Purchasing Assets with Pre-tax Dollars

[Nate]

I stumbled upon this idea in a Kiyosaki book (I'm not really a huge fan, but that's not the point). In it, he mentions how his rich dad buys property out of his pre-tax dollars, where as his poor dad pays taxes bi-weekly like most people, and then has to buy property out of whatever is left.

The concept itself isn't that difficult. I'm an online business owner myself, for about 3 years now, but only full time starting the beginning of this year 2012 when it reached a point that it could sustain life. I want to ask you pros out there if you have anything else you can share on this idea? I have become a bit obsessed with the idea of seeing how I can lower my taxable income through buying things I might consider "assets" that can be counted as legitimate expenses. (At least I think that's how the whole thing works.)

My obsession stems from the fact that I am 29 years old, single, and I am not a home-owner. I live with a couple roommates, so I can't seem to want to pull the trigger on buying a house when my rent comes in at $300 per month. Because of my scenario, I feel like I am going to be taken in taxes. I will be in the 25% bracket, pushing the next level up, and don't want to get slapped with a huge fat tax bill come next tax season. I also don't want to pay quarterly taxes, mostly on principle. Accountant said I don't have to, but be prepared for a fat bill if I don't. Mitt Romney will pay a lower percentage of his income in taxes than I will. Lame.

Sorry for being long-winded, and on to the crux of my question here: What kind of things (if any) can be done to lower your taxable income by spending money on legitimate business needs/expenses/whatever a la Rich Dad example I used above? I appreciate any replies and hope this will help some others out there as well.

 

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[RE Taipan]

Nate,
Here is how I see it…and do it myself. And before I get into the nitty-gritty, please know that if this is something your acct has not explained to you, I would respectfully provide that while your acct may be the absolute best person for someone else’s business, he/she is probably NOT the best person for your business….

Here we go….

When you have your business in a Corp, or even an LLC ( for brevity I’ll just use Corp here) , you only pay taxes on the profit that the Corp has at the end of the year. This means the between the time when you receive/earn the income and when your financial year ends (for most this would be Dec 31[SUP]st[/SUP]), everything you purchase that is reasonably related to the business is paid for using the income it receives…that makes sense…but here is the kicker…the “income money†that you use to pay for whatever widget you just bought has not been taxed yet, since your financial year has not ended and because the purchase of the widget is an expense to the Corp.

Now let’s look at an example of this using 2 methods…

Method 1) uses after tax dollars…while 2) uses pre-tax dollars to see how it plays out…..

Let’s say for the sake of talk that the CEO of Corp wants to acquire a used 2010 Aston Martin Volante for $100,000. Corp receives $100,000 in income on March 1. If Corp does not spend this money prior to the end of its financial year, it will have to pay taxes on this $100,000 as it will be considered profit.

Method 1)
Since Crop is doing well the CEO decides that he/she can afford to purchase a used 2010 Aston Martin Volante which costs $100,000. So the CEO pays himself/herself $100,000 to allow for the CEO to purchase the used 2010 Aston Martin Volante. While the $100,000 amount paid, if considered “salary.†Bonus,†etc. to the CEO is an expense to the Corp it is not taxable to the Corp. However it is a taxable event to the CEO since it is considered income and will be reported as such on his/her W-2 at year’s end. Assuming a 25% tax bracket (so I don’t have to do any hard calculations), the CEO will have to pay $25,000 in taxes and out of the $100,000 paid is left with a net of $75,000. This means that in order to get the used 2010 Aston Martin Volante, CEO will have to pony up an additional $25,000….ouch!

Method 2)
Crop decides it is in the Corp’s best interests to acquire a used 2010 Aston Martin Volante because Corp is in the business of, among other things, providing financial planning and lifestyle success coaching to its clients. Further, having the CEO and others of the Corp being seen in and with items generally associated with those items readily identifiable as being markers of high wealth individuals is highly beneficial to the business and success of the Corp. Based on the best research available to the Corp, the used 2010 Aston Martin Volante is among those items which satisfy the requirement of being readily identifiable as a marker of high wealth individuals and it is in the best interests of the Corp to acquire this asset. Further, it is also in the best interests of the Corp to allow certain employees of the Corp, including the CEO to utilize this asset in and when conducting the business of the Corp.

So Corp now purchases the used 2010 Aston Martin Volante for $100,000. The $100,000 dollars has now been spent and more importantly been turned from a taxable income component into an expense component for the Corp. Since the $100,000 expenditure is classified as an expense to the business and it is considered a legitimate business expense via the paper trail above, the $100,000 is no longer taxable. CEO has access to the used 2010 Aston Martin Volante.

