Am I about to commit tax fraud...?

[Logan Reinard]

I have the opportunity to purchase the (commercial) building that I have a business in.  

We currently pay $650/mo in rent.

Our business is set up as an LLC.

We could purchase the building for $92K which would have a lower mortgage payment than what we are currently paying in rent.

What I'd like to do is no longer take a paycheck (which has higher a tax rate) and just pay myself with rental income by raising the rent that the business would pay.  Is that illegal?

Also, what is the difference in tax rate when you compare rental income to owner's draw payment (or self employment tax)?

[Steven Hamilton II]

Originally posted by @Logan Reinard:

I have the opportunity to purchase the (commercial) building that I have a business in.  

We currently pay $650/mo in rent.

Our business is set up as an LLC.

We could purchase the building for $92K which would have a lower mortgage payment than what we are currently paying in rent.

What I'd like to do is no longer take a paycheck (which has higher a tax rate) and just pay myself with rental income by raising the rent that the business would pay.  Is that illegal?

Also, what is the difference in tax rate when you compare rental income to owner's draw payment (or self employment tax)?

Assuming your LLC is taxed as an S or C-corp you cannot do that. It must be Fair market rent. You are only doing a disservice by not paying into Social Security and paying wages. You could also lose other deductions. If you stop paying there is a point at which you would no longer qualify for disability in the event something happens. Roughly 40% or more of people will be considered "disabled" at some point.

  Please speak with  a competent accountant as you are required to pay a reasonable salary.