Do you file Schedule C for your business?
Is your business profitable?
Is there property or equipment your spouse owns separately or co-owns with you that you can use in your business?
If the answer to all these questions are yes, then this article will show you a tax strategy that can let you move money from your business to your spouse and help you save taxes at the same time. This strategy works particularly well for married couples living in a community property state.
Recently, the spouse of one of our clients started her own chiropractic clinic. Both spouses are licensed chiropractors and the husband runs his own profitable chiropractic clinic. Thanks to some effective tax planning, we showed our client how the IRS actually allows her to take a tax deduction on her Schedule C for rent she paid her husband to use chiropractic equipment he owned. Moreover, this strategy works even if both spouses file a joint tax return.
How did our clients end up saving 15.3% in taxes as a result of this strategy?
Simple. The $20,000 in rent our client paid her spouse reduced her Schedule C income subject to self employment taxes from $100,000 down to $80,000. Because the $20,000 rental income is not subject to the 15.3% self employment tax, our client only paid self employment tax on the $80,000 net profit on her Schedule C instead of on $100,000. Just like that, our client put money in their pockets by saving on their self employment taxes. Even better, they get to bank the savings every year.
Of course, this strategy is not just limited to equipment. It can be used for an office building, autos or any other asset that you need in your business. Moreover, for those of you who are single, this strategy can also work with a S corporation replacing a spouse.
There are, however, a few caveats to point out about this strategy.
First, you can’t use this strategy to absorb those suspended passive rental losses. Unfortunately, the self rental rules disallow the rent paid from being categorized as non-passive income.
Second, if your Schedule C business net profits are over $113,700, then the savings from this strategy may not be significant.
Lastly, there are some steps you need to take to make this strategy work and sustain an IRS review.
At Gedeon Law & CPA, we can help you put the right documentation and tax compliance in place to make this strategy work. At the end of the day, you’ll be happy knowing you got to save on taxes without having to actually spend any real money to make it happen.