Tax

100% Deduction for Manufacturing Buildings: How to Qualify Under IRC §168(n)

Neil Langlois Business Taxes, Real Estate , , , , , , 1 Comment
100% Deduction for Manufacturing Buildings: How to Qualify Under IRC §168(n)

New Manufacturing Tax Deduction Could Be a Game-Changer — If You Structure It Right

Find the long version of this summary here: Executive Summary: 100% Deduction for New Manufacturing Facilities (Qualified Production Property)

From January 1, 2025 through December 31, 2028, there’s a powerful federal tax deduction on the table for businesses that build or buy manufacturing property — but you have to structure it right to qualify.

The headline: If you construct or purchase a building and use it for actual manufacturing, production, or refining, you may be able to deduct 100% of the building cost in the year it’s placed in service. This goes far beyond machines and equipment — this is about the building itself.

Under the new IRC §168(n) provision — often referred to as the Main Street Manufacturing deduction or Qualified Production Property (QPP) expensing — businesses can fully expense the cost of eligible real property placed in service during that four-year window. But the rules are tight, and the IRS will be watching.

No More “HoldCo leases to OpCo”

That common setup where your holding company owns the building and leases it to your operating business? That structure kills the deduction. The law is clear: landlords don’t qualify, even if the tenant is your own company. To get this right, the same taxpayer needs to be on both sides of the activity.

Even if you’re using a disregarded LLC, having a formal lease in place could still trigger the lessor disqualification. If there’s rent on paper, the IRS could treat it as a landlord arrangement regardless of how it’s taxed. That means your real estate holding company likely won’t qualify unless it’s completely ignored for tax purposes and there’s no lease in place.

Use It Right — Or Give It Back

There’s a 10-year recapture rule. If you stop manufacturing in that space, convert it to storage, lease it out, or sell it within 10 years, you could be required to pay back some or all of the tax savings. This isn’t a quick-flip benefit — it’s meant for long-term operators with real production activity.

Watch the Anti-Abuse Period

You also can’t just buy an old factory and write it off. If the building was used by anyone for manufacturing between January 1, 2021 and May 12, 2025, it doesn’t qualify. That anti-abuse lookback period trips up more deals than you’d think. You’ll need documentation showing what the space was used for — and brokers aren’t always equipped to give you the right answer.

Mixed-Use? Only Deduct the Manufacturing Footprint

If your business occupies part of a property and leases out the rest, only your manufacturing portion counts. You’ll need to carve out the costs based on actual use — square footage, building systems, etc. This isn’t a generic cost seg play. It’s a functional-use allocation tied to how much of the building supports actual manufacturing activity.

Didn’t Qualify? There May Still Be Options

If the building flunks the QPP test, you might still be able to expense certain components — like HVAC, roofs, security systems, or tenant improvements — under Section 179. It’s not a full write-off of the building, but it might still give you meaningful deductions in the first year. That’s especially important if you’re investing in a facility that’s used for warehousing, offices, or other non-manufacturing functions.

The §168(n) window only runs from 2025 to 2028. Miss the timing, and you miss the deduction.

Thinking about buying or building a facility for your business? Let’s make sure your structure doesn’t blow up your deduction.

I work with operators, owners, and investors who want to take full advantage of the new §168(n) manufacturing deduction. If you’ve got a project on deck and want to make sure it’s eligible before it’s too late to fix the setup — let’s talk.

This is not tax advice. But if you’re looking for real-world answers and practical modeling, I can help.

You can reach me directly at info@neil.tax or (541) 240-2933.

Depreciation vs. Cash Flow: The Hidden Tradeoff That Can Kill Your Loan Application

Neil Langlois Business Taxes, Real Estate , , , 0 Comment
Depreciation vs. Cash Flow: The Hidden Tradeoff That Can Kill Your Loan Application

If you’re a small business owner, real estate investor, or recently self-employed, this is an issue that catches people off guard—often at the worst possible time.

It tends to affect:

  • New or growing businesses
  • Contractors and asset-heavy operators
  • Real estate investors doing renovations or buying equipment
  • Anyone aggressively minimizing taxes within a few years of buying, refinancing, or expanding with debt

The problem isn’t depreciation itself.
It’s understanding how tax rules and lending rules look at the same activity very differently.

A real example from 2023

In 2023, I worked with a real estate investor who owned roughly 20–30 rental units. He focused on buying older properties and doing heavy turn work—flooring, cabinetry, countertops, and similar improvements.

From a tax standpoint, most of that spending was booked as repairs. That wasn’t sloppy bookkeeping—it was intentional.

Here’s why.

Tax law draws a distinction between:

  • Repairs, which are immediately deductible, and
  • Capital improvements, which are added to the property and deducted over time through depreciation

By 2023, bonus depreciation had already begun phasing out. Only 80% of qualifying property was eligible for bonus depreciation, and that percentage dropped again in 2024. In that environment, expensing repairs often created a larger upfront tax deduction than capitalizing improvements subject to partial bonus depreciation.

At the time, the decision made sense. Repairs reduced taxable income faster.

The problem showed up later.

In 2024, when the client tried to refinance a property, the lender could not add those repair costs back to income. From the bank’s perspective, those weren’t non-cash accounting deductions tied to assets—they were operating expenses. Qualifying income was lower, and the refinance stalled.

Same properties.
Same cash flow.
Different accounting treatment.
Very different outcome.

An infographic comparing depreciation versus cash flow in relation to loan applications, highlighting affected groups like new businesses and real estate investors, and explaining lenders' perspectives on repairs versus depreciation.

