Can the business under my LLC pay rent to me for running from a shop on my property?

[LucioWRX]

I am currently renting someone else shop to run my business, I am considering buying my own and install it on my property.
Can I collect rent from my own business?

[tagteam]

Not sure what you are trying to accomplish, but the real estate and business need to be owned by separate entities (one of which can be an individual). 

Regardless, there are still self-rental rules that come into play.

See https://www.thetaxadviser.com/issues/2008/aug/avoidingtheself-rentaltrap.html

[Carl]

You're running in circles here trying to get to your thumb by going around your elbow.  First, what kind of business do you have? This matters big time. A sole proprietorship or single member LLC that's reported on SCH C as a part of your personal tax return? An S-Corp? A C-Corp? A multi-member LLC? A Partnership? Different rules on this apply to different types of business.

[adf5]

I know this is old, but I'm interested in the answer to this question... I have a multi-member LLC (one other owner) and will run it from a small portion of my home that has been set aside explicitly for the business.

[Carl]

Since this is a multi-member LLC and I assume the two owners are not married to each other and therefore do not file a joint tax return together, this doesn't "quite" fall into the self-rental arena. But there are tax consequences still.

Rent paid by the business would be paid "from" the business to "to" you personally. Then you would report that income on SCH E as a part of your personal 1040 as rental income. The payment would be reported on the 1065 as a business expense in the rents paid category. This is where it gets weird. You're using a part of your primary residence as a business rental; not a residential rental. Therefore depreciation would be over 30 years and not 27.5 years.

Understand also that depending on the laws of your state or county, using your primary residence (and in some cases any part of your primary residence) for business may disqualify you for any homestead or other exemptions you may otherwise qualify for on your property taxes.

[M-MTax]

It's a self rental.....The property owner materially participates in the entity renting the property.........Income gets reclassified as non-passive and losses remain passive.

[Carl]

Ah yes. Forgot about that. So it's reported where on the 1040? I can't recall since the form changed.

[tagteam]

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@Carl wrote:

So it's reported where on the 1040?

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Schedule E:

[sb101020]

I'm curious about this as well and having trouble finding guidance - I have a multi member LLC (husband and wife owned) and the business maintains a shop on my property. We had the LLC pay us a reasonable rent for the property use this year and have a lease agreement in place. Does the LLC need to issue us a 1099 for the rental income/ how is the income reported on my personal return? Can I deduct the rent expense on the LLC return? A link to guidance on this topic would be helpful.  

[JamesG1]

Your personal tax return will report the income on Schedule E.

The LLC will probably need to file a 1099 for the rental payment.  This website states:

The basic rule is that you must file a 1099-MISC form with the IRS if you pay an unincorporated independent contractor $600 or more during a year for rental-related services. 

The rent expense may be deducted but this website talks about IRC Section 469 the self-rental rule.

The self-rental rule in IRC Section 469 applies when you rent property to a business in which you or your spouse materially participates. Under the rule, any rental losses are still considered passive, but the rental income is deemed nonpassive.

That means your self-rental profits can not be offset by passive losses, and the self-rental losses generally can offset only passive income. You essentially forfeit the tax benefits from current rental losses unless you have passive income.

You do not talk about other passive activity losses (PAL) that you may be carrying or generating.

[tagteam]

I agree with @JamesG1. Further, below is a link to a TurboTax article on rentals, which is a decent primer.

https://turbotax.intuit.com/tax-tips/rental-property/real-estate-tax-and-rental-property/L3e09vT71

@sb101020 

[sb101020]

Thank you, this was very informative. I still need some clarification and I will provide more insight as well:

• The "rental" is just a room located next to my garage that we operate the LLC out of. I do not anticipate any losses related to the rental activity between myself and the LLC. We decided to have the LLC (owned by myself and my husband) pay rent for use of this space because it seemed reasonable that this room would be rented had it been used by any other business and also provided us the opportunity to get some cash out of the LLC. 
• So we should have issued ourselves a 1099 for the rental income? What are the penalties for not issuing by 1/31?
• Is there any benefit to paying ourselves rent? How else can we go about releasing money from the LLC to us as individuals? Is a monthly distribution from the LLC to myself an option - this would avoid having to complete the 1099, but are there any other other implications associated with this?

Thanks so much for the guidance!

[sb101020]

I've done a bit more research and found that issuing a monthly distribution instead of classifying the payment as rent seems to be much cleaner and has the same net tax impact. This omits the hassle of dealing with 1099's and also the complicated nature of the passive/ non-passive rules of the "self-rental" 

Please share any additional insight you might have or if you think I'm missing anything. Thanks for the help!

[JeffreyR77]

If your LLC is treated as a partnership filing a 1065, there are tax advantages of treating the LLC as an S-Corporation for tax purposes.  You each could draw payroll and have 401(k) plans that the S-Corp can make contributions to up to 25% of your compensation.  The company contributions would be treated as business expenses, as would your payroll of course.  You could also set up an accountable plan to reimburse your for the use of your home office.  The reimbursement would be tax-free to you and a business expense to the S-Corporation.  You elect to be treated as an S-Corporation by filing Form 2553.

[Chaseter14]

What if the Officeyour S corp uses is a commercial building you own. Can you reimburse yourself for rent under an Accountable Plan?