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Tax Talk with George Saenz

Ask the tax adviser

Self-employment taxes on business rental income

Dear Tax Talk:
We own a corporation that leases equipment and trucks from a partnership, which is also owned by us. I have been filing Form 1065 since 1995 and have been paying self-employment tax on the net earnings. An outside accountant now thinks the net earnings are not subject to self-employment taxes. Any help would be greatly appreciated.
Edward

Dear Edward:
If I understand correctly, you have two entities, which I'll call A and B. A, which is a corporation, leases equipment from B, which is a partnership. B's income consists of rents from the use of personal property (not real estate).

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You, admittedly not a professional tax preparer, have been filing your own Form 1065 and paying self-employment tax on the rental income. Now, some hotshot accountant comes along and in a misguided attempt to woo your business tells you that you have been paying self-employment tax of 15.3 percent on rental income when you shouldn't have. Tell the accountant that he should do his research before telling prospective clients that they don't know what they're doing.

In computing the self-employment income from a partnership, only certain rental income from real property is excludable from self-employment income. You can show the accountant page 26 of the Internal Revenue Service instructions for Form 1065 and direct him to Code Section 1402(a).

-- Posted: Oct. 10, 2002

Read more Tax Adviser columns
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See Also
Tax responsibilities of the self-employed
10 leasing goofs to avoid
Finding a tax pro who's right for you
Tax glossary
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