But wait you say….

I really like that whole Aston Martin Volante thing and would love to tool around town in one of those, but I have an online golf ball store, not a financial planning and lifestyle success coaching so I guess I’m stuck….

If you think this way my friend, you would be wrong…

….and here is how you could potentially justify it as a legitimate business expense….

Corp decides it is in the Corp’s best interests to acquire a used 2010 Aston Martin Volante because Corp is in the business of, among other things, selling golf balls to its clients via its online store. Further, golf is a recreational activity that while not exclusively, is often played and enjoyed by high wealth individuals. Further, the Corp’s best available research indicates that high wealth individuals and those who play golf have a preference to associate with individuals who they perceive and see as being high wealth and successful individuals. The research also indicates that the 2010 Aston Martin Volante is among those items which the Corp’s clients, potential clients and high wealth individuals regard as being associated with high wealth and successful individuals. Further, having the employees, managers and officers of the Corp being seen in and with items generally associated with those items readily identifiable as being markers of high wealth individuals is highly beneficial to the business, marketing strategy and long-term overall success of the Corp. Further, it is also in the best interests of the Corp to allow certain employees of the Corp to utilize this asset in and when conducting the business of the Corp.

Here is the part that should be familiar….so Corp now purchases the used 2010 Aston Martin Volante for $100,000. The $100,000 dollars has now been spent and more importantly been turned from a taxable income component into an expense component for the Corp. Since the $100,000 expenditure is classified as an expense to the business and it is considered a legitimate business expense via the paper trail above, the $100,000 is no longer taxable. CEO does not own the 2010 Aston Martin Volant, but does have access to the used 2010 Aston Martin Volante.

OK, if you liked that…let’s get a bit more sophisticated….

Let’s assume that Corp has $1,000,000 of income. Wow…lot of tax dollars will be paid on that $1,000,000 huh?. How is Corp going to be able to minimize the tax liability of this $1,000,000 of income?

Well let’s see….
Take the $1,000,000 and shop it around until Corp finds a bank that will loan Corp $1,000,000 in return for Corp’s deposit of $1,000,000 into a CD. Let’s see where this will put us...Corp now has the original $1,000,000 dollars that it has deposited in a CD with the bank AND it has $1,000,000 which the bank has loaned. This means that Corp now has $2,000,000 in its account to spend….but it also has something else which is very important….it has a loan in the amount of $1,000,000….and since loans have to be repaid, loaned money is not considered income and is therefore not taxable….since the loan has to be repaid, that means that the payments in paying off that loan are an expense to the business. Wait, did I say expense? That means that the income Corp uses to pay those expenses can come from pre-tax income dollars and if Corp earns and spend those income dollars in the same financial year, the money paid in expenses is not taxable. So then Corp uses the $1,000,000 in the CD to pay off the $1,000,000 loan and is left with the $1,000,000 in loaned money…the same amount that it started with….but now it is not taxable.

You can do this with cars, boats, homes, pens, erasers, you name it…..and these are only 2 ways to minimize taxes and operating your Corp…ANNNND I have not even touched on a whole host of other things including involving international operations, etc…

Note: 2 of the most important people on your team should be your atty who understands how to do this and the acct your atty hires....by the way...that is how you want to do it..have your atty hire your acct so in the event of an IRS audit, your acct can go to the audit (preferably with your atty) and operate under the atty-client privilege...if you hire your acct direct, then generally speaking, they cannot

Yep, business is really fun when you know how to play the game!!!

 

[GlobalWealth]

.but now it is not taxable.

Maybe I missed something here, but how is the original $1m not taxable? As I read your example, the $1m was earnings from the company. The $1m was then deposited in the bank CD, and a $1m loan was initiated.

For simplicity sake, lets say its a 4.8% loan which means you have a $4000 monthly payment, or $48,000 per year in interest payments.

If I earn $1m and am at a 25% tax bracket, I would still owe $250k in taxes on the earnings and then could only offset that tax payment with a $48k interest expense.

Assuming I had a CD with a maturity of less than 1 year, I could pay off the $1m loan with the $1m CD, but that still wouldn't eliminate my tax burden on the original $1m in income. It would offset it by a bit with interest expense deduction (which is still an expense), but it would eliminate the tax burden.\

Again, maybe I am missing something so please clarify.

