S-Corp + Cost Segregation for Commercial Investors: The Actual Math

The idea in one paragraph

Karlton Dennis is an Enrolled Agent who teaches small business owners and real estate investors to plan ahead instead of waiting until filing season. His public material leans on two levers: an S-corp election to cut self-employment tax, and real estate depreciation, especially cost segregation. I haven't worked with him and I don't endorse any course or service. The ideas are real, and the math is easy to get wrong, so I ran it. Everything is federal only. Florida has no state income tax.

Lever 1: The S-corp election

If you are a self-employed broker, developer, or operator, you pay both halves of Social Security and Medicare on net profit: 15.3% up to the Social Security wage base, then 2.9% above it. The 2026 wage base is $184,500. An S-corp lets you pay yourself a salary and take the rest as a distribution. Payroll tax applies to the salary, not the distribution.

Payroll tax saved is about $12,934. Subtract the extra income tax and roughly $2,500 of payroll and S-corp return costs, and the net is about $4,400 a year. Taxable income rises because you lose the deduction for half of SE tax, and the 20% QBI deduction shrinks, since it applies only to the profit left after salary.

The catch is the salary. The IRS expects it to be reasonable for the work you do. The lower you set it, the bigger the audit risk.

Lever 2: Cost segregation on a commercial building

Commercial buildings depreciate over 39 years. A cost segregation study moves components such as flooring, electrical, site work, and fixtures into 5-, 7-, and 15-year property. With 100% bonus depreciation, which the 2025 tax law made permanent for qualifying property, those pieces can be deducted in year one. For more detail on studies themselves, see our cost segregation guide for Florida CRE.

Example: a $2,000,000 commercial property.

• Land at 25%, so depreciable basis is $1,500,000.
• A study reclassifies 20%, or $300,000, which is deducted in year one.
• The remaining $1,200,000 depreciates over 39 years, about $30,800 a year.
• Year-one depreciation is about $330,800. Straight-line alone would be about $38,500.
• With $120,000 of net rent before depreciation, the paper loss is about $210,800.

If that loss could offset other income, it would be worth about $50,600 of federal tax at 24%, or about $78,000 at 37%. That is where the second catch matters.

The catch most examples skip: passive loss rules

Commercial rental activity is generally passive. A passive loss offsets passive income, such as rent from other properties or gain on a sale, and is otherwise suspended and carried forward. It doesn't reduce your commissions or wages.

The usual way to change that is real estate professional status: 750 or more hours a year in real property trades or businesses and more than half of your working time, plus material participation in the rental. For a working broker, the hours may exist, but they have to be logged, and on a joint return the test is generally applied to one spouse. Short-term rental rules that some examples cite generally apply to stays averaging 7 days or less. They don't apply to a typical tenant lease.

If you don't qualify, the study still creates value. The suspended loss can shelter future passive income and the gain when you sell. It just doesn't produce a check this year. Whether a study fee of a few thousand dollars makes sense then is a question for your CPA.

It is a deferral, not a permanent saving

When you sell, depreciation comes back. Gain on the reclassified pieces is taxed as ordinary income, up to 37%, and the building portion up to 25%. Three common ways to avoid or postpone it: hold the property, exchange into another under Section 1031, or hold until death for a stepped-up basis. Each has rules and risks your attorney and CPA must confirm.

Putting it together

The S-corp piece nets about $4,400 a year on these numbers. The cost segregation piece is worth nothing this year if the loss is passive and you don't qualify as a real estate professional, and roughly $50,000 or more if you do. That spread is the whole story. Before you buy a property for the tax benefit, find out which side of that line you are on.

Run your own numbers with the S-corp + cost segregation calculator. It defaults commercial properties to passive treatment and lets you flip the toggle. For a deeper asset-type model, use the Cost Segregation Calculator, and underwrite the whole deal in the deal analyzer.

What to ask your CPA

• Does an S-corp make sense at my profit level, and what salary is defensible?
• Would I qualify as a real estate professional, and how should I log hours?
• Is a cost segregation study worth its fee for this property and my holding period?
• What will recapture look like when I sell, and does a 1031 exchange fit?
• How do state rules and my other income change the answer?

Frequently asked questions