Maximize Your Tax Savings: Cost Segregation, Business Shutdowns, and Self-Employment Tax Strategies


Cost Segregation: Is This Strategy for You?

One of the biggest tax benefits of owning residential rental or non-residential commercial property is depreciation, which allows for deductions without additional spending. However, traditional depreciation schedules for real property are lengthy—27.5 years for residential rental properties and 39 years for non-residential properties—resulting in small annual deductions.

A strategy called cost segregation can accelerate depreciation deductions, especially during the early years of ownership. This technique involves identifying and separately depreciating elements of a property that are not classified as real property, such as:

While cost segregation does not increase total depreciation, it front-loads deductions by utilizing shorter depreciation periods: five or seven years for personal property and 15 years for land improvements. Additionally, property owners can leverage bonus depreciation or Section 179 expensing to deduct most or all of these costs in the first year of ownership.

Conducting a cost segregation study is necessary to determine which building elements qualify. Studies are typically done by engineers or through less expensive but potentially less reliable methods. However, cost segregation may not be ideal in every situation, such as when passive loss limitations prevent immediate deductions or when a property owner intends to sell soon and faces depreciation recapture.

The optimal time to conduct a cost segregation study is the same year you purchase, build, or renovate a property, though it can be delayed until it provides the greatest tax benefit.


Tax Implications of Shutting Down a Sole Proprietorship

Closing a sole proprietorship or a single-member LLC taxed as a sole proprietorship carries significant tax implications. Consider the following key points:

Careful planning and accurate reporting can optimize tax outcomes when shutting down a sole proprietorship.


Limited Partners and Self-Employment Taxes

Self-employment taxes can be costly, leading many to seek strategies to minimize them. While S corporations allow owners to avoid self-employment tax on distributions (though not on reasonable salaries), partnerships present different challenges.

In a general partnership, all partners pay self-employment tax on their share of business income. However, limited partners traditionally do not, since they are considered passive investors. Some states even allow limited partners to work in the business while retaining their limited liability status.

Could this loophole allow working limited partners to avoid self-employment tax? A recent U.S. Tax Court ruling in Soroban suggests otherwise. The court held that only truly passive limited partners qualify for the self-employment tax exception, excluding those actively engaged in the business.

This ruling follows other IRS victories on similar issues involving state limited liability partnerships, LLCs taxed as partnerships, and professional LLCs. In response, the IRS is drafting regulations requiring a functional analysis of whether a partner qualifies as limited. Increased IRS audits of limited partnerships on self-employment tax issues are also expected.

Given the IRS’s aggressive stance, business owners using partnership structures should carefully evaluate their tax positions and seek professional guidance to avoid potential pitfalls.