 

[GlobalWealth]

he mentions how his rich dad buys property out of his pre-tax dollars

One option is to use a self-directed IRA (or Roth IRA) with check writing capability. You can then invest you IRA funds (pre tax) into real estate investments. Obviously you are limited to your IRA funds so you would need to consider the max annual contributions, although there are some other options which allow larger contributions like Individual 401k's and SEP IRA's.

What kind of things (if any) can be done to lower your taxable income by spending money on legitimate business needs/expenses/whatever

This is a different question. You are just inquiring about expenses here. You just need to keep good records of legitimate business expenses and deduct them from your taxable income. You may want to find a local accountant to help you understand what is and what isn't deductible in your situation. Some things you may think are deductible, like computers, may not be an expense but may need to be a balance sheet item and depreciated.

 

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[RE Taipan]

Honestly, it was late last night when I wrote my post. I included LLCs as well and in hindsight probably should not have due to the pass thru potential for certain tax treatment elections available to the LLC form. I should have just kept it with C corporations or at least an LLC which has elected to be treated for tax purposes as a C Corp and serves as a division of a C Corp.

Let me explain further….

In your post, you refer to Y-O-U earning $1MM and are at a 25% tax bracket…I did not say this and may be where your confusion lies…and in my post, YOU/I/ME/any individual did not earn anything, the Corp did.

When you have a Corp, YOU do not earn anything as a result of the income paid to the Corp for the business of the Crop. The Corp earns everything. You are an employee, nothing more, nothing less. Anything you earn from the Corp, IS taxable and reported to you on the year end W-2 or other applicable tax doc.

The situation you raise is different….if YOU earn $1,000,000 and you are at a 25% tax rate then you are most likely indeed going to be subject to paying tax on that $1,000,000. Also, if you are loaned $1,000,000, you can’t deduct principal payments on the loan made from your income. Depending on the use of the funds, you may be able to deduct the interest expense paid…and in many cases you cannot even deduct that amount. In my example, you do not play any part of this. You are merely a lowly functionary employee of this Corp which happens to do really well.

Keep in mind that a Corp only pays taxes on profits, not income. And profits are only made of what is left over at the end of the year and one of the beauties of the Corp form IMHO. So if a Corp earns $1.00 or $100,000,000,000,000 dollars in a year, generally speaking for tax purposes all that matters is how much is left at the end of the year. So if Corp earns $1.00 during the year and it expenses $1.00 during that same year on legitimate business expenses, its tax liability will be -0- all things being equal. Similarly, if Corp earns $100,000,000,000,000 dollars and expenses $100,000,000,000,000 dollars in the same year on legitimate business expenses then its tax liability would also be -0- as there would be no profit at years end.

It is completely legitimate for the business to take $1,000,000 of income and shop around for a loan using that $1,000,000 as collateral for a loan if the loan is for money that will be used for a legitimate business purpose. Will you be able to walk into your local B of A and do this?… probably not…but then again, if Corp has $1,000,000 it is doing this with, then you are not going to be at a level where you would walk into your local B of A and do this kind of a thing. Will you find a lender who is willing to allow Corp to deposit $1,000,000 into a CD, give Corp a loan for $1,000,000, then accept only the $1,000,000 back – no of course not, there are always going to be fees, some interest that will have to be paid, etc., etc., etc….but those elements vary so greatly and are individual based on what it going on with the particular lender, the Corp, and on and on at the particular time that the transaction is undertaken.

The bottom line is that the Corp’s loaned money if used for a legitimate business purpose is not income to the Corp. Money that is used to repay the Corp’s loan is an expense to the Corp and as an expense of the Corp it is not considered part of “what is left over†ie, profit, at the end of the year. The Corps earned $1,000,000 is now *poof* gone as an expense of the Corp. The amount remaining, the loaned $1,000,000, is not taxable money since loaned money is not taxable. It can sit there until the cows come home and not have to pay tax on it.

……No profit = no tax.

Your query raises another valid point. I understand that this is sometimes hard to understand I have worked for firms and with clients where this was done day in and day out ….so I am confident that it works and is legal so long as you are not dealing with pass thru entities as the top business form. This is a reason why IMHO it is critical that you have on your team the necessary attys and accts who understand this type of process and the tax laws behind it who can address “your†Corps particular business situation as those situations can vary greatly and may make all, some or none of this applicable.

