About
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Careers
Why Cohen & Company Our Culture Total Rewards & Benefits Intern & Entry Level Opportunities Experienced Opportunities
Contact
Akron, OH Baltimore, MD Chicago, IL Cleveland, OH Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Services Industries Knowledge Center People

About Our Services

We offer tailored solutions — whether private company or owner; public or private fund, adviser or fund service provider; or Fortune 1000 enterprise. Learn how we can help you.

Learn More

Assurance Services

Employee Benefit Plan Audits Internal Controls Investment Company Audits Private Company Audits SOC Readiness & Compliance

Tax Services

Federal Tax Planning & Compliance High Net Worth & Wealth Transfer International Filings & Structuring Investment Company Tax State & Local Tax Tax Credits & Incentives Transaction Tax Planning

Advisory Services

Business Valuations Data & Insights Digital Finance Solutions IT Strategy & Implementation M&A Advisory Outsourced Accounting Solutions Risk Assurance & Advisory Transaction Services Turnaround & Restructuring

Our Industry Expertise

Our industry experience means you can find professionals who speak your language and bring earned insights to the table. Learn how we can help you.

Learn More

Key Industries

Digital Assets Investment Companies Manufacturing Private Companies Private Equity Real Estate & Construction Technology & Life Science
VIEW THE COMPLETE LIST

Knowledge Center

Our team wants to help your team stay up to date. Browse our thought leadership, events and news for insights and a point of view on business-critical topics.

Learn More

Insights

Browse valuable articles and publications our experts have written to help you and your organization answer key questions — and consider new ones.

Read Our Insights

Events

Join us in person and online for events that address timely topics and key business considerations.

Explore Our Events

News

Find out what is happening at Cohen & Company, from industry recognitions and growth updates, to where we are contributing to important media stories.

Read Our News
People
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Why Cohen & Company Our Culture Total Rewards & Benefits Intern & Entry Level Opportunities Experienced Opportunities
Akron, OH Baltimore, MD Chicago, IL Cleveland, OH Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Back to Insights

Renting Property to Your Business Could Backfire on Your Tax Liability

August 31, 2016 Federal Tax Planning & Compliance, Real Estate & Construction

If you own both property and a business, it just makes sense to lease the property to your business, right? Not always — this approach could be costly tax-wise, especially in light of the 3.8% net investment income tax (NIIT) now imposed on certain passive income. Fortunately, there may be a way to avoid these undesirable consequences. 

The Self-Rental Rule

The self-rental rule applies when you rent property to a business in which you and/or your spouse “materially participate.” The rule treats rental income as nonpassive but rental losses as passive. A taxpayer materially participates in a business if he or she works on a regular, continuous and substantial basis in its operation.
 
Unfortunately, the Internal Revenue Code generally prohibits taxpayers from deducting passive losses. A passive loss usually can offset only passive income, meaning income from a business in which you don’t materially participate, or rental real estate in which you don’t actively participate. “Active” participation is a less stringent standard than “material” participation. The active participation rules provide for limited circumstances under which you’ll be able to deduct passive losses; typically, though, absent passive income you may not claim current deductions for passive losses.
 
On top of that bad news, higher-income taxpayers generally will be subject to the NIIT on some or all of their unearned income, including rental income. This is in addition to — and calculated separately from — the taxpayers’ regular income tax or alternative minimum tax liability.

An Alternative Approach

You might be able to avoid the negative self-rental rule results by electing to “group” your business activities and rental activities for purposes of the passive loss rules — if both activities together constitute “an appropriate economic unit.”
 
The factors given the greatest weight when determining whether a group is an appropriate economic unit are:

  • Similarities and differences in types of businesses,
  • The extent of common control,
  • The extent of common ownership,
  • Geographical location, and
  • Interdependencies between or among the activities. 
  • The interdependencies factor might consider, for example, the extent to which the activities purchase or sell goods to each other; involve products or services that are normally provided together; have the same customers or employees; or are accounted for with a single set of books and records.

Proceed with Caution

If you qualify for the grouping election, you could offset your business’s nonpassive income with the otherwise passive rental losses. The rules for grouping are complicated, though, and include conditions beyond the appropriate economic unit requirement. Your tax advisor can help you chart the best course forward to minimize your taxes.

For more information, contact Angel Rice.


Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Sign Up for Our Emails & Events

Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.

Subscribe Today
Subscribe to our newsletter
About Contact Submit RFP Privacy Policy
LinkedIn Twitter Facebook
© 2023 Cohen & Company