Question: Sheila owns Pup Adub Dub, a dog grooming business, as a single member LLC. The LLC has not elected to be taxed as a corporation. She also owns the building where she operates her business. Can Sheila rent the building to Pup Adub Dub for fair market value, report the rental income on a Form 1040 Schedule E and the expenses paid on the books of Pup Adub Dub?

Answer: No. Sheila can claim neither the expense on the Schedule C of Pup Adub Dub nor the income on Schedule E. Sole proprietors cannot rent from themselves. Under Reg. §301.7701-2(b) the mere fact that her Schedule C business is in an LLC does not change this determination. A single member LLC is a disregarded entity thus the business will be rented from the owner of both the property and the business which is not permitted under §162(a)(3).

Source : National Association of Tax Professionals ( NATP)

Courtesy : Sandoval & Associates
jairo@sandovaltaxservices.com