I hope that I have answered your question as I think that we might be talking about 2 entirely different situations……must also add that I truly appreciate the information you provide and have in fact implemented a number of the components you have suggested in my own strategy. In fact, thanks to your writings, I discovered that I was able to use my Italian heritage (for more than making killer meals) as a ticket to allow both myself and my family to get our second flag. Also, thanks to your information on the Seychelles and Cook Islands we are working on flag number three.

 

[Rickson9]

I still don't understand how $1m in revenue is offset by a $1m loan.

The $1m is a revenue entry on the income statement.

The $1m loan is a liability entry on the balance sheet.

A $1m loan is not an expense. It doesn't even show up on the income statement. How can it impact the $1m in revenue?

The $1m loan generates an interest expense which reduces the $1m revenue by a relatively tiny interest amount, not by $1m.

I think I'm missing something in all the words.

edit: Are you taking out a $1m loan just to 'pay the loan off' with the $1m in revenue? If this were true, the IRS should then allow me to take out a loan in the amount of my operating profit from my RE business. I would then take my operating profit to 'pay off my loan' at the end of the year and show the IRS $0 in profit and not pay any tax. That doesn't seem right.

 

[GlobalWealth]

I still don't understand how $1m in revenue is offset by a $1m loan.

This is still my question as well. Even if it is a Ccorp, the Ccorp is still its own taxable entity just like a person or a pass-thru LLC.

The $1m earnings has not been offset by an expense, only a loan repayment which is a balance sheet not a P&L item as Rickson9 stated.

 

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[RE Taipan]

Rickson

No problem....let me ask this....when a Corp has a loan, that loan (+ any interest which has accumulated) has to be paid back at some point. You are correct that the loan itself is not an expense to the Corp but a liability....however, the act of paying the loan back is an expense to the Corp. When that loan is paid back, where does the money come from? A Corp only has one place to pay that loan back from, its income or some form thereof. So in paying back the loan with the money held in the CD, the money used to pay back the loan becomes an expense to the Corp. As an expnse, that income is no longer part of the potentially taxable amount (profit) at the end of the year.

Here is another articulation of the same thing:

Corp starts with $1,000,000 in profit

Corp takes $1,000,000 in profit and goes to bank and deposits $1,000,000 into bank CD

Corp then take $1,000,000 loan from bank and secures the loan with the $1,000,000 CD

Corp now has $2,000,000 in its total account -- ($1,000,000 in profit + $1,000,000 in loaned money)

Corp now decides that it is going to pay back the $1,000,000 loan. This transaction (paying back the $1,000,000 loan) is an expense to the Corp

Corp redeems the $1,000,000 CD taking that $1,000,000 in profit and paying back the $1,000,000 loan

Corp now has $1,000,000 in loaned money in its acct which is not taxable.

 

[Nate]

Thanks guys, in particular Taipan, for the great responses. The 1million dollar loan thing is also a bit confusing for me... but I'm not going to worry about that one for now as my numbers are much less than that. The Aston Martin example however, was very thought provoking for me.

Question about that: The business I own (an S-Corp incidentally) requires that I go pick-up some metal equipment that I then need to ship off. Because of that I'm thinking of selling my car to buy an SUV (so I can actually haul it around) as the amount is increasing week by week. I will ask my accountant (don't even have a lawyer), but do you think I can legitimately call this SUV a business vehicle since that is why I am selling my car to get one? Does it matter if it will be my only vehicle, ie. I will also be using for gallivanting around town, picking up chicks in all my single-hood glory?

Secondly, keeping with the idea of things that can be considered LEGIT write-offs, but that I might want to buy anyway... are there any others that anyone can think of? Let me throw out an example, feel free to shoot it down. I buy/collect/store silver bullion coins/bars. I like them, part of it is for collecting and fun. I also incidentally think price is going up over the next decade. Is there anyway to feasibly write off these purchases, seeing as they amount to somewhere between 10-20% of my annual income. (Yes, I am all in on this one).

May I ask a semi-unrelated question? My accountant says I should buy a home, even though I don't really want one. Because of my income, probably will be 80k for 2012, and me having no home, no wife, no kids, no student loans, school etc., she says I get eaten alive in taxes. Any thoughts? I live with a friend that charges me $300 monthly, so can my first home purchase be one that I just rent out seeing as I don't want to pay $1,000ish dollars per month to live in my own home, and don't want to look for roommates.

Thanks guys. What a great forum. I'm a member since it was brand new I think, 2007. Mostly just reading, but I think I need to get a bit more active. A lot has changed for me since then, mostly quitting the day job and owning my own no-super-time-intensive-online business. Freedom!

