The C Corp Leasing Company: Why It's Not the Tax Haven It Seems
The latest lie in taxes: The C Corp “rental leasing company”
A client recently asked ”Should I create a C Corp leasing company for my rental activity? This video says I should.”
I watched the video. Of course I did.
I will never get back those 6 minutes or the following 30 I spent explaining to my client why the “advice” presented was pure trash.
Here’s their pitch: You have a few rental properties, probably each in its own LLC. You establish a C Corporation “leasing company” - not to hold the properties (thank goodness) - but instead to sublease from the LLCs. With your rental profits now zero’d out and converted into C Corp revenue, you can unlock deductions available only to C Corps - primarily owner health expenses. And who doesn’t want a 21% C Corp tax rate compared to the highest personal tax rate of 37%? Further, any after-tax C Corp profits can be left in the company for other uses or simply taken out at the owner’s discretion “tax free”.
Doesn’t this sound great? Who WOULDN’T want to drop their tax rate by over 15% simply by setting up a new company and moving some money around? Who WOULDN’T want a tax deduction for their personal health expenses?
Why aren’t we all doing this RIGHT NOW??
Ugh
So much wrong with this message.
❌ Entities should have non-tax avoidance reasons for their existence. Is there a non-tax need for a leasing company for the 3 rental properties you self-manage? I can’t say ‘no’ for sure, but it does seem a stretch.
❌ Conveniently no mention of adding a new tax return that will need to be filed every year, incurring more tax prep fees. 💸
❌ State income taxes are glossed over. E.g., Florida has no personal income tax but DOES have a corporate income tax with a 5.5% rate. Let’s make sure we’re not encouraging folks to turn non-taxable income into taxable income at the state level.
❌ Due to depreciation expense, many small residential rentals throw off tax losses in their initial years - even if they generate positive cash flow. No need to add an extra entity in the mix if its sole purpose is to convert one type of profit into another and you don’t even have profits.
❌ No mention of other tax entities that also allow a deduction for owner health insurance premiums. No mention of just what types of medical expenses are and are not deductible in a C Corp health reimbursement arrangement. Spoiler alert: you probably shouldn’t deduct your swimming pool.
Perhaps the WORST part of the message:
❌❌❌ No mention of C Corporation DOUBLE TAXATION. Owners can’t take after-tax profits of C Corps “tax free” as the speaker states. If that were true EVERYONE would use C Corps for EVERYTHING. Instead, C Corp profits are returned to owners through a) taxable dividends or b) taxable wages. And while owner wages ARE tax deductible by a C Corp, it’s not a “wash”; you now have self-employment tax & payroll concerns when rental real estate typically doesn’t have either. No matter how you slice it, comparing a 21% corporate rate to a 37% individual rate isn’t an apples to apples comparison. 🍎
Are C Corporations poor entity choices?
Nope.
I love C Corps in an appropriate setting of which there are many - widely-held ownership, potential Qualified Small Business Stock scenarios, etc. They even have a legitimate use in rental real estate situations, e.g., blocker corp for foreign investors seeking to avoid US taxation at the individual level.
But I’m always against entities that needlessly complicate an owner or investor’s situation simply to line someone else’s pockets for setup and annual tax prep fees. Especially when the tax savings are likely non-existent.
The moral of the story, as always:
If someone tells you your business or investment NEEDS a certain type of tax structure and they know NOTHING about what you’re doing, RUN.
