For purposes of Federal Income Tax and Self Employment Tax: I would
like an analysis of the viability and risks associated with an
individual leasing real estate to his own privately owned Limited
Liability Company. The theory is that a taxpayer can lease commercial
real estate to his company to "drain" income subject to self
employment tax out the company and into a "real estate professional"
business which is not subject to self employment tax. I am assuming
that the taxpayer is not earning significantly more than the upper
limit for self-employment tax.

Consider these points:

1) Is the transaction limited to the fair-rental-value of the leased
property or can the lease be based on the company's revenues or
profits?

2) Does it make a difference whether the individuals owns the real
estate or leases it?

3) If the individual leases office space for $1,000/month can the
individual sub-lease it to his LLC for a significantly higher amount?

4) Has the IRS challenged arrangments of this nature and what was the outcome?

5) What references from the tax code, regs, court cases, etc support
your conclusion?

The rent deducted cannot exceed the fair market rent.
Leasing/subleasing to yourself will not help lower your SE taxes.

BTW, a "real estate professional" pays SE tax on net profits. It's
non-professional rental real estate holders who can avoid SE taxes.

There are a couple ways to get your SE taxes down. You have 2 options.
First, you could buy the office space & decuct the mortgage interest &
taxes & depreciation on Schedule C. This lowers your net income but
also significantly lowers your cash flow.

Alternatively, you could become an S-corporation. An S-corp *must* pay
its shareholders a 'reasonable' salary for services rendered, &
deducts that salary as a business expense on Form 1120S. The net
profit on the 1120S is passed through to the shareholders via a
Schedule K-1. However, it is taxed as ordinary income & is not subject
to SE taxes. The big audit alert here is that many S-corp shareholders
try to pay themselves a low salary & the IRS calls that fraud. Figure
out the bare minimum you'd have to pay someone else to do your job &
set that as your salary. Take the rest of the profits as ordinary
income. If your net Schedule C income is around $90k, you could
probably pay yourself $50k as salary & take the rest as ordinary
income without fearing an audit. You could not pay yourself $20k
unless you had excellent proof that you could hire someone to do your
job for that much.

If you form an S-corp, you'll need to file the Articles of
Incorporation & "maintain the corporate formalties" every year or the
IRS can challenge your S-corp status. Don't forget to file the
election to be taxed as an S-corp within 60 days of incorporating! The
S-corp also has to file quarterly employment tax returns (Forms 940 &
941) & withhold & remit taxes from your base salary.

You can find a lawyer who will incorporate you for $500-$2500 + filing
fees, or you can get a couple self-help legal books from the library &
file the forms yourself. Another method is to form an LLC under state
laws, then elect to be taxed as a corp (partnership is the default),
then file the S-corp election, an carry on as outlined above.

Hi Abezon,
comments with personal email addresses usually get removed on G-A,
especially if there seems to be a professional interest, i.e., a
suggestion that the questioner should contact the commenter.

Just a tip, Myoarin