 

[GlobalWealth]

You are correct that the loan itself is not an expense to the Corp but a liability....however, the act of paying the loan back is an expense to the Corp.

Agreed the loan is a liability, and from an accounting point of view paying the loan back would not be an expense - it would be a debit against assets.

Loan repayment is never an expense, only the interest portion is considered an expense. Principle repayment is always considered a reduction of assets.

A Corp only has one place to pay that loan back from, its income or some form thereof.

I disagree here. You don't repay loans from income from an accounting point of view. Interest on loans is repaid and debited from income while principle is debited from assets.

 

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[GlobalWealth]

but do you think I can legitimately call this SUV a business vehicle since that is why I am selling my car to get one? Does it matter if it will be my only vehicle, ie. I will also be using for gallivanting around town, picking up chicks in all my single-hood glory?

Yes it can be a business owned vehicle. I would buy it through my company in you situation. At the end of the year you will need to allocate a certain percentage of the vehicle for personal use which will accrue to you as taxable income. For math's sake, lets say you can depreciate $10,000 per year in vehicle expense you estimate 30% personal use. Then $3000 would accrued to you as taxable income. You need to discuss this with your accountant.

I buy/collect/store silver bullion coins/bars.

Not an expense. That would be an asset item. Personally I would hold them personally and not own them through the company.

Any thoughts?

I will most likely never own a personal residence again. I don't want the restriction so keep this as a disclaimer. But maybe you could consider buying a property as a rental. Maybe a duplex, triplex, or small apartment building and rent the other units. You could potentially earn enough to get income and live rent free.

 

[RE Taipan]

Nate,

If I could offer (although others might differ)...if you are going to buy the SUV as a business function, you have to make sure that the money you use to acquire the asset comes from the business and not you directly...this could raise a flag of comingling and a disregard of the corporate form which could then cause you to potentially peronally liable for the liabilities of the corporation. The better way for you to go might be to sell your car then take that money and make an investment in the corp. This would allow you to more closely follow the corp form and protect you. Once you have done that, you can look at acquiring the vehicle.

Now that the Corp has the money to buy the SUV, you need to draft a resolution giving the corp the authority to acquire the SUV. Here is where the legitimate business purpose comes in. Roughly speaking, and not intended as being definitive, you could say something like…

The business of the Corp involves, among other things, the transport of certain materials by vehicle. The transport of these materials and the quantity of these materials are such that the current vehicles used by the corporation has become inadequate for the purposes of the Corps business. The Corp’s needs are such that a vehicle better suited to its needs is required in order for the Corp to operate at its most efficient and profitable level. The Corp has researched available vehicles and has determined that a XXX is the best vehicle currently available for the Corp’s business. The Corp is therefore authorized to acquire a XXX at the best available price and rate in an amount to not exceed $XXX.

You might also do a second resolution authorizing your use of the SUV….maybe something roughly along the lines of…. The business of the Corp involves, among other things, the transport of certain materials by vehicle. The transport of these materials is being done by “Nate” using the Corp’s XXX. Nate is the person in the Corp most qualified to conduct this aspect of the Corp’s business. In order to conduct the affairs of the business as efficiently as possible, it is in the best interests of the Corp to have Nate available at any time and upon short notice. The Corp has determined that the most economical and efficient way to achieve this is to allow Nate to have full access to the Corp’s XXX for the Corp’s and Nate’s own personal needs without cost or expense to Nate so long as the needs and business of the Corp are Nate’s primary responsibility and obligation.

There are other ways to do this of course, repayments, expense use, allocation, etc...and some involve a taxable event to the individual for the value placed on the personal use of the vehicle....so you'll want to be sure to discuss this with your qualified tax/legal person who is best familair with your particular situation.

Keep in mind that doing this will also mean that you will need to ensure the vehicle with a commercial policy and that in the event that anything happens to you while operating the vehicle, such as an accident, injury, etc, this would open the business up to potential liability for damages…..this in turn means that you might want to consider talking to GlobalWealth about changing your business structure to something more relevant to your business objectives. (No commissions are paid by my recommendation )

Also, you might consider forming a second Corp or LLC which has as its only asset the SUV and which leases the SUV to your operating Crop and secure that lease with a UCC-1 filing….just so in the event that something bad happens, the leasing entity can foreclose and seize the SUV and then “re-lease” it to a new Corp entity.