Why lenders care about depreciation

Most residential lenders underwriting one-to-four-unit properties follow agency-based underwriting guidelines, even if borrowers never hear those names mentioned.

Those guidelines are built around a simple question:
Is this income likely to continue?

Depreciation matters because:

  • It is a non-cash expense
  • It represents the accounting write-off of an asset already paid for
  • It does not affect current cash flow

Because of that, lenders are generally allowed to add depreciation back when calculating qualifying income.

Repairs and supplies are treated differently.

Even if they happened last year, lenders usually view them as recurring business costs—money that will likely need to be spent again. As a result, they are far less likely to be added back when underwriting a loan.

From a lender’s point of view:

  • Depreciation looks like an accounting adjustment
  • Repairs look like ongoing expenses

The de minimis trap in ordinary businesses

This issue isn’t limited to real estate.

The IRS allows businesses to adopt a de minimis accounting policy, which lets you expense purchases under a certain dollar amount instead of capitalizing them. The maximum threshold is $2,500 per item, but businesses are not required to use that limit. You can choose a lower threshold.

For example, if a business buys five $1,000 computers:

  • Using de minimis, that’s a $5,000 supply expense
  • Alternatively, those same computers could be capitalized and depreciated

Both approaches are allowed. The difference is a choice, not a requirement.

From a tax perspective, the result may be similar—especially now that bonus depreciation is back at 100%. But from a lender’s perspective, depreciation tied to identifiable assets is far more likely to be added back to income than a supply deduction.

Same purchase.
Same cash outlay.
Very different impact on qualifying income.

What would have changed the outcome

Looking back at the 2023 investor:

  • Flooring, cabinetry, and similar work could have been carved out as five-year property
  • Partial bonus depreciation would have applied
  • Assets would have remained on the books
  • Qualifying income would likely have been higher

The same principle applies to equipment-heavy businesses:

  • Group purchases as depreciable personal property
  • Depreciate instead of expensing everything as supplies
  • Preserve income on paper when financing is foreseeable

This isn’t about being aggressive or conservative.
It’s about being intentional.

The mistake isn’t recklessness—it’s reactive planning

Most business owners aren’t trying to sabotage financing. They’re responding to the tax incentives in front of them.

The problem arises when tax planning happens without a timeline.

Then the banker looks at the tax return and says:
“You don’t make enough money.”

From the owner’s perspective, that feels disconnected from reality. The cash flow exists. The business is running fine. But the tax return tells a different story.

The takeaway

If financing is even a possibility in the next few years, tax planning needs to align with where you’re headed, not just what you owe this year.

Sometimes that means:

  • Paying some tax
  • Delaying purchases
  • Capitalizing instead of expensing
  • Showing assets instead of repairs

And sometimes the answer is straightforward:
If the business truly isn’t profitable, depreciation won’t change that.

But when the difference is how deductions are categorized—not whether money was made—those decisions can quietly determine whether a loan gets approved.

Want help applying this to your situation?

If you’re self-employed, investing in real estate, or running a growing business, the right tax strategy depends on where you’re going—not just what shows up on this year’s return.

If you’re planning to buy, refinance, or expand, or you’re unsure how today’s deductions could affect tomorrow’s financing, we can walk through it together. That usually means reviewing your tax return, looking at how a lender will view your income, and aligning your tax decisions with your longer-term goals.

If that sounds useful, email info@neil.tax and let me know what you’re working toward.

Understanding Self-Rentals and Tax Strategies for Business Owners

Neil Langlois Business Taxes, Individual Taxes, Real Estate , , , 0 Comment
Understanding Self-Rentals and Tax Strategies for Business Owners

Many business owners own both their operating business and the building that business operates in. The usual setup is simple: the business pays rent to a building LLC, the LLC takes depreciation, and everyone assumes they’re getting the full benefit of the structure.

The issue is that the passive activity rules treat self-rentals differently, and the default treatment often blocks you from using losses when you need them most. This becomes especially noticeable in a cost segregation year. The fix is the grouping election, but most owners are never shown how it works or why it matters.

Below is a simple, real-number example so you can see exactly where self-rentals break down and how grouping solves it.

A Simple Example

You own:

  • A CPA practice (Schedule C)
  • The building it occupies (owned in an LLC)

For the year:

  • CPA profit: $200,000
  • Rent paid from the practice to the LLC: $36,000
  • Cost segregation bonus depreciation: $(450,000)
  • Spouse’s W-2 wages: $150,000
  • You materially participate in the CPA practice

We’ll compare two outcomes:

  1. Default self-rental treatment
  2. Grouping the building and business into one activity

Scenario 1: Default Self-Rental Treatment

The self-rental regulation says that only net rental income is recharacterized as non-passive. “Net” means income minus deductions.

First, calculate the rental LLC’s results:

  • Rental income: $36,000
  • Bonus depreciation: $(450,000)
  • Net rental result: $(414,000)

Because the rental nets to a loss, there is no net rental income, so nothing is recharacterized as non-passive.

What you end up with is:

  • Non-passive income from the rental: $0
  • Passive loss: $(414,000), suspended

And that passive loss cannot be used this year to offset:

  • Your $200,000 of CPA income
  • Your spouse’s $150,000 W-2 income

You still get the depreciation; it wipes out the rent entirely. But the remainder drops into the passive bucket and gets stuck there until you generate passive income or dispose of the property.

This is where most people assume they’ve “lost” a benefit, when really it’s just locked away.

