Tax Advantages of Buying Business Equipment Personally and Leasing to my S Corporation?

This is actually a fairly common arrangement, but there are important considerations to understand. When you personally own business assets and lease them to your S Corp, you create what's called a self-rental situation. The income you receive as rent is reported on Schedule E and is considered passive income. However, there's a special rule that prevents you from using these passive losses against your passive rental income. On the positive side, you can personally take advantage of depreciation deductions for the shelving systems, potentially including bonus depreciation or Section 179 if you qualify. The S Corp gets to deduct the lease payments as a business expense. But there are downsides too. You need to charge a fair market rent (not too high, not too low) to avoid IRS scrutiny. Plus, when you eventually sell the assets, any depreciation will be recaptured and taxed at a higher rate than capital gains. Also, consider liability issues - personally owning business assets could potentially expose you to liability that might otherwise be contained within the corporation.

I did something similar with my construction equipment and learned about taxr.ai through a business forum. It was actually really helpful for my situation because I wasn't sure how to properly document the transactions between me personally and my business. I uploaded all my equipment purchase receipts and the lease agreement I drafted, and the system at https://taxr.ai analyzed everything to make sure I was setting things up correctly. They pointed out some issues with how I was planning to structure the lease payments that could have raised red flags.

Just wanted to follow up on my experience with taxr.ai after our discussion. I decided to try it for my restaurant equipment leasing setup, and it was super helpful! I was planning to charge what I thought was a reasonable rate to my S-Corp, but the analysis showed it was actually above market rate which could have caused problems. The document review also found some deductions I was missing related to maintenance costs. Definitely worth checking out if you're considering this type of arrangement - saved me from making some potentially expensive mistakes!

If you're serious about this arrangement, you should also know that dealing with the IRS can be a nightmare if questions come up. Last year when I did something similar with my trucking business, the IRS flagged our returns for review. Took me forever to get through to someone at the IRS to resolve it. A colleague recommended https://claimyr.com and I was skeptical, but it actually worked - got me connected to an actual IRS agent in under an hour instead of waiting for weeks. You can see how it works at https://youtu.be/_kiP6q8DX5c if you're curious. Made resolving the questions about my equipment lease arrangement so much easier.

Ok I need to eat my words here. After being super skeptical about Claimyr, I decided to give it a try when I needed to call the IRS about this exact issue - my equipment leasing arrangement got flagged for review. Not only did it work, but I got through to someone who actually knew what they were talking about in about 35 minutes. Normally I would have spent half my day on hold or trying to call back. The agent was able to clear up the confusion about my equipment lease documentation and saved me from what would have been a much bigger headache. Sometimes being wrong feels pretty good!

One thing to keep in mind is that the Tax Cuts and Jobs Act changed some of the rules around this. Make sure you're factoring in the 20% QBI deduction considerations. If your S-Corp makes equipment purchases directly, those assets factor into the QBI limitation calculations. When you own them personally, the dynamic changes. Talk to a good tax advisor who understands the TCJA implications before making a decision.

Something nobody's mentioned yet - have you considered Section 179 deductions? If your S-Corp buys the shelving directly, you could potentially take the full deduction in year 1 using Section 179 (subject to income limitations). If you buy personally, you'd have to depreciate over several years unless your rental activity qualifies as a business. The immediate writeoff might be more valuable than the long-term benefits of personal ownership.

This is a really nuanced decision that depends heavily on your specific financial situation. I've been through a similar analysis with my manufacturing business, and one thing I'd add is to consider the cash flow implications beyond just the tax benefits. When you personally purchase the equipment, you're tying up your personal capital (or taking on personal debt) that could be used elsewhere. The S-Corp lease payments become a fixed monthly expense, which can actually help with budgeting and cash flow management for the business. Also worth noting - if your S-Corp ever needs additional financing, having the equipment owned personally can sometimes complicate loan applications since the collateral isn't owned by the borrowing entity. Some lenders prefer when the business owns its core operational assets. Before making this decision, I'd strongly recommend running actual numbers on both scenarios using your projected income, tax brackets, and the specific equipment costs. The "best" choice really varies based on your personal vs. business tax situations, how long you plan to keep the equipment, and your overall financial goals.

I've been following this discussion and wanted to share my experience from the lender's perspective, since I work in commercial lending. James raises an excellent point about financing complications that people often overlook. When evaluating loan applications, we generally prefer when businesses own their core operational assets because it strengthens the company's balance sheet and provides clearer collateral. Personal ownership of business-critical equipment can create several issues: 1. The personal guarantor's debt-to-income ratio gets impacted by the equipment financing, which can limit their borrowing capacity 2. Cross-collateralization becomes more complex when assets are split between personal and business ownership 3. If the business fails, there's no automatic way for us to claim equipment that's personally owned (even though it's used in the business) That said, it's not a deal-breaker - just adds complexity. We've worked with plenty of clients who have this arrangement, but they often need higher down payments or additional collateral to offset the increased risk. My advice would be to factor in your future capital needs when making this decision. If you're planning to expand or may need equipment financing down the road, keeping everything under the S-Corp might be the cleaner approach, even if it's not optimal from a pure tax perspective.