As for the suggestion to buy the house….possibly not the best one IMHO unless you find a house that is your dream one in your dream area and you want to die in….I’d think it better to use that money to acquire another cash flowing asset such as an apt building which will give you cash flow and build wealth….I’d stay away from a single house as a rental as just having one can be more hassles than they are worth IMHO…and yes, yes, I know that most SFH rental czars started with one house and built from there…but if rental houses are not your business it could distract you too much from your main biz...so an apt “might” be better for your overall plans.

 

[RE Taipan]

Global,

Ok...here is how I will leave it...I used this as an example of what can be done depending on the individual's particular business situation. This is why corp's like GE, Disney, Apple and others at this level have armies of tax attys and the various taxing agencies have their own armies -- people may disagree...yet they continue to pay an effective tax percentage rate which is but a fraction of the guy who works at a Disney kiosk in Anaheim, CA. Tax laws, federal and state, et al, are subject to interpretation...I have participated in these manipulations before and in the years that I worked with the individuals and entities that did, I am unaware of any issues which any domestic govt entity had with this. One is free to use, disregard or make whatever of it that they want to. Everyone needs to do what is best for their own individual situation...when I responded to this thread, I started it by saying that this is what I do...I'm not advocating, pushing anything or any product here and (knock on finely polished and burled cherrywood inlay) I have not been subject to an audit...so until the day when everything is moved 100% offshore, or the tax laws change, I'll keep on keeping on doing what I need to do to minimize my tax burden.

 

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[Rickson9]

Just make sure you don't tell anybody that you're booking the payback of a loan as an expense. Especially not the IRS.

 

[Nate]

I want to revisit one part of this. I did some research and it seems that if you buy (finance) a rental property, the interest on the mortgage is tax deductible but the principle is not... is that right? So if I bought a home for 150k and put down 30k, that 30k needs to be paid tax on? Or, if I financed the whole thing only the interest on each monthly payment is a legit business expense... is that right?

 

[Rickson9]

Your $30k is after-tax dollars. There is no tax on that.

Here is an educational resource:
Khan Academy

 

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[biophase]

I want to revisit one part of this. I did some research and it seems that if you buy (finance) a rental property, the interest on the mortgage is tax deductible but the principle is not... is that right? So if I bought a home for 150k and put down 30k, that 30k needs to be paid tax on? Or, if I financed the whole thing only the interest on each monthly payment is a legit business expense... is that right?

Yes and No and Yes

If you buy a home and finance $120k and during the year your interest is $10k. That $10k is tax deductible because it's part of your expenses in your rental business. The property tax and HOA are all expenses so it's subtracted off your income. The amount of your payment going to principle is not an expense and therefore you cannot deduct it.

The $30k you put down has no bearing

Yes, the interest is considered an expense.

 

[Nate]

Great guy, thanks for the info.

 

[andviv]

This is a great thread. Rep++ for a couple of posters here.

RE Taipan, I still remember your talk during the B&P some years back, great stuff. And your advice here is also very good.

Global, Rickson and Bio's comments are also very good.

Thanks all.

 

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[healthstatus]

Not saying I do this, it is ALL hypothetical....

Mind your corporate structure as mentioned before, you need to have an annual meeting, and you need to take notes at the annual meetings, that annual meeting can take place anywhere in the 48 states (more IRS risk if you travel abroad or to Hawaii), all travel, accommodations and some meals can be paid for by the company to the traveling shareholders, officers of the company and key employees (like an assistant to take notes) that need to be part of the annual meeting. So if you lived in Chicago, you could have an annual meeting in San Diego, the first day of the meeting might be general discussion and planning, some of the discussion might require that research be done and the meeting reconvened in 4-6 days. You do your research and contemplation on the issues while still in San Diego, reconvene the meeting, make decisions, adjourn and return to Chicago. All this is a legitimate corporate expense (watch out for meals, the IRS loves to hammer on meals). File your corporate meeting minutes.

If your company makes anything, there is a really great program on cable called, "how its made", making sure you stay current on manufacturing techniques is important, especially if at your annual meeting you discussed looking into acquiring some equipment. To stay current, you have to have a cable subscription. There are also whole channels devoted to health, fitness, investing, computers, cars and so on so if you have a business in those areas, or from your annual meeting minutes discussion of branching into these areas would justify having cable as a business expense as well.

Of course you need to stay in touch with your business so your cell, ipad, computer and the subscriptions required to keep them functioning are business expense. If you develop websites then all the software that would be needed to create websites or could be used to create websites (Microsoft office suite, Adobe Creative Suite, could all be expensed).