Scenario 2: Grouping the Building With the CPA Practice

If the building exists solely to support the operating business, ownership matches, and you are effectively the only tenant, the IRS allows both activities to be treated as one combined activity. This is the grouping election under Reg. 1.469-4.

When grouped, the building and the CPA practice become one non-passive activity.

Now combine the numbers:

  • CPA profit: $200,000
  • Rent (still part of the activity’s income): $36,000
  • Cost seg bonus depreciation: $(450,000)

Combined activity result: $(214,000)$ non-passive loss

Because the entire activity is non-passive, you can use that loss against all of your non-passive income.

Your only remaining non-passive income for the year is your spouse’s W-2:

  • W-2 income: $150,000
  • Loss applied: $(150,000)

Remaining: $(64,000)$ non-passive loss, carried forward (subject to the §461(l) business loss limitation rules)

And importantly:

  • The rent portion is still not subject to self-employment tax

Grouping doesn’t change how SE tax works. It only changes how income and losses are classified under the passive activity rules.

Side-by-Side Summary

Without Grouping (Self-Rental)

  • $36K rent is fully wiped out by depreciation
  • Remaining $(414K)$ is a passive loss
  • Cannot offset CPA income
  • Cannot offset W-2 wages
  • Passive loss is suspended

With Grouping (One Activity)

  • Building + business = one non-passive activity
  • Net loss = $(214K)$ non-passive
  • Can offset W-2 income and business income in the same year
  • Remaining $(64K)$ carried forward as non-passive
  • SE tax treatment unchanged

Why This Matters

Self-rental rules don’t stop you from deducting depreciation. They simply classify the leftover loss as passive, and passive losses can’t offset W-2 wages or business income.

Grouping removes the passive bucket entirely for this activity and treats the whole thing as part of the business you already materially participate in.

For owner-operators—especially in a cost segregation year—this can be the difference between carrying a large loss forward for years or using it today to reduce your tax bill dramatically.

If you own your building, are the only tenant, and the ownership structure lines up, the grouping election is often worth evaluating every single time.

The Short-Term Rental “Loophole” in 2025: How to Make STR Losses Non-Passive (and When You Can’t)

Neil Langlois Business Taxes, Real Estate , , , , 0 Comment
Short term rentals

Why investors care (in 60 seconds)

Most rental losses are passive, which means they normally can’t offset your W-2, business, or other non-passive income. Short-term rentals (STR) (think Airbnb/VRBO) can be different. If your rental isn’t a “rental activity” under the passive activity rules and you materially participate, your STR losses can be non-passive—which means they can offset W-2s, consulting income, interest, etc. That’s the “loophole.”

Plain English: get it right and a big cost-seg/bonus depreciation deduction from a new STR can reduce your ordinary income. Get it wrong and the same loss just piles up as passive carryforwards.

When a “rental” isn’t a rental

Under the passive activity rules, a “rental activity” generally means you’re paid for someone to use property you own. But there are exceptions. Two big ones for STRs:

  • Average stay < 7 days. If your average period of customer use is 7 days or less, the activity is not a rental activity.
  • Average stay < 30 days and you provide significant personal services (hotel-like services).

If you fit either exception, you’re outside the normal “rental” bucket. Then, if you materially participate, the activity is non-passive.

Quick example. You host 120 nights across 40 bookings (average 3 nights). You’re under 7 days—not a rental activity. If you materially participate (see below), your losses are non-passive.

What non-passive STR losses can offset

If your STR is not a rental activity and you materially participate, the loss is non-passive and can offset:

  • W-2 wages
  • Schedule C or K-1 non-passive income
  • Interest/dividends/short-term capital gains (depending on other rules)

This is why investors pair STRs with cost segregation + bonus depreciation to create large year-1 deductions that actually move the needle on total tax.

This is the “aha” most readers miss: the value is not just depreciation—it’s making that depreciation non-passive.

Material participation—human terms

A man wearing a plaid shirt is smiling while receiving keys from a woman, indicating a rental transaction, with a plant visible in the background.

You need to be active enough that the IRS considers you truly running the activity. There are seven tests; common paths:

  • 500-Hour Test: You spend 500+ hours on the STR in the year.
  • Substantially All Test: You (and your spouse) do substantially all the work.
  • 100 Hours + More Than Anyone Else: You do 100+ hours and more than any other person. Bookkeeping, messaging guests, setting rates, repairs, turnovers, supervising cleaners, vendor management, and pricing work can count. Keep a contemporaneous log.

The property-management company wrinkle (your big question)

Many owners hold the property in an LLC and pay a separate property-management company (sometimes their own Schedule C or C-corp) to handle operations. Does that break the STR play?

It depends on structure: “master lease” vs. “agent.”

  1. Master-lease to the manager (bad for STR treatment).
    If your property LLC leases the home long-term (say, a 1-year lease) to a management company, your customer is the manager, not the nightly guest. Your average period of customer use is the length of the master lease (>> 7 days). You’ve now fallen back into rental activity territory at the owner level.
  • Result: Your big depreciation loss is passive at the property-owner level.
  • If you materially participate in the management company, the self-rental rule can re-characterize net rental income as non-passive, but losses remain passive—so the cost-seg loss won’t offset W-2.
  1. Manager acts as your agent (good for STR treatment, with caveats).
    If the PM is acting as an agent (no master lease), and you—the owner—are the host granting nights to guests, your “customer use” is the guest’s stay. You can meet the < 7 days exception, and if you materially participate (not just the manager), your losses can be non-passive.
  • Caveat: If significant personal services are provided (daily cleaning, meals, concierge), net income may be subject to self-employment tax. If services are not significant, many practitioners treat it as not subject to SE tax, even while non-passive for §469 purposes. Facts matter; document your services.

