When you read about some of America’s wealthiest entrepreneurs, you'll often discover that they regularly received highly detailed tax and legal advice. A recent biography published about the life of attorney Greg Bautzer, one of Howard Hughes’ attorneys, revealed many interesting and rather questionable details about how Hughes conducted certain business transactions.
One minor fact referenced was that Hughes definitely knew the advantages of having one of his many enterprises lease equipment and goods to other business entities he owned. This is just one of the many ways that smart entrepreneurs go about saving money on their taxes, while also generating extra income.
Although you should theoretically pay added taxes on the income that your “Company A” earns from leasing equipment or goods to your “Company B,” that’s not always required. This is where appropriately applied tax shelters can sometimes be used.
Under the right transactional circumstances which your Peachtree City attorney can discuss with you, it may be fully legal to “shelter” the added income by taking deductions for repairs, deprecations, insurance, administrative costs and other similar expenses. And your “Company B” can usually write off all of its lease payments to “Company A” as what the IRS usually refers to as ‘ordinary and necessary’ business expenses.
Of course, there are certain factors you must bear in mind when trying to negotiate such deals between your own companies.
Be Careful to Abide by Fair Pricing and Other Basic Leasing Principles
Always charge fair fees. Never try to lease goods or equipment from one of your company's to another one for fees that are unusually high – or at least well above current market average for similarly leased goods. You can be absolutely sure that IRS auditors carefully examine these types of usually lawful (yet clearly self-serving) deals;
Obtain proper legal advice and drafting help. Ask your Peachtree City attorney to carefully draft the required paperwork for these lease transactions. If you like, the two of you might also want to ask a tax expert to review how you’ve set up all of the leases – and how you're planning to list all added income and deductions on your upcoming tax filings.
Also, among other topics, be sure you and your lawyer have already properly created each of your businesses in keeping with Georgia statutes --so that all of your leasing transactions will be fully legal and beneficial to your overall business plans.
Disadvantages of Leasing and Reasons to Question This Approach
Depending upon the length of the proposed leasing term, it can prove far more costly to lease rather than purchase certain equipment. As future IRS auditors might point out, you cannot always use leasing between your companies to try and avoid valid government taxation if purchases would prove far more economical than leasing;
You can't build equity in something you don't own. Of course, given the speed with which technology brings changes to many current goods – this may not always be a drawback;
Your business needs may change over the course of the lease term. Regardless of whether all of the goods or equipment you've leased are still useful to you throughout the life of the lease, you still must make all lease payments required under your agreement. (It might be wise to ask your attorney if he/she can properly include provisions in your lease for the substitution of updated goods or equipment at reasonably specific intervals – while the original lease period continues).
To obtain help with handling all of your Georgia business planning needs, please contact Shane Smith Law today. You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.