Tax deductions

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.

IRS Issues Revenue Ruling on New Tip Deduction: Guidance for Employers

Neil Langlois Business Taxes, Individual Taxes , , 0 Comment
IRS Issues Revenue Ruling on New Tip Deduction: Guidance for Employers

The IRS has now issued Rev. Rul. 2025-18278, giving final clarity on how the new federal deduction for qualified tips (enacted under the “One Big Beautiful Bill Act”) will work starting in 2025. While the deduction is designed to boost take-home pay for tipped workers, employers need to understand their reporting responsibilities — and where their role ends.

What Counts as a Qualified Tip

The ruling defines “qualified tips” as:

  • Voluntary cash tips paid by customers (including cash, card, or electronic payments like Venmo/PayPal).
  • Given in the course of employment in an occupation Treasury has designated as “customarily tipped” before Dec. 31, 2024 (think restaurant servers, bartenders, drivers).
  • Not mandatory service charges, auto-gratuities, or negotiated fees.

What Doesn’t Count

  • Performers and entertainment workers (dancers, musicians, streamers, etc.) — excluded under the Specified Service Trade or Business (SSTB) rules.
  • Healthcare, athletics, and similar professions — also SSTBs, excluded.
  • Non-cash “gifts” like tickets, services, or tokens that aren’t exchangeable for cash.

So yes, a tip for a server at your restaurant may qualify, but an online fan “tip” for a live-streamer or performer does not. And while teachers are incredibly valuable, an apple on the first day of school has never counted as a tax-deductible tip. Our feeling is that educational streamers are also out.

What Employers Should Focus On

1. Don’t Advise Employees on Their Taxes
Your job is to track and report; employees will determine whether they qualify for the deduction with their own tax advisors.

2. Reporting is Coming

  • Starting with 2026 Forms W-2 and 1099 (filed in early 2027), employers must report qualified tip amounts in Box 12 and the related occupation code in Box 14.
  • Some employers may voluntarily start in 2025, but it’s not required.

3. Train Staff on Classification
Make sure managers and payroll teams understand that service charges ≠ tips. Misclassifying can create compliance problems.

4. Work with Payroll & POS Vendors
Ask now whether your payroll provider or POS system will be ready to capture and code tips under the new IRS requirements.

The Bottom Line

This new deduction is about supporting tipped workers in industries where gratuities are a normal part of income. For employers, the key responsibility is system readiness and proper reporting, not interpreting who gets the deduction.

Focus on compliance, let employees handle their own tax filings, and you’ll keep your business out of trouble as these new rules take effect.

IRS to Accountants: No More Free Lunch Starting 2026 (and What to Do About It)

Neil Langlois Business Taxes, CPA and Accounting Industry , , , 0 Comment
Cafeteria buffet with salad bar in an office environment

A Tax Change Only an Accountant Could Love

If your firm runs on catered lunches, Costco snacks and late‑night pizza during busy season, brace yourself. Thanks to a delayed provision of the 2017 Tax Cuts and Jobs Act (TCJA), expenses for employer‑operated cafeterias and meals provided for the convenience of the employer will go from 50 % deductible to totally nondeductible on January 1, 2026. Think of it as Congress’s way of saying, “We see your bagels—now pay for them yourselves.”

What’s Changing?

Under current law (since 2018), an employer can deduct only 50 % of the cost of operating an on‑site eating facility that qualifies as a de minimis fringe benefit. To qualify, the cafeteria must be located on or near the business premises, its revenue must equal or exceed its direct operating costs, and it can’t discriminate in favor of highly compensated employees. When these conditions are met, the value of meals is excludable from employees’ income under IRC § 119 (meals furnished for the convenience of the employer), and the employer currently gets a 50 % deduction.

That all changes for amounts paid or incurred after December 31, 2025. IRC § 274(o) will disallow any deduction for:

  • The cost of running an employer‑operated eating facility that meets the de minimis fringe rules.
  • Food or beverage expenses associated with that facility.
  • Meals provided on the business premises for the convenience of the employer.

So the tax break for staff cafeterias and those “let’s order in and keep going” nights? Gone. The deduction drops from 50 % to zero, regardless of when your fiscal year ends.

New Exceptions (But Not for Most Firms)

Recent legislation softens the blow—but only for a few industries. One exception allows a deduction when the employer sells meals in bona fide transactions for full fair market value, meaning restaurants and other businesses that sell food to paying customers can still deduct the cost of feeding on‑shift employees. There’s also a narrow exception for food or beverages provided on certain fishing vessels, fish‑processing facilities and offshore oil rigs. Unless your accounting firm moonlights as a café or a cannery, these carve‑outs won’t apply.

Giving Firms Credit Where It’s Due

A group of colleagues enjoying lunch together at a meeting, with a focus on a woman smiling and holding a salad.