Bottom line: Avoid master-lease arrangements if your goal is non-passive STR losses. Use an agency relationship and make sure you materially participate.

Where the law/guidance comes from (in brief)

  • IRS Pub. 925 explains passive activity rules, exceptions for average stays (< 7 days; < 30 days with significant services), and self-rental recharacterization (net income non-passive; losses stay passive).
  • IRS Chief Counsel Advice 202151005: confirms that STRs with average stays < 7 days can be non-rental activities and, with material participation, non-passive (implications also discussed for NIIT).

(There are also Tax Court decisions analyzing “significant personal services” and misclassified STRs, but Pub. 925 + CCA 202151005 are plenty to show the framework.)

Common misclassifications we still see

  • STRs dumped on Schedule E as passive when average stays are < 7 days and the owner clearly meets a material participation test.
  • Master-lease setups that unknowingly kill the STR exception at the property-owner level.
  • Treating heavy hotel-like services as passive (risk: SE tax can apply to net income when services are significant).

Practical checklist (use this before you buy or restructure)

  • Average stay math: Track nights/booking to prove < 7 days (or < 30 with significant services).
  • Your role: Keep a time log; if you rely on a manager, ensure you still hit a material participation test.
  • Contract structure: Avoid master leases; use an agency agreement with your PM.
  • Cost seg timing: Plan acquisition/placed-in-service dates to maximize bonus depreciation (and confirm 2025 bonus phase rules with your CPA).
  • SE tax exposure: If services are hotel-like, plan for possible SE tax on net income.
  • Documentation: Policies, pricing decisions, guest messaging, maintenance oversight—document all of it.

Have a Short-Term Rental tax question?

We handle STR questions every week for owners and real estate investors.
If you want clarity on how these 2025 rules apply to your property:

Ask a STR Tax Question

Quick FAQ

Q: If my PM company does “everything,” can I still materially participate?
A: Yes—if your hours are 100+ and more than anyone else, or you hit another test. If the PM’s hours exceed yours, you may not meet the test.

Q: Can I just lease the home to my own C-corp manager and still take non-passive losses at the property LLC?
A: Generally no. A master lease makes your customer the manager; you lose the < 7 days exception at the owner level. Also, self-rental rules can recharacterize income but not losses.

Q: Do STRs automatically go on Schedule C?
A: Not automatically. Schedule C is more likely when significant services are provided. Some non-rental, non-SE-tax STRs are still reported outside Schedule C. Facts matter; coordinate with your CPA.

The takeaway

The “loophole” isn’t magic—it’s definitions and documentation. Structure the PM relationship as agency (not master lease), keep average stays under 7 days, and materially participate. Do those three, and your depreciation-driven STR losses can become non-passive and actually offset other income.

Ready to do this the right way?

If you’re planning a 2025 STR purchase or thinking about cost seg/bonus on an existing place, let’s make sure the structure actually delivers non-passive losses (agency vs. master lease), your material participation is documented, and your depreciation plan fits your broader tax picture.

What we’ll cover in a quick strategy call:

  • Entity & contract check: Confirm your PM relationship is agency (not a master lease) so the STR stays out of “rental activity” status.
  • Participation plan: Pick the right material-participation test and set up an easy time-log so it holds up.
  • Cost seg & bonus timing: Coordinate placed-in-service dates, safe-harbors, and year-one impact on your W-2/other income.
  • SE-tax exposure: If services are hotel-like, plan for (or around) self-employment tax on net income.

Questions or ready to run numbers?
Wm. Neil Langlois, CPA, LLC • (541) 240-2933 • info@neil.tax

Important note & disclaimer

This post is general education, not tax or legal advice. Facts drive outcomes with short-term rentals (average stay, services, hours, contracts, and ownership). Before you implement anything here, get advice for your situation. Services provided by Wm. Neil Langlois, CPA, LLC (Oregon). We work with clients in multiple states.

References

  • IRS Publication 925, Passive Activity and At-Risk Rules (rental exceptions; self-rental rule; material participation).
  • Chief Counsel Advice 202151005 (STR average stay < 7 days; material participation; non-passive treatment and NIIT implications).
Ask a Short-Term Rental Tax Question
We handle STR questions every week for owners and real estate investors. If you want clarity on how these 2025 rules apply to your property:
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2025 Tax Bill or the Big Beautiful Bill: What Small Business Owners Need to Know

Neil Langlois Business Taxes, CPA and Accounting Industry, Individual Taxes, Real Estate , , 0 Comment
Wm. Neil Langlois CPA, LLC News

2025 Tax Bill Update: What Small Business Owners Need to Know (July Update)
Neil Langlois | Business Taxes, CPA and Accounting Industry, Individual Taxes, Real Estate
Originally published March 2025 | Updated July 2025

Congress continues to advance a sweeping tax bill aimed at extending—and in some cases expanding—key provisions from the 2017 Tax Cuts and Jobs Act (TCJA). While the political debate continues, here’s what actually matters for small business owners—especially if you operate as an S-corp, partnership, or sole proprietor.

