific course of action.

However, you mentioned several issues that you need to explore in more detail with your current tax pro, or one with more experience in this area.

First is the fact that a corporation can conduct more than one kind of business and is not restricted to only the original activity.  It is very common for corps to add new business ventures all the time, just as individuals do.  Your existing S corp could operate rental properties.

The issue of avoiding FICA tax only applies of there is going to be a net profit after all expenses, including depreciation.  If you’ve seen my comparison of C and S corps,  you know that profitable businesses can often have lower taxes via a C corp.

Depreciation can only be claimed by the actual owner of the property.  While transferring ownership of your property to a corp might sound like a good idea, the long term effect could be expensive.  Capital gains tax rates are generally higher for corporations than for individuals. 

What some people do is own the property in their own personal names, and then lease it to their corp, which in turn operates the B&B or other rental activity.  Any experienced tax pro should be able to help you with such a configuration.

There are obviously a gamut of pros and cons to every possible scenario, making an easy “one size fits all” answer impossible to find.  Make sure all of these points are covered in your discussions with your tax pros.

Good luck.

Kerry Kerstetter

 

Q:

Subject: additional paid in capital

 

C-corp has accumilated additional paid in capital,  can this capital be taken out of the corp by shareholder? is this taxable to the shareholder or just the shareholder taking out his equity?

 

thanks

A:

This is the kind of thing you should be discussing with your personal professional tax advisor rather than relying on  advice from strangers on the internet.

Basically, any time you are repaid for your capital investment in a corp, you will need to show that on Schedule D of your 1040.  It won’t necessarily be taxable because you can deduct your cost basis that you allocate to that particular payment, which is normally the exact same amount for payments taken from the Paid in Capital account.  It’s not costly tax-wise, but is a big nuisance to have to report.

This is why it is generally better to keep the capital accounts as low as possible and use loans to transfer money between the corp and the owners. None of the principal payments in either direction has to be reported on your tax return, although interest payments obviously do.  This is something I learned almost 30 years ago, when I first started working on corporate tax returns, and any experienced tax pro should understand.

Your personal tax pro can give you more specific advice for our unique situation.

Good luck.

Kerry Kerstetter