How To Use Your Business To Split Income Among Family Members

How To Use Your Business To Split Income Among Family Members

by Bernard Fruchtman, Esq.

With the tax rates running as high as 39.6%, income shifting to family members in lower tax brackets is a valuable tax saving technique.

One technique a business owner can use to shift income to lower tax bracket family members is a sale and leaseback.

Here’s how it works:

Your business sells its equipment to your children and immediately leases it back from them. Your children own the equipment but your business continues to use it.

Tax Ramifications:

  1. Business. Your business makes lease payments to your children and the lease payments are deductible in full as business expenses. 
  2. Children. Your children report the lease payments as rental income.They get to take depreciation deductions against the rental income.In addition, if they used debt to buy the equipment the interest on the debt is also deducted from the rental income.

Results of Sale — Leaseback

  • Your business is making fully deductible payments for using the equipment.
  • A portion of the business income is shifted to your children.
  • A portion of your children’s income is offset by deductions.
  • Your children’s net income (gross income minus deductions) is taxed in a bracket that’s lower than yours.

Variations On The Family Sale- Leaseback

  1. Trust. You can set up a trust to buy and the lease the equipment to your company. Your children are made beneficiaries of the trust. The lease payments go to the trust and the trustee decides how much to pay out to the children and how to invest any undistributed income. 
  2. Limited Partnership. You set up a limited partnership to buy and lease the equipment to your company. Your children are the limited partners of the partnership. The limited partners receive the bulk of the income and deductions, while the general partners make all of the decisions. 
  3. S Corporation. You can set up an S Corporation to buy and lease the equipment to your business. Your children could own the non-voting stock so that you maintain control with all the voting power. The income and deductions are received by the holders of non-voting stock.

Funding

You can help your children buy the equipment debt free by giving money either to them or to the entity that will be buying the equipment for them.

You are allowed to give up to $10,000 annually per person ($20,00 if a married couple) without incurring gift taxes.

An additional benefit of giving your children the money to buy the equipment is that you get the money out of your estate and thereby reduce any estate tax liability.


Bernard Fruchtman, Publisher/Editor of TaxTalk – Plain & Simple. TaxTalk – Plain & Simple, is a monthly newsletter that helps you save money by reducing your taxes. An annual subscription is $48 per year. For more information and a FREE ISSUE see web page at: http://village.ios.com/~taxtalkor write to TaxTalk, Inc., 1562 First Ave., New York, NY 10028.