Will this make firm owners stop buying lunch? Not likely. Experienced partners know it’s hard to finish a 12‑hour day on an empty stomach, and the morale boost of a shared meal is worth more than the tax deduction. Expect to see the same bagels and burritos in the break room—you’ll just bear the full cost after 2025.

What You Should Do

  • Budget for the full cost. Through the end of 2025, you still get a 50 % write‑off for qualifying cafeteria costs. After that, those meals reduce taxable income by nothing, so plan accordingly.
  • Consider alternatives. Reimbursing employees for meals they buy while traveling or meeting clients remains 50 % deductible. Gift cards or small bonuses can replace the goodwill of free lunches without triggering the § 274(o) disallowance.
  • Confirm if you qualify for an exception. If your business sells food to the public or operates a qualifying fishing or offshore facility, you may still deduct those meals. Everyone else should prepare for the deduction to disappear.
  • Keep feeding your team. Remember, the law doesn’t forbid providing food—it just kills the tax deduction. Your people will still need coffee and carb‑loads during busy season; you’ll just treat it as a straight business expense.

Final Bite

This isn’t the end of free lunch; it’s the end of the tax deduction for free lunch. You’ve got a little over a year of 50 % deductibility left, so enjoy it. Starting January 1, 2026, plan on treating staff meals as a pure cost of doing business. In the meantime, watch for further guidance—Congress could always decide to tweak the rules again, but nothing broader than the current carve‑outs is on the table at the moment.

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

Demystifying Tax “Write-Offs”: What You Need to Know

Neil Langlois Business Taxes , , , 0 Comment
Tax Write-offs

Tax “write-offs” are a topic that often carries a lot of misconceptions and confusion. Many people believe that a write-off magically eliminates taxes or that it’s a term interchangeable with deductions. In this article, we’ll unravel the mysteries of tax write-offs, debunk common myths, and shed light on the reality of how they work within the tax code.

Myth 1: A Write-Off Means No Spending Required

One of the most pervasive misconceptions about tax write-offs is the belief that they can miraculously erase your tax liability without any real expenditure in your business. This notion often arises when you hear friends casually claim that they “write off” everything and pay no taxes.

Imagine a friend who enthusiastically shares how they “write off” their lavish vacations, expensive dinners, and luxurious car. It might give the impression that they pay little to no taxes.

The Reality: A tax write-off is not a magical escape from taxation. In reality, a write-off is another term for a deduction, and it represents a legitimate business expense that can be subtracted from your taxable income. In simpler terms, you can reduce your taxable income by the amount you’ve spent on eligible business expenses, thereby lowering your tax liability. However, you need to have spent money on these expenses to claim them as write-offs.

Imagine a friend who enthusiastically shares how they “write off” their lavish vacations, expensive dinners, and luxurious car. It might give the impression that they pay little to no taxes. However, what they’re likely doing is deducting legitimate business expenses, such as travel for client meetings, meals with potential clients, or a vehicle used for business purposes. They’re not evading taxes but rather accurately accounting for their deductible expenses.

Myth 2: Write-Offs Mean Dollar-for-Dollar Tax Reduction

Another common misconception is that a tax write-off directly and immediately reduces the taxes you owe, dollar for dollar.

The Reality: While it’s true that write-offs (deductions) lower your taxable income, the tax savings are based on your tax rate. If you’re in a 30% tax bracket, a $1,000 deduction reduces your taxable income by $1,000, but it saves you $300 in taxes (30% of $1,000). So, write-offs reduce your tax liability, but the amount saved depends on your tax rate.

Understanding Business Deductions Under Code Section 162

In the tax code, business deductions fall under Section 162. This section allows businesses to deduct “ordinary and necessary” expenses incurred in the course of conducting their trade or business.

Examples of Deductible Expenses Under Section 162:

  1. Office Rent: Payments made for office space or workspace used exclusively for your business.
  2. Employee Salaries: Wages and salaries paid to your employees.
  3. Supplies: Costs associated with office supplies, materials, and equipment used for business purposes.
  4. Travel Expenses: Costs related to business travel, including transportation, lodging, and meals.
  5. Advertising and Marketing: Expenses for promoting and advertising your business.

Expenses That Are Not Necessarily Immediate Write-Offs:

It’s important to note that not all expenses are immediately deductible. Some expenses, such as entertainment, country club dues are never deductible. While assets like machinery or vehicles, need to be depreciated or amortized over time according to IRS rules.

Conclusion

Tax write-offs can be a valuable tool for reducing your taxable income and, subsequently, your tax liability. However, it’s essential to understand that they are not a magical way to eliminate taxes without spending money in your business. Write-offs are deductions, and their impact on your taxes depends on your tax rate. To maximize your tax benefits and stay compliant with IRS regulations, it’s crucial to distinguish between legitimate business expenses and personal expenses and be aware of the specific rules governing the deduction of different expenses under Section 162 of the tax code. Remember, while tax write-offs can provide savings, they are just one part of a comprehensive tax strategy for your business.