If you create software or apps and in your annual meeting discussed getting involved into games and potentially going cross platform with games then you will need to acquire an Xbox, PS, Wii and controllers and sample games for each so you can consider the viability, and a big screen so you can properly demo your work or ideas.

You have to have a corporate vehicle to get you to the bank and your post office box to get your corporate mail and deposit revenue.

If you have a webserver located somewhere, you should go visit it at least once a year to make sure they are following the terms and conditions of the contract. These can be located anywhere in the world. Just make sure you pick up a business card and note who you saw at the facility when you visited. ( Hosting Server Cancun - paginas web, nombres de dominios, hosting y posicionamiento en buscadores web, aplicaciones web )

You can get polo shirts/golf balls/basically anything with your logo on them and use them in marketing as employee give-aways or employee uniforms. If they are a uniform having them laundered is an expense. If you blog for money, whatever you write about on the blog tied to your subject matter could be considered for deduction. i.e. If you have a health website and join a bootcamp, that would be a legitimate expense if you blogged about the experience and what you got out of it. If you have an investment website and blog about going to the baseball game, that probably wouldn't qualify unless you took a client.

C-corporations allow you to give awards to employees each year that value below $400, so if you have an employee of the year, most senior employee, etc. What you pay for the awards is a business expense.

Use your corporate meeting minutes to help justify, use a corporate credit card and NEVER put personal expenses on the card. (You can put business on personal and reimburse yourself, but never the other way around). There are several tax books in the US about deductions you can take (many of these suggestions are from them) and buying those books are a deduction.

I am not a tax guy, this is not tax advice, this is not advice at all, this is all speculation, I was on something when I wrote this, don't follow without consulting a professional tax guy, lawyer, or somebody other than me.....

 

[BeingChewsie]

In fact, thanks to your writings, I discovered that I was able to use my Italian heritage (for more than making killer meals) as a ticket to allow both myself and my family to get our second flag. Also, thanks to your information on the Seychelles and Cook Islands we are working on flag number three.

Global,

Just a small threadjack...I want to second my husband on the above and say thank you to you as well. You have offered up some really valuable advice and I know working through and implementing the strategies you suggest has brought us significant peace of mind.

Sue

 

[healthstatus]

For those of you that buy vehicles through your company (home based businesses), do you also buy the more expensive commercial insurance, or do you just buy personal insurance and title the vehicle in your name?

 

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[GlobalWealth]

For those of you that buy vehicles through your company (home based businesses), do you also buy the more expensive commercial insurance, or do you just buy personal insurance and title the vehicle in your name?

I don't own a car anymore (thankfully), but in the past I always owned cars titled in the company name with commercial insurance.

 

[RE Taipan]

For those of you that buy vehicles through your company (home based businesses), do you also buy the more expensive commercial insurance, or do you just buy personal insurance and title the vehicle in your name?

Here’s my 2 cents…hypothetical speaking of course….

If you have your personal vehicle in your name and something bad happens…if you are on a business activity….among the questions that will invariably be asked as part of a set of interrogatories will likely be something along the lines of the following…

2.6 State
a) the name address and telephone number of your present employer or place of employment and
b) the name address and dates of employment, job title and nature of work for each employer or self-employment you have had from five years before the incident until today.

3.6 Have you done business under fictitious name during the past 10 years? If so, for each name state:
a) name
b) dates used…

20.3 State the address and location where your trip began and the address and location of your destination

20.4 Describe the route that you followed from the beginning of your trip to the location of the incident, and state the location of each stop, other than routine traffic stops during the trip leading up to the incident.

With these questions (and others in the set), you can often times find out lots of good info that can lead you to either find out (or ask additional questions to establish) that the person was using the vehicle as part of their business…once that has been done, you can allege a joint venture and go after the corp too for damages….or at the very least allege that the individual and the corp are one in the same and that there is no separation between the corp and the individual therefore the corp structure can be disregarded and treated as one with the individual. This allows you to go after the person and the business for damages....not good.

So…to use a car for business you might want to consider doing it one of the following ways:

1. Have the Corp buy the car, buy the commercial policy and give you permission to use the vehicle…being sure to word your resolution and other docs to establish that the nature of your work for the Corp can demand that you be available at any day/time. Otherwise there might be a chance that your non-work use of the car (ie, personal use) is a taxable event.
2. Have the Corp buy the car and “give†it to you as a bonus or as part of your compensation…but then this means that you will have to declare the value of the auto on your taxes and pay your fair share on it to the govt.
3. Buy the car yourself and have the Corp authorize the reimbursement of expenses to you…again however, this runs the risk of having the same issue as #1 above.

