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147671 Resource 78777 78860 78860 1162744127181 1164143667469 Controlled Commercial Real Estate Financing and Corporations

Corporations Are Subject to Double Taxation

A ton of commercial real estate properties are owned by old-fashioned C-type corporations.  A C-corp is the plain vanilla form of corporation, as opposed to an S-corp, which is limited to just 35 investors.  Bob's Trucking, Inc. might own its trucking yard and dispatch office.  P&S Food Distribution Corporation might own its huge warehouse.  You get the picture.There are some advantages and disadvantages to owning a commercial building in a C-corp.  One advantage to owning a commercial building in a corporation is that the depreciation can be used to reduce the corporation's taxable income.The big disadvantage to owning a commercial building in a C-corp is that the net income of the corporation is subject to double taxation.  Let's suppose that Bob's Trucking, Inc. earns $1 million in net income.  Corporations are subject to income taxes, very much like individuals.  Bob's Trucking might have to pay $310,000 in income taxes on that $1 million in net income.Let's suppose that old man Bob Schoenfeldt owns all of Bob's Trucking, Incorporated.  His corporation made $1 million in net income, but the corporation has already paid $310,000 in income taxes, so only $690,000 is left so far.  If Mr. Schoenfedlt pays himself a dividend of $690,000, 'ole Bob will have to pay another $300,000 in personal income taxes.  Yikes!  It's double taxation.  The corporation pays income taxes on its net income, and then the owners of the corporation pay taxes on their dividends.  In our example, of the original $1 million in net profit, $610,000 got eaten up in taxes.Many small business owners will therefore buy the commercial property personally and lease it to their corporation.  Mr. and Mrs. Schoenfeldt might buy the trucking yard personally and then lease it to Bob's Trucking for, say, $400,000 in rent per year.  The Schoenfeldt's can shelter part of their $400,000 in rental income with the interest payments on their first mortgage, as well as some depreciation on the building.  In addition, the corporation does not have to pay payroll taxes on the $400,000 in rent paid to the Schoenfeldts.  This saves another 12% or so in taxes on that $400,000.Gee, you might think, why can't the Schoenfeldts pay themselves $600,000 in rent on their building?  This trick would save a whole bunch more money in payroll taxes and dividend taxes.  The IRS watches out for tax shelters like this and tries to make sure that the rent paid by Bob's Trucking to the Schoenfeldts is no higher than the market rent for the space.  In real life, many small business owners will push the <a title="IRS Web Site." href="http://IRS.GOV" target="_blank">IRS</a> on this issue.  As a result, the experienced underwriter of commercial mortgage loans will never trust the rent level set between a corporation and its owners.  It's not an arm's length deal.When making a loan to a corporation, you will want to collect a relatively current financial statement on the corporation, two years tax returns, the Articles of Incorporation, and a Resolution to Borrow.  The Articles of Incorporation are the operating rules of the corporation and indicate whether the corporation is authorized to borrow money.  A Resolution to Borrow is a copy of the minutes of a meeting of the board of directors of the corporation giving the President and/or the Secretary permission to borrow money, permission to sign on the loan documents, and typically indicates who has the authority to sign the loan documents.  Small corporations may decide that the president alone has the authority to borrow.  Larger corporations may require that both the president and the secretary of the corporation sign any loan documents.  Be sure to read the Articles of Incorporation and the Resolution to Borrow.  There have been many cases where a president alone has borrowed money on a corporation's assets and then skipped town.  A careful reading of the Articles of Incorporation may reveal that the promise of the corporation to repay is invalid without two signatures.  Yikes!You can apply to hundreds of commercial real estate lenders in just four minutes at <a title="Find a commercial real estate lender at http://C-Loans.com." href="http://c-loans.com/" target="_blank">C-Loans.com</a>. 9 application/xml false commercial loan commercial loan rates commercial mortgage commercial mortgage rates commercial real estate financing commercial real estate loan commercial real estate loans C-Loans Commercial Mortgage Lender Databank Apply to 750 Commercial Real Estate Lenders in Just Four Minutes http://www.c-loans.com/onlineapp Mozilla/4.0 (compatible; MSIE 6.0; Windows NT 5.1; MyIE2; SV1; .NET CLR 1.1.4322) 127.0.0.1 127.0.0.1 GBlackburne false true false false true 198508 false false true false false false true 78777 blog blogsite/CLoans/web