Key Provisions That Affect Small Business Owners

✅ QBI Deduction Gets a Boost (and Becomes Permanent)

The Qualified Business Income (QBI) deduction would increase from 20% to 23% and become permanent under the proposed legislation. This is a huge shift for pass-through businesses that have been planning around a 2026 phaseout. Permanence means we can now build long-term tax strategies without second-guessing when the deduction might disappear.

✅ 100% Bonus Depreciation Returns

Bonus depreciation has been phasing down (we’re at 60% for assets placed in service this year), but this bill would bring back 100% bonus depreciation for qualifying property placed in service between January 19, 2025, and the end of 2029. That opens the door for accelerated write-offs on equipment, leasehold improvements, and other capital expenditures.

✅ Higher Section 179 Expensing Limits

Section 179 expensing limits would rise to $2.5 million, with a phaseout beginning at $4 million. This enhances flexibility to fully expense assets like vehicles, software, and machinery—especially useful for businesses that regularly invest in infrastructure.

✅ Interest Deduction Relief

Section 163(j) would return to EBITDA-based limitations instead of the stricter EBIT calculation used under recent law. This would make more interest expense deductible, a welcome change for businesses using debt to fund growth or real estate expansion.

✅ R&D Expensing Restored (Section 174 Fix)

Since 2022, businesses have been forced to capitalize and amortize domestic R&D costs over five years (15 for foreign). The new bill would reverse that, restoring full expensing of U.S.-based R&D starting in 2025. This is a game-changer for startups, tech companies, and any business investing in process improvement or internal tooling.

✅ Software Development Costs: Expense Instead of Amortize

Tied to the R&D fix, the bill also allows domestic software development costs to be fully expensed in the year incurred. No more five-year amortization for building internal platforms, apps, or client-facing systems—this puts developers and tech-forward businesses back on better tax footing.

Strategic Takeaways for Business Owners

  • More Upfront Deductions
    The combination of 100% bonus depreciation, increased Section 179, and restored R&D expensing makes 2025 a powerful year for reducing taxable income. If you’re eyeing CapEx, internal systems, or process automation, timing matters.
  • Certainty in Long-Term Planning
    A permanent QBI deduction gives us the green light to optimize your compensation and entity structure without wondering what will expire in 2026.
  • Debt-Financed Growth Gets Easier
    With interest deductibility based on EBITDA again, borrowing for expansion becomes more tax-efficient.
  • R&D Credits and Software Deductions Back in Play
    If you’ve been holding off on R&D claims or software write-offs due to Section 174 limitations, it’s time to reevaluate. The new rules simplify your path to strategic tax savings.

What’s Next?

As of July 2025, the bill has cleared the House Ways and Means Committee and may advance later this year as part of a broader budget reconciliation package. It’s not law yet, but it’s close enough that proactive planning now could give you a major edge.

From My Desk at Wm. Neil Langlois, CPA

These aren’t abstract code tweaks. They affect how you invest in your business, when you purchase equipment, and how you structure ownership across entities. If you’re a client, we’ll start modeling these scenarios ahead of fall. If you’re still just filing returns without a strategy-first mindset, now’s the time to change that.

Tax returns are the result.
Tax planning is the job.

If you want to break this down for your business—whether it’s optimizing deductions, forecasting cash flow, or restructuring for 2025 and beyond—reach out. As always, we’ll make it clear, strategic, and focused on your bottom line.

—

Wm. Neil Langlois, CPA
Exceptional, tailored service for your accounting and tax prep needs.

neil.tax | info@neil.tax | (541) 240-2933

Free Residential Cost Segregation Estimator for Landlords

Neil Langlois Business Taxes, Real Estate , , , , 0 Comment
Cost Segregation Study

We’re excited to announce a powerful new addition to our website: a free Residential Cost Segregation Estimator—built specifically for landlords, CPAs, and real estate investors who want to take control of their after-tax returns.

If you own rental property, you’ve probably heard of cost segregation—a strategic way to accelerate depreciation deductions by breaking your property into shorter-lived components. The problem? It’s traditionally required a paid engineering study just to see if it’s worth it.

That’s why we built this estimator.

Our tool lets you estimate how much of your building’s value might qualify for 5-year personal property, 15-year land improvements, and standard 27.5-year building structure categories. You’ll also see:

  • Bonus depreciation impacts (under IRC §168(k))
  • First-year tax savings based on your federal and state tax rate
  • Tailored results based on unit count, building quality, appliances, flooring type, HVAC system, and more

It’s fast, free, and educational—and while it doesn’t replace a full engineering-based study, it gives you a reliable benchmark before spending thousands on a formal report.

🔍 Try the tool here: Residential Cost-segregation Tool

When Should You Use It?

  • You’re evaluating a new rental property acquisition
  • You want to understand potential first-year depreciation
  • You’re comparing different properties or rehab strategies
  • You’re a tax professional doing high-level planning for a client

Disclaimer: This estimator uses general assumptions and industry benchmarks. It should not be relied upon for filing purposes. If you’re serious about maximizing depreciation, we recommend a formal cost segregation study backed by engineering detail.

Ready to explore a professional cost seg study? Book a strategy call now

Qualifying as a Real Estate Professional: Unlock Significant Tax Benefits

Neil Langlois Business Taxes, Real Estate , , , 0 Comment
Real Estate Professional

If you’re a real estate investor, understanding how to qualify as a real estate professional can transform the way your rental real estate activities are taxed. This special designation allows you to unlock powerful tax benefits, including the ability to offset rental losses against other forms of income. In this post, we’ll explore the key qualifications, rules for married couples, and how these tax benefits can make a significant impact—complete with examples.

