Cost SegregationCost Segregation

Active & Passive IncomeActive & Passive Income

Active IncomeActive Income

Income generated from businesses in Income generated from businesses in which there is which there is material participationmaterial participation- Individual participates in the business on a Individual participates in the business on a

regular, substantial, and continuous basisregular, substantial, and continuous basis- The majority of your client’s income most The majority of your client’s income most

likely comes from active incomelikely comes from active income- This means he or she needs active losses This means he or she needs active losses

to offset this active incometo offset this active income

Active Income ExampleActive 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

Active Income ExampleActive Income Example

Active Income can only be offset by Active Income can only be offset by active lossesactive losses

The dentist owns and operates Clean The dentist owns and operates Clean Teeth, LLC – all income & losses are Teeth, LLC – all income & losses are activeactive- This means losses from the building This means losses from the building

resulting from increase in deprecation can resulting from increase in deprecation can offset active income from businessoffset active income from business

Active Income ExampleActive 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

Active Income ExampleActive Income Example

Dentist is allowed to group the activities Dentist is allowed to group the activities of Clean Teeth, LLC & Clean Teeth of Clean Teeth, LLC & Clean Teeth Realty, LLC togetherRealty, LLC together- LLC Entities form an economic unitLLC Entities form an economic unit

• Gains & losses will flow through each entityGains & losses will flow through each entity• Losses generated from cost segregation will Losses generated from cost segregation will

offset gains from Clean Teeth, LLC business offset gains from Clean Teeth, LLC business operations.operations.

Passive IncomePassive Income

Income generated from an enterprise in Income generated from an enterprise in which the individual is not actively which the individual is not actively involvedinvolved- Losses generated from passive activities Losses generated from passive activities

can only offset passive incomecan only offset passive income

Passive Income ExamplePassive Income Example

Your client also owns a

second entity

Entity holds a rental house

Passive Income ExamplePassive Income Example

Rental houses qualify for cost Rental houses qualify for cost segregationsegregation

Your client is a passive investorYour client is a passive investor- Does not materially participateDoes not materially participate

• Only rental property he ownsOnly rental property he owns• Rarely visits sight, schedules maintenance, etcRarely visits sight, schedules maintenance, etc

– Does not materially participate – passive income/lossDoes not materially participate – passive income/loss

– If a cost segregation study is performed, losses If a cost segregation study is performed, losses generated will only offset passive income, not income generated will only offset passive income, not income from main dental occupation from main dental occupation

ExceptionsExceptions

Real Estate ProfessionalReal Estate Professional- More than ½ of personal services More than ½ of personal services

performed in real estate business in which performed in real estate business in which taxpayer materially participatestaxpayer materially participates

- Performs more than 750 hours of services Performs more than 750 hours of services in real estate business in which the in real estate business in which the taxpayer materially participatestaxpayer materially participates

- Example Example

Further AssistanceFurther Assistance

Should you need assistance speaking Should you need assistance speaking with a client or a CPA regarding active with a client or a CPA regarding active and passive income issues please call and passive income issues please call the home office.the home office.- 225-757-5025225-757-5025- Robert Taylor, Ryan Camp, Jim ShreveRobert Taylor, Ryan Camp, Jim Shreve