If you are a sole proprietor, you know that the 15.3 percent self-employment tax can eat up your profits in a hurry.
You may be able to use a simple strategy to ease this tax burden.
If you own an office building or other assets, you can set up a rental arrangement with your spouse that could significantly cut your self-employment taxes.
How the Strategy Creates Cash
Suppose you operate a sole proprietorship and you earn $100,000 of net income.
You must report your income on Schedule C of your tax return, which creates a self-employment tax liability of $14,129.55.
Here’s how the rental strategy can help. You give the office building to your spouse, who then rents the office space back to you. To do this, you must have a valid non-tax purpose for the transaction, as we explain later.
You pay your spouse $2,000 rent each month (the fair rental value of the building), which moves $24,000 off Schedule C and onto Schedule E.
Schedule E, unlike Schedule C, does not give rise to self-employment taxes.
Thus, this strategy reduces your self-employment income by $24,000, which puts an extra $3,391.09 of cash in your pocket at the end of the year.
The Legal Authority
The tax court approved this arrangement in ... Log in to view full article.