What is the Real Estate Professional Tax Election?

Under IRS rules, most rental real estate income or losses are considered passive. This means that losses can only offset other passive income, not wages or other forms of nonpassive income.

However, if you qualify as a real estate professional, you can treat rental real estate activities as nonpassive. This allows you to use rental real estate losses to offset income from wages, business profits, or other nonpassive sources, significantly reducing your overall taxable income.

Qualifying as a Real Estate Professional

To qualify as a real estate professional, you must meet two key requirements:

  1. More than 50% of your personal services performed during the tax year must be in real property trades or businesses in which you materially participate.
  2. You must perform more than 750 hours of service in real property trades or businesses in which you materially participate.

Both criteria must be met during the tax year, and accurate documentation of hours worked is essential. Keep detailed records, as post-event estimates or reconstructions are typically not accepted by the IRS.

Material Participation Requirement

Qualifying as a real estate professional is only the first step. To treat your rental activities as nonpassive, you must also demonstrate material participation in each rental activity.

Material participation can be established through one of several tests, such as spending over 500 hours on a rental activity. If you own multiple rental properties, you can elect to group all rental real estate activities as a single activity to meet the material participation requirements. This election must be made on your tax return and is generally irrevocable.

Special Rules for Married Couples

If you’re married, the IRS applies special rules for determining whether you qualify as a real estate professional and materially participate:

  1. To meet the 50% and 750-hour tests, one spouse must individually satisfy these criteria. Hours worked by both spouses cannot be combined for this purpose.
  2. For material participation, hours worked by both spouses can be combined. This means that if one spouse is heavily involved in managing the rental properties, their hours can help satisfy the participation requirements for the other spouse.

These rules provide flexibility for couples and can be especially useful when one spouse works primarily in real estate while the other does not.

The Benefits of Qualifying as a Real Estate Professional

The ability to treat rental real estate activities as nonpassive can significantly lower your tax liability. Here’s how:

Offsetting Ordinary Income with Real Estate Losses

Typically, passive rental losses cannot offset wages or business income. For example, consider a married couple:

  • One spouse is a high-earning professional, and the other manages several rental properties.
  • The rental properties generate significant passive losses due to depreciation, but those losses cannot offset the professional’s wages unless one spouse qualifies as a real estate professional.

Now, imagine the couple acquires a new property and conducts a cost segregation study, allowing them to take advantage of bonus depreciation. This strategy could create sizable rental real estate losses.

If one spouse qualifies as a real estate professional and materially participates in their properties:

  • The losses from depreciation can now offset the professional spouse’s high income, significantly lowering their taxable income.
  • For example, a $100,000 real estate loss could reduce their taxable income by the same amount, potentially saving tens of thousands of dollars in taxes.

Accelerating Tax Benefits

Qualifying as a real estate professional opens the door to accelerated depreciation through cost segregation. This allows you to front-load depreciation expenses, creating large paper losses even if your properties generate positive cash flow.

Tax-Deferred Growth

When combined with strategies like bonus depreciation, you can defer paying taxes on rental income for years. This deferral allows you to reinvest more into growing your real estate portfolio, compounding your returns.

Greater Flexibility in Tax Planning

If you qualify as a real estate professional, you can plan strategically to manage taxable income, especially in years with high earnings or significant property acquisitions.

Key Considerations

While the benefits are significant, there are a few important considerations:

  1. Nonpassive Income Limitation: If your rental activities generate income rather than losses, qualifying as a real estate professional may prevent you from offsetting this income with passive losses from other investments.
  2. Short-Term Rentals: Time spent managing short-term rentals (with average stays of seven days or less) does not count toward the 750-hour requirement.
  3. Record-Keeping: Maintaining accurate, contemporaneous records of your hours is critical. Courts routinely reject post-event estimates or approximations.

Is Qualifying as a Real Estate Professional Right for You?

If you’re heavily involved in real estate and want to maximize your tax benefits, qualifying as a real estate professional could be a game-changer. This designation allows you to treat rental losses as nonpassive, offset other income, and take advantage of accelerated depreciation strategies like cost segregation.

For married couples, the ability to combine hours for material participation provides added flexibility, making it easier to meet the requirements.

Take the Next Step

Qualifying as a real estate professional requires careful planning, documentation, and a clear understanding of the rules. If you think this strategy might benefit you, contact us to schedule a consultation. Together, we can analyze your situation, develop a plan, and ensure you’re leveraging all available tax benefits.

Disclaimer: This content is for informational purposes only and should not be considered as tax, financial, or legal advice. Always consult with a qualified tax professional regarding your unique situation. Wm. Neil Langlois, CPA LLC does not guarantee the accuracy or applicability of the information presented in this blog post to any individual circumstances.

“How to Leverage 1031 Exchanges to Elevate Your Real Estate Portfolio”

Neil Langlois Business Taxes, Real Estate , , , , , 0 Comment
1031 Exchange

Introduction:
In the dynamic world of real estate investing, savvy investors are constantly seeking strategies to maximize returns while minimizing taxes. One such powerful tool at their disposal is the 1031 exchange. This article delves deep into the intricacies of 1031 exchanges, providing you with actionable insights to not just defer taxes but to significantly enhance the efficiency and growth of your investment portfolio.

Understanding 1031 Exchanges:
At its core, a 1031 exchange allows real estate investors to defer capital gains taxes by reinvesting the proceeds from the sale of one property into another. However, the true artistry of leveraging this strategy lies beyond mere tax deferral. Strategic reallocation of your property’s basis and a deep understanding of depreciation opportunities can unlock levels of investment efficiency that many, including seasoned CPAs, often overlook.

