C Corporation Rental Agreements

The IRS may challenge the following rental situations between shareholders and a corporation:

1. If the rent has the character of a distribution of profits from the corporation (i.e. variable rate rent that minimized the profitability of the corporation)
2. If the rent is paid to an employee, IRS may attempt to recharacterize the payments as wages
3. A self rental rule blocks taxpayers from offsetting passive losses with income from rental property
4. Payments made to employees for equipment that is required as a condition of employment are taxable wages, unless the amount is paid under an accountable plan
5. Rental of personal property must be clearly segregated from employment activities

While rents can be used by taxpayers to gain income from property rented to a wholly owned C corporation, the IRS is cautious to minimize the advantage of self interests in rental agreements.