Here might be a larger concern….what happens if the Corp runs into a $$$ or other liability issue aside from the vehicle itself? Depending on the level of "bad" it is possible that the Corp could have the vehicle seized in satisfaction of a claim. …again, not good. Perhaps a better way would be for a separate Corp (LeaseCorp) to be set up whose sole asset is the vehicle and which happens to be in the business of leasing vehicles. LeaseCorp could then acquire the vehicle and lease it to Original Corp with the lease secured by a UCC-1 filing. Lease payments would be made from Original Crop to LeaseCorp to a PO box or bank acct in Nevada, each month in accordance with the terms of the lease. In the event that something bad happened and the vehicle was in danger, Original Crop would simply stop lease payments and LeaseCorp would repossess the vehicle as any good leasing company would do….and then, as luck would have it, LeaseCorp could find a new customer named OriginalCorp II that just happened to be looking to lease a vehicle -- WOW, what luck!!). Not wanting an asset to sit idle, LeaseCorp would then enter into a new lease with OriginalCorp II for the vehicle (which would of course allow you to use the vehicle too)

In a nutshell….get the commercial policy…pay the extra $$ for the peace of mind and make sure that you (and anyone else who would drive the vehicle) are individually listed as a named insured. Oh yeah…I know that I don’t need to remind that you that your home address should never be listed on any registration docs.

..again, all of this is hypothetically speaking...

 

[preciseau]

Here is the part that should be familiar….so Corp now purchases the used 2010 Aston Martin Volante for $100,000. The $100,000 dollars has now been spent and more importantly been turned from a taxable income component into an expense component for the Corp. Since the $100,000 expenditure is classified as an expense to the business and it is considered a legitimate business expense via the paper trail above, the $100,000 is no longer taxable. CEO does not own the 2010 Aston Martin Volant, but does have access to the used 2010 Aston Martin Volante.

Is this possible? How would you have to structure the purchase so that the $100K is not taxed? I have spoken with multiple accountants, tax attorneys and financial advisers and they have all said that you cannot write off the purchase price of a car. Although you can use the "companies" pre tax money to purchase the car all cash, you will only be able to write off a 179 depreciation expense, then have to pay taxes on the remaining price right?

 

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[GlobalWealth]

you will only be able to write off a 179 depreciation expense, then have to pay taxes on the remaining price right?

There are ways to accelerate the depreciation schedule (talk to your accountant), but basically you are able to write off a large amount in the first year directly and depreciate the balance over a certain number of years. For very expensive cars, you would not be able to write off the total cost in the first year. For trucks or suvs you may be able to since there is a different allowable amount for 1st year write off. Again, talk to your accountant for specific numbers.

 

[Steve37]

If you buy a home and finance $120k and during the year your interest is $10k. That $10k is tax deductible because it's part of your expenses in your rental business. The property tax and HOA are all expenses so it's subtracted off your income. The amount of your payment going to principle is not an expense and therefore you cannot deduct it.

The $30k you put down has no bearing

Yes, the interest is considered an expense.

I'm not sure that HOA fees are tax deductible, at least that's what my accountant has claimed.

Other items worth mentioning to the OP regarding taxes on real estate. Depreciation on investment properties is an excellent way to reduce your taxable income ( although to claim this on a yearly basis you'll need to be considered a real estate professional by the IRS ) and the 1031 exchange program is a great way to defer taxes on gains. As long as the government doesn't get rid of the 1031 exchange you could pretty much defer taxes on gains forever.

 

[andviv]

I'm not sure that HOA fees are tax deductible, at least that's what my accountant has claimed.

I was told three years ago it is not deductible for your personal residency home but it is a business expense for your rental. But, things may have changed or my accountant was not that good.

 

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[Steve37]

I was told three years ago it is not deductible for your personal residency home but it is a business expense for your rental. But, things may have changed or my accountant was not that good.

You might be right and it's my accountant that isn't very good. Actually I know he's not that good and yet i've let him handle my stuff for years too long. If HOA dues are indeed tax deductible on investment properties then there are years worth of deductions that somehow I need to recapture. This might be the straw that gets me off my a$$ and put the proper accountant on my team.

 

[CommonCents]

RE Taipan thinks repaying a loan is an expense? I hope nobody took that advice.