Navigating Common Pitfalls:
Despite its potential, the path to mastering 1031 exchanges is fraught with complexity. From accurately tracking old assets to navigating the nuanced requirements of the IRS code, the process can be intimidating. Moreover, a common stumbling block for many investors and tax professionals alike is the execution phase, where the intricacies of reallocating basis and optimizing depreciation schedules are critical.

Strategies for Maximizing Benefits:

  • Continued Depreciation: Learn how to continue depreciating the basis of your old property over its remaining life, rather than starting anew. This can significantly accelerate your tax benefits and enhance cash flow in the near term.
  • Rebalancing Basis: Discover the advantages of rebalancing your old property’s basis over the new property’s asset classes. This often overlooked step can shift non-depreciable land basis to depreciable assets such as buildings and land improvements, yielding substantial depreciation deductions.

Detailed Example Case Study:

Imagine you own a commercial property with an adjusted basis of $1.3 million, where $1 million is allocated to the land (non-depreciable) and $300,000 to the building (depreciable over its remaining 9 years, instead of the full 39 years). This scenario is quite common, but the strategic response to it is what sets apart savvy investors.

Initial Scenario:

  • Old Property Adjusted Basis: $1.3 million ($1 million land, $300,000 building)
  • Remaining Depreciation Life of Building: 9 years

You decide to engage in a 1031 exchange and acquire a new property. The new property is valued at $4 million, with an asset class ratio of 75% building and 25% land. Most investors and their CPAs might simply add the old basis to the new property’s total and depreciate over a new 39-year cycle. However, a more nuanced approach can yield significant benefits.

Strategic Approach:

  • Continue Depreciating Old Building Basis: Instead of restarting the depreciation schedule for the $300,000 building basis over 39 years, you choose to continue the depreciation over the remaining 9 years. This approach provides an annual depreciation deduction of approximately $33,333 ($300,000 / 9 years) instead of $7,692 ($300,000 / 39 years), significantly enhancing your near-term cash flow.
  • Rebalance Basis Over New Asset Classes: You then assess the new property’s ratio of building to land value (75% building, 25% land). By rebalancing your old property’s $1.3 million adjusted basis according to this ratio, you allocate 75% ($975,000) to the building and 25% ($325,000) to the land of the new property.

This rebalancing allows you to depreciate $975,000 over the remaining 9 years of the old property’s depreciation schedule, translating to an annual depreciation deduction of approximately $108,333. This is a significant increase compared to not rebalancing and merely continuing with the old $300,000 building basis or starting anew with a full 39-year depreciation schedule.

Impact Analysis:

  • Without Strategic Rebalancing: Annual depreciation = $7,692 (over 39 years)
  • With Strategic Rebalancing: Annual depreciation = $108,333 (over 9 years)

Conclusion:
This strategic approach to a 1031 exchange not only defers taxes but recharacterizes old, unused basis into a powerful tool for current income tax deductions in the form of accelerated depreciation. It’s a nuanced strategy that requires careful planning and execution but can significantly impact your investment’s financial performance.

Final Thoughts:
Leveraging 1031 exchanges to your advantage requires a deep understanding of tax laws and strategic financial planning. By meticulously analyzing your investment’s basis and potential for depreciation, you can uncover opportunities that enhance your portfolio’s value and growth potential.

For those looking to navigate these waters, consulting with a tax professional who specializes in real estate investments and understands the intricacies of 1031 exchanges is crucial. Their expertise can guide you through the process, ensuring compliance while maximizing financial benefits.

Remember, in the realm of real estate investing, knowledge is not just power—it’s profit.

Relief in Sight: The 2025 R&D Expensing Fix and What It Means for 2022–2025

Neil Langlois Business Taxes , , , , 0 Comment
Wm. Neil Langlois CPA, LLC News

Neil Langlois | Business Taxes, CPA and Accounting Industry | Updated July 2025

Innovation drives progress, and for decades, the U.S. tax code recognized the critical role of research and development (R&D) by allowing businesses to fully deduct R&D costs in the year incurred. That changed in 2022, when new rules from the Tax Cuts and Jobs Act (TCJA) required businesses to capitalize and amortize their R&D expenses—five years for domestic costs, 15 years for foreign. Now, relief appears to be on the horizon.

A Costly Change That Stifled Innovation

Before 2022, businesses could immediately deduct R&D expenses, which supported cash flow, reinvestment, and agility in innovation. But under Section 174 changes triggered by the TCJA, businesses were forced to capitalize R&D expenses over time. For startups, tech firms, and manufacturers—many of whom rely heavily on R&D—that change translated into higher tax bills, reduced liquidity, and delayed innovation.

The 2025 Fix: Retroactive and Forward-Looking

Included in the latest 2025 tax bill now moving through Congress, lawmakers propose a fix that would retroactively restore immediate expensing of domestic R&D costs, effective back to the 2022 tax year. This means businesses may be able to amend prior returns or apply relief retroactively, unlocking deductions they previously had to spread out over years.

If passed, this change would remain in effect through at least the end of 2025, giving businesses a much-needed runway while permanent solutions are debated.

