My wife's job places her on long-term contracts (> 6 months) in different parts of the US. The employer currently pays for a permanent car through a popular car rental agency and a permanent room through a popular hotel chain. If her employer is willing to consider alternate companies to rent from, would I be able to create a company that purchases these assets and then rents them to her employer for her to use? Are there any legal or tax problems with this plan?
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1Are you saying that you would purchase cars and/or hotel space in order to rent them to your wife's company?– John BensinCommented May 15, 2013 at 16:40
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If it makes a difference, the company I form would purchase the assets, not me. In the case of the room, it would be an apartment, not a hotel.– drsCommented May 15, 2013 at 16:50
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2 Answers
Technically you can, but it would not be practical.
First legal issues - you'll might have to register yourself as a rental service, not just a private landlord. Companies usually don't rent from private landlords (and from my personal experience in similar cases - they get much better negotiated rates from the chains with which it would be hard to compete).
Then of course the taxes - you'll be paying various income and franchise taxes on something your wife gets either tax free or pays taxes already.
The IRS and the State might not like the arrangement, as well. They might consider it a tax avoidance scam of some kind (which it in fact is), because you'll be receiving money from your wife's employer, but it won't be taxed as salary. From the IRS perspective, it is salary so you might end up being on the hook for all the payroll taxes as well as some penalties and maybe even criminal prosecution.
And last but not least - one time short term rental is not profitable. You'll have to sell that car/apartment when the assignment is over and the overhead will eat up all your earnings.
Get a legal and tax advice from professionals - attorneys and CPA/EAs practising in this field.
answered May 15, 2013 at 17:29
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4+1. These would be considered taxable fringe benefits. Also, as a practical matter, it's unlikely that your wife's company would agree to use a company that you formed as a vendor, given the potential conflict of interest you and the company would create in relation to your wife. Most companies prefer to sign a volume deal with vendors to get out of these businesses. It's likely the time and expense of running a bona fide asset management company would cancel out any perceived benefits. If your wife doesn't like her options, the company might be open to a simple per diem. Commented May 15, 2013 at 18:04
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So the primary problem from a tax and legal perspective is that it is my wife that will be using the assets? If instead it were a friend of mine or one of her coworkers, there would be no tax avoidance or fringe benefit issues?– drsCommented May 15, 2013 at 22:21
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1@drs the fringe benefist are the mere rentals for the employee, these are taxable on their own behalf. You should probably ask a lawyer about the rest, as it does seem fishy, but I'd say the fact that its your wife makes it almost certainly a problem. Even if its not your wife, it will be hard to show an "arms-length" transaction, and then you can get in trouble. Commented May 15, 2013 at 22:50
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1@drs if you don't have any personal involvement that would avoid the appearance that the employer might be somehow paying your wife via your company under suspicious circumstances. However, as littleadv mentioned, you can't offer a competitive rate on one car and one rental. This is not a viable way to end up with a car and an apartment when your wife no longer needs to rent them for work. The margins in these businesses are very low and you need scale to make money. Are you working under the impression that the price rent vs. buy is out of balance or that renting is a "waste"? Commented May 17, 2013 at 18:03
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1That's possible but remember that as an asset management company, you will be taxed on your revenues and will have other business expenses. Additionally, you have to think about maintenance, and depreciation on the car. The rental prices also reflect that a group of assets won't always be full utilized - a signficant number will always be vacant. I see your point that you're willing to accept the assets in whatever shape they are in when they are no longe needed, but practically it's still very likely that the company would prefer to work with a large established vendor. Commented May 20, 2013 at 14:53
Make sure the employer is aware of this arrangement. And if the employer is a government agency, or funded with government money, stay away from such an arrangement altogether.
This type of arrangement is known as self-dealing, where your wife in effect represents both sides of a transaction. That can create a conflict of interest to the detriment of the employer.
