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.
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).
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