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Cost Segregation

Cost Segregation. Active & Passive Income. Active Income. Income generated from businesses in which there is material participation Individual participates in the business on a regular, substantial, and continuous basis

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Cost Segregation

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  1. Cost Segregation Active & Passive Income

  2. Active Income • Income generated from businesses in which there is material participation • Individual participates in the business on a regular, substantial, and continuous basis • The majority of your client’s income most likely comes from active income • This means he or she needs active losses to offset this active income

  3. Active Income Example Your Client Your Client’s Business Both your client’s business and the building he operates out of are held in the same entity

  4. Active Income Example • Active Income can only be offset by active losses • The dentist owns and operates Clean Teeth, LLC – all income & losses are active • This means losses from the building resulting from increase in deprecation can offset active income from business

  5. Active Income Example Generates majority of income, pays rent to Clean Teeth Realty, LLC Only income is income received in form of rent from Clean Teeth, LLC

  6. Active Income Example • Dentist is allowed to group the activities of Clean Teeth, LLC & Clean Teeth Realty, LLC together • LLC Entities form an economic unit • Gains & losses will flow through each entity • Losses generated from cost segregation will offset gains from Clean Teeth, LLC business operations.

  7. Passive Income • Income generated from an enterprise in which the individual is not actively involved • Losses generated from passive activities can only offset passive income

  8. Passive Income Example Your client also owns a second entity Entity holds a rental house

  9. Passive Income Example • Rental houses qualify for cost segregation • Your client is a passive investor • Does not materially participate • Only rental property he owns • Rarely visits sight, schedules maintenance, etc • Does not materially participate – passive income/loss • If a cost segregation study is performed, losses generated will only offset passive income, not income from main dental occupation

  10. Exceptions • Real Estate Professional • More than ½ of personal services performed in real estate business in which taxpayer materially participates • Performs more than 750 hours of services in real estate business in which the taxpayer materially participates • Example

  11. Further Assistance • Should you need assistance speaking with a client or a CPA regarding active and passive income issues please call the home office. • 225-757-5025 • Robert Taylor, Ryan Camp, Jim Shreve

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