Why It Matters

  • Cash Flow Relief
    For 2022, 2023, and 2024, many businesses reported significantly higher taxable income because they couldn’t deduct their full R&D spend. This rollback corrects that distortion—freeing up working capital.
  • Software Development Gets Clarity
    Internal-use software development has been especially confusing under Section 174. The new bill restores full expensing of domestic software development alongside other R&D activities.
  • Retroactive Planning Opportunities
    If your business capitalized R&D expenses in 2022 or 2023, you may be able to file amended returns and reclaim those deductions—potentially resulting in significant refunds.

Policy Reversal or Policy Reset?

This is more than just a technical fix. It signals a broader shift in tax policy: a return to supporting U.S.-based innovation with immediate financial incentives, rather than revenue-raising mechanisms that hinder long-term growth. Restoring full expensing doesn’t just reduce taxes—it empowers companies to keep innovating without hesitation.

What’s Next?

As of July 2025, the R&D expensing fix is included in the House-approved tax package alongside other small business provisions like QBI permanency, bonus depreciation, and Section 179 enhancements. The Senate is expected to consider the bill as part of broader budget negotiations later this year. While not yet law, its bipartisan support and inclusion in the larger tax package suggest high chances of passage.

Final Thoughts from My Desk

If you capitalized R&D in 2022 or 2023, it’s time to revisit those filings. Refund opportunities may be on the table, and your current year planning should reflect the likelihood of restored deductions. This change could improve your taxable position, liquidity, and valuation overnight.

Innovation shouldn’t be penalized. And now—finally—it looks like we’re correcting course.

If you’d like to review how this could impact your prior returns or 2025 planning, let’s talk. As always, I’ll break it down in plain English with your strategy front and center.

Understanding Timber Growth and Basis for U.S. Income Tax Purposes

Neil Langlois Timber , , , 0 Comment
Timber Basis

Introduction to Timber Taxation

Navigating the intricacies of timber taxation in the United States is crucial for anyone involved in forestry, whether as a landowner, investor, or business entity. Unlike other assets, timber’s value grows over time in a literal sense, and this growth has significant tax implications. This article aims to demystify the key concepts of timber growth and basis, which are essential for understanding and accurately reporting your tax obligations related to timber activities. By grasping these concepts, you can make informed decisions that optimize your financial outcomes in forestry investments.

Defining Timber Basis

The ‘basis’ in timber is a foundational concept in forestry taxation. It represents the capital investment in timber, comprising the purchase cost of the timberland and other associated expenses, such as legal fees, surveying costs, and the cost of planting or seeding. Understanding your timber basis is vital for determining the taxable gain when selling or harvesting timber, affecting your overall tax liability.

Importance of Timber Growth Tracking

Monitoring the growth of your timber is essential for both management and tax purposes. It helps in estimating the volume of timber available for sale or harvest, guiding your operational decisions. For tax purposes it is important to track and maintain accrurate estimates of annual timber growth to aid in the proper calculation of a depletion deduction. Understanding how much your timber has grown, both physically and in value, is essential for accurate tax reporting.

Methods of Calculating Timber Basis – Depletion

Calculating the basis in timber can be done through various methods, each with its own set of considerations. The depletion method is the most commonly used in scenarios of periodic harvesting. This method involves determining the basis for the portion of timber that is cut or logged, based on the original investment in the timber relative to how much timber was logged in the current year. Since most investors do not complete timber cruises annually, having accurate estimates of timber growth is an integral part of being able to support an accurate depletion deduction. A depletion deduction is equal to the original investment and other capitalized expenses times the current year ratio of MBF Cut over Total Available MBF (not this is not the original MBF at time of purchase). Accurate growth tracking and estimating provides the “Total Available MBF”

Example 1: Logging a Percentage of Grown Timber

Consider an investor who buys 100 acres of land for $1 million, allocating $100,000 to the bare ground and $900,000 to the timber. Initially, there are 900,000 MBF (thousand board feet) of Douglas Fir. Over a 10-year period, the timber grows at an average rate of 3% per year. After 10 years, the investor decides to log 45% of the total timber.

Here’s how the depletion method is applied…

Timber Growth: The original 900,000 MBF of Douglas Fir grows to approximately 1,209,525 MBF over 10 years.

Volume Logged: 45% of this grown volume, about 544,286 MBF, is logged.

Basis Calculation: The basis for tax purposes is 45% of the original timber basis of $900,000, which equals $405,000.

Example 2: Logging a Specific Volume of Timber

Now, let’s consider the same scenario, but instead of logging a percentage of the timber, the investor logs a specific volume – 450,000 MBF (equal to 45% of the original available MBF) – after 10 years…

Timber Growth: As before, the timber grows to about 1,209,525 MBF.

Volume Logged: The investor logs 450,000 MBF, which is approximately 37.20% of the grown timber volume.

Basis Calculation: The basis for tax purposes is 37.20% of the original $900,000 timber basis, amounting to approximately $334,842.

Comparison and Key Insights

These examples highlight a vital aspect of the depletion method – the basis calculation is directly linked to the original investment and the proportion of timber logged relative to its growth. The depletion deduction varies between the examples by more then $70,000. The method does not necessarily consider the current market value or the final volume of timber. This approach ensures that tax calculations reflect the economic reality of the timber investment over time.

Conclusion and Disclaimer

The depletion method is a fundamental aspect of timber taxation in the U.S., crucial for accurate tax reporting and financial planning in forestry investments. However, it’s important to note that this article is for informational purposes only and does not constitute professional tax advice. Timber taxation can be complex, and the laws are subject to change. Therefore, individuals and businesses involved in forestry should consult with a certified public accountant (CPA) or a tax professional specializing in timber taxation for personalized advice and compliance with current tax laws.