In a recent court case it was determined that using an S corporation to rent realty to a related firm does not pay off from a tax perspective for a couple who owned all of the stock in both companies.
They had their S firm lease a building to their regular corporation, which the latter used in its business.
Because the husband materially participated in the activities of the regular company, an appeals court said that the S firm’s rental income is treated as nonpassive income and cannot be offset with any other passive losses of the couple.
When I recommend this type of situation to clients it is to limit potential liability for the companies and owners.
Williams, 5th Cir.