Asset ownership by individual vs. S Corp

[Chet Kincaid]

I have an S-Corp of which I am sole owner. As depreciation (and Sect. 179)
flow to the stockholder's personal return anyway, does it really matter if
one makes assets part of the corporation and deducts them that way or own
them personally, lease to the business, and deduct directly?

I did the latter with the major assets when I started the business. The S-
Corp paid me personally (Schedule C business) an amount just enough more
than that year's depreciation deduction to keep C in profit but not so much
as to trigger SE tax.

I once called the IRS and asked about this and they said it's a common way
to do things.

It seems about the same either way. Are there things I haven't considered?
I may be buying some significant business equipment and I need to decide
which way to go. I am not trying to shield assets from lawsuits or
anything like that so that's not really a consideration.

[McGyver]

Post by Chet Kincaid
I have an S-Corp of which I am sole owner. As depreciation (and Sect. 179)
flow to the stockholder's personal return anyway, does it really matter if
one makes assets part of the corporation and deducts them that way or own
them personally, lease to the business, and deduct directly?
I did the latter with the major assets when I started the business. The S-
Corp paid me personally (Schedule C business) an amount just enough more
than that year's depreciation deduction to keep C in profit but not so much
as to trigger SE tax.
I once called the IRS and asked about this and they said it's a common way
to do things.
It seems about the same either way. Are there things I haven't considered?
I may be buying some significant business equipment and I need to decide
which way to go. I am not trying to shield assets from lawsuits or
anything like that so that's not really a consideration.

Yes, there is one thing you haven't considered. Your objectives are
wrong. You are "...not trying to shield assets from lawsuits"? But
shielding assets from lawsuits (and bankruptcy claimants and other
business risks) is the point of having a corporation. Why else would
you bother to form a corporation? Here is a clear statement of what
your objective should be: Establish a corporation as a separate entity
so that the business entity will bear it's own business risks while
isolating the owner of the business from those risks. That separate
entity will protect your house, savings, retirement accounts, other
investment accounts and other non-business assets from business
creditors, including judgment creditors.

Keeping some major assets out of a business can be a good idea. But the
owner of those assets should be another corporation or LLC, not you
personally. If you use this procedure properly (such as via leasing),
failure of the business which is using the assets will not result in
loss of the leased assets. The leasing company will own the assets, not
a bankruptcy trustee. This procedure is best used when the primary
asset is land, but it also works with capital equipment. This is what
the IRS person meant by "common way to do things."

However, keeping the major asset out of the ownership account of the
business corporation is unwise if you personally own the assets rather
than using another corporation for that purpose. Personal ownership
would put any risks associated with those assets on your personal
shoulders.

This answer must not be relied on as legal advice for the reasons posted
here: http://mcgyverdisclaimer.blogspot.com . And I am not your attorney.

McGyver

[Chet Kincaid]

(Acknowledging that you are not my attorney and you are not giving me
legal advice!)

Actually I incorporated mostly to save on payroll taxes. I pay myself a
salary which is appropriate for the work, is similar to what I was paid
doing the same work for others, and would be defensible in comparison
with industry norms. This is less than the profit of the business and
the difference then comes to me as S-Corp profit, still subject to income
taxes, of course, but not to payroll taxes. Which is fair since it's
earnings as owner not worker.

That was it; not asset protection. I don't run up debt at all so in the
event the business failed there's nothing to run away from. I even have
an escape clause in my lease (which is only year to year anyway so I
doubt I'd ever invoke it). I have a sympathetic landlord! I'm not
engaged in anything physically nor intellectually risky but if God forbid
I were sued for some reason, as the owner / manager / employee / person
who actually does most of the work I presume they'd sue me personally as
well as the business and if some costly assets were in the name of a 2nd
corporation that I was sole owner of they'd probably go after it, too.

But as I said, that's not really much on my mind.

Sounds like, these issues aside, there's not much difference between me
owning and the S-Corp owning, other than the need to file a C on my
personal return not to mention the business paying me and telling the IRS
about it via 1099/1096. I guess I can ponder all of that before tax
season next year.

Thank you.

Chet.

Post by McGyver
Yes, there is one thing you haven't considered. Your objectives are
wrong. You are "...not trying to shield assets from lawsuits"? But
shielding assets from lawsuits (and bankruptcy claimants and other
business risks) is the point of having a corporation. Why else would
you bother to form a corporation? Here is a clear statement of what
your objective should be: Establish a corporation as a separate entity
so that the business entity will bear it's own business risks while
isolating the owner of the business from those risks. That separate
entity will protect your house, savings, retirement accounts, other
investment accounts and other non-business assets from business
creditors, including judgment creditors.
Keeping some major assets out of a business can be a good idea. But
the owner of those assets should be another corporation or LLC, not
you personally. If you use this procedure properly (such as via
leasing), failure of the business which is using the assets will not
result in loss of the leased assets. The leasing company will own the
assets, not a bankruptcy trustee. This procedure is best used when
the primary asset is land, but it also works with capital equipment.
This is what the IRS person meant by "common way to do things."
However, keeping the major asset out of the ownership account of the
business corporation is unwise if you personally own the assets rather
than using another corporation for that purpose. Personal ownership
would put any risks associated with those assets on your personal
shoulders.
This answer must not be relied on as legal advice for the reasons
posted here: http://mcgyverdisclaimer.blogspot.com . And I am not
your attorney.
McGyver