As a small business advocate, we truly want what is best for our local businesses. Every decision a small business owner makes carries a ton of weight, especially when it comes to leasing vs owning space for their business. Making the decision to buy your first building may be scary – but the benefits to owning far outweigh those of leasing – and the SBA 504 Program makes purchasing real estate for your business easier. While some of the benefits to owning a building may be obvious, the tax benefits of buying a building for your business are often not factored into the equation – but should be!
Recent recipient of an SBA 504 loan, CPA Louise Cochrane, states, “I knew from early in my career as a CPA that owning the building for my business was a no brainer. It feels so good to know that I am building equity for my individual future but funding it through the business.”
The benefits to owning over leasing are plentiful. By owning your own property, you are making a valuable long-term investment while lowering your taxable income at the same time. In addition to the tax savings, the space is yours to customize, YOU are benefitting from the building’s depreciation not your landlord, your occupancy costs are stable and you have peace of mind knowing you’ll never be displaced.
Below, we’ll dive in a bit deeper on the tax benefits to buying, but keep in mind, business owners should carefully weigh all the tax benefits based on their own personal circumstances and discussions with their CPA.
Tax Benefits of buying a building: Owning property in an LLC
When you buy real estate for your business, you can take title in your business’ name, but most people take title with their individual name or with a newly created limited liability company (LLC), which distributes liability and mitigates risk. This way, you will own two business entities that work together, your primary operating business and the LLC that holds the real estate. Your operating business will pay rent to the LLC, allowing the operating business to deduct the lease payments as a business expense. The owner through the LLC shows the rent as income but is able to offset it with interest and any expenses as deductions.
LLCs are also advantageous because, as long as there are multiple members, it is taxed as a partnership. Partnerships provide corporate-like advantages and protections without the trouble of being a corporation.
Tax Benefit: Depreciation
The LLC is able to depreciate the building, offering additional tax savings. The operating company pays market rents to the LLC and is essentially able to move money from one entity to another with reduced tax obligation. With a larger property acquisition, a cost segregation study can also help accelerate the depreciation to reduce your current year taxable income.
Tax Benefit: Interest
For business entities, the law known as the Tax Cuts and Jobs Act (TCJA), which generally took effect in 2018, provides welcome simplifications for small business taxpayers. To the IRS and FTB, businesses with less than $25mm in gross receipts qualify as a small business. As a small business, you gain additional relief by the exclusion of business interest limitations such as 163(j). As such you can deduct 100% of interest expense each year.
Tax Benefit: 199A Deduction
The 2017 Tax Reform Act (TCJA) added a new Section, 199A which provides sole proprietorships, partnerships and LLC’s a 20% deduction for qualified business income (QBI) earned by the business on the owner’s tax return. Talk to your CPA about the recent safe harbor election.
Tax Benefits: When it’s Time to Sell
Selling your building can be a perfect nest egg for retirement and when a property is owned in an LLC leased to your operating company, you have many options when it’s time to retire. When you sell the property, the equity gains can be taxed as long term gains, which have substantially lower tax rates than ordinary income.
Making Property Ownership Easier with the SBA 504 Program
Purchasing property can be a huge undertaking for a business – the SBA 504 Program makes it easier. The 504 loan offers accessible, affordable financing designed to help small businesses thrive. It is fixed-asset financing, which includes:
- The purchase of commercial land or buildings
- The construction of new facilities or renovation of existing facilities
- The purchase of large equipment with a service life of at least 10 years
- refinancing commercial real estate mortgages
The 504 loan is administered by a Certified Development Company (CDC) such as TMC Financing, and loans are granted in conjunction with a conventional lender (bank or credit union) that provides 50% of the total project cost. Your CDC facilitates the SBA loan for up to 40% of the cost, or $5 million ($5.5 million for manufacturing projects or if the project is eligible for the Green Energy Program), at a fixed, below-market rate. You provide 10-15% of the project cost as a down payment. A 504 loan can have a term of 10, 20 or 25 years, with full amortization (no balloon payments).
If you’re ready to take advantage of the tax advantages of owning your building for your small business, now is the time to take action. You can find out more about the 504 loan from one of TMC Financing’s 504 loan experts. TMC is the no. 1 SBA 504 lender in the U.S. and is a Premier Certified Lender, funding projects worth more than $9 billion across California and Nevada, resulting in the creation of an estimated 60,000 jobs. With nearly 40 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process.