Q:

Subject: Lease from Self

I am part owner of several corporate entities, Health Care Facilities,  Fast Food stores and Real Estate.  We have owned these properties for several years, consequently the majority have been depreciated ou,t specifically the equipment.  My question is, is it possible to use a corporation to buy the equipment from the entities and lease the equipment back to them and thus re-establishing depreciation on that equipment.  Be aware that there is common ownership among these entities.  What would be the benefits of this and what would be the drawbacks or negatives.

A:

This is the exact kind of thing that you should be discussing with your personal professional tax advisor.

What you will probably find out, if your tax pro runs some numbers for you, is that your plan would end up costing you more than it saves.  In order to inflate the values of the assets for higher depreciation, the selling entities will have to report gains, including depreciation recapture, which would be immediately taxable.  The higher depreciation deductions would be spread out over the next several years of the assets' lives.  Paying lump sum higher taxes now for higher deductions over the next five plus years seems to be counter-productive.

However, your entities may have large net operating losses, or other large deductions that could offset the sale profits.  Your personal tax advisor can help you see if that is the case.  However, if s/he does decide that such a sale makes sense, you will nee to be extra diligent in documenting the values you place on the assets.  IRS automatically regards such sales (aka churning) between related parties with suspicion, especially when there will be a tax savings opportunities.

Good luck.  I hope this helps.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/30/2006 12:28:00 PM Send this post: