Scenario #4: Food Manufacturing Company (Bakery)

Situation

A successful bakery was not utilizing building loses to offset the bakery’s income. RINA suggested a cost segregation study. The owners’ current CPA did not think a cost segregation study was allowable and that there would be no benefit.

Goal

Increase cash flow for the bakery by reducing the owners’ taxable income. RINA suggested utilizing the rental losses generated from accelerating the depreciation on the building to offset some of the taxable income from the bakery.

Solution

RINA performed extensive research regarding how the rental losses could net against the food manufacturing income. RINA shared the information with the owners’ CPAs and as a result, the owners allowed a cost segregation study.

Results

RINA identified special IRS provisions which allowed the owners to net the rental losses from the building against the income from the food manufacturing business. 

• This tax strategy generated significant additional cash flow of $300,000 for the owners, as a result of netting the income from the S corp.
• The cost segregation study provided an immediate $400,000 tax deduction for the owners.
• Many times with real estate, the passive loss rules do not allow you to take those losses against other income. In real estate situations, proper planning can avoid this result and significantly reduce the owners’ tax liabilities.