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Taxes and Investing

Small Business, Taxes and Investing

Applying Cost Segregation on a Tax Return

A few weeks ago I wrote about the massive tax benefits to investment property owners and business owners who also own commercial real estate using a cost segregation study. Some of you took me up on the offer and now are up for a significant tax reduction. Then the problems started. I didn’t anticipate the large number of tax professionals who didn’t know how to handle cost segregation studies on a tax return.

Before you call your tax preparer bad names, know most tax professionals rarely, if ever, see a cost segregation study in their office. When the rules changed a few years back I doubt 1 in 100 accountants handled their client tax returns correctly as it pertained to the repair regs and tangible property rules. The good news is the changes only required certain actions in the first year of accounting method changes. The bad news is that most tax professionals don’t know how to handle a cost segregation study on the actual tax return when a client comes in with one. Not to worry. Your favorite accountant will spill the beans on how to get it done right.  No picking on your accountant either. This is advanced tax planning and tax law can be miles from tax application at times.

Tax professionals will find this helpful; taxpayers should find value, too. Knowing of a tax advantage is only worth something if you can apply it. There are two major issues surrounding cost segregation studies: tracking the components/elements listed by the study and taking full advantage of the additional depreciation allowed.

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Stop Paying Your Quarterly Estimated Taxes!

 

When life is good the revenuers have a way of raining on the parade. A large year-end bonus, mutual fund distribution, or large year-end sale at your business can crimp your tax situation in more than one way. A quick call to your accountant gives you the answer: Make an estimated tax payment.

But making an estimated tax payment can hurt you! A quick payment at the end of the year to eliminate a tax liability still subjects you to an interest penalty in many cases. What you need is a quick and dirty guide on estimated tax payments to avoid nasty surprises, and even better, a way to game the system. (Who doesn’t like gaming the tax system? It’s this accountant’s favorite pastime.)

Our goal today is to pay as little as possible for as long as possible. There are two reasons for this: 1.) The longer you keep your money the longer it keeps working for you earning interest, and 2.) When you know you owe money you start thinking of ways to reduce the liability you have to eventually pay. I understand interest rates are very low as I write this. Still, keeping you money invested longer in your account is better than paying the government. If you are in the “digging out of debt” phase of your wealth building, keeping your money longer means less debt for longer. Since debt interest is significant, the later you pay the better for you.Continue reading

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Why Trade Wars Never Work

An old nemesis has returned to the United States and other nations around the planet: protectionism. These leaders, and the voters who bought their snake oil, falsely believe protecting their borders by building walls, taxing imports, claiming currency manipulation and threatening to dissolve trade agreements will bring jobs back home. They’re wrong.

What these well-intentioned people forget are the lessons of history. They forget about The Tariff Act of 1930, also known as the Smoot-Hawley Tariff, the one piece of legislation that hastened, accelerated and prolonged The Great Depression. People forget about the jobs created that did not exist before due to current trade agreements and the lower prices consumers paid for goods and services.

The misguided perception that jobs will be created for nations with trade deficits by preventing trade does not work. And we are dangerously close to poking the sleeping giant again. Once a trade war begins it is hard to stop the cascading effects. The damage is swift and painful with few options available less painful. Best to leave the sleeping beast where she is. But politicians sometimes have an agenda we all pay the price for.

But why do trade barriers cause job loss? If the U.S. has a massive trade imbalance, curtailing imports should bring the jobs home to create those products, right? It’s not that simple. Today we will explore why curtailing trade destroys jobs in all countries involved. Open trade is beneficial to everyone.




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Here is How You Can Piss Off Donald Trump

Disclaimer: This is not a political rant! The time is ripe for this message and Trump happens to be President. It is meant as satire wrapped around a serious message you must follow or suffer the financial consequences.

Nothing is more fun than good times. The recent run in the stock market in nothing short of incredible. After years of slow growth economy and low inflation coupled with a rising stock market, the stock market has exploded. The chart has gone parabolic! But this is not a story about investing or the stock market, however. This story is about pissing off Donald Trump.

Promises of faster economic growth and more high paying jobs face reality after Election Day. President Trump has hitched his wagon to a promise of hyper economic growth, in the neighborhood of 4% or higher. Depending on the day, a lot higher. I’m guessing if things go well we can see wages double every three, maybe four, years. And the best part, no inflation while the government pays off the national debt and increases spending across the board. Such are the promises of politicians.

And in these “best of times” you think it will last forever. Think 1929 or 1987 or 1999. Oh, for the heady days on 1999 when broad stock indexes sported triple digit P/E ratios. How can you lose? The future is clear to the horizon. Life is good, just ask the government.

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Get a $100,000 Gift from the IRS Using Cost Segregation

In the past I shared ideas that saved you $10,000 or more per year. I also shared numerous other ways to reduce your tax burden by smaller amounts. And, of course, retirement accounts and the Health Savings Account provide plenty of tax reducing power, too.

That is all small change compared to what I share today. Today the gloves come off. Today you will learn how to peal massive amounts off your tax bill. I am talking about taking six figures and more from the IRS and putting it into your pocket legally. No jail required.

This program applies to investment properties and businesses with a building. All other can safely skip today’s post. Or you can read it and share it with someone who owns rental properties or a commercial building. You will make a lifelong friend if you do.

What is Cost Segregation?

The risk I take is getting too technical. You don’t need to understand all the deep tax terms to use this strategy so I will avoid technical jargon as much as possible.

The first thing you need to know is that cost segregation only works on buildings with an original cost basis (purchase price, plus additions) of $250,000 or more. Residential income properties, commercial properties, additions and build-outs all work. This does not include the value of the land. Example: You but a property for $450,000. Land value usually comes in around 20% of the purchase price. Therefore, $360,000 is for the building. Cost segregation works on the building portion of a property only. Also note, the higher the value of the property, the more tax benefits cost segregation provides.

The IRS says you have to depreciate a residential rental property over 27.5 years and commercial property over 39 years. This means you put a lot of money down upfront without a tax benefit.

The IRS says you can use cost segregation to separate the components of the building for faster depreciation. A typical building under cost segregation may have about half the value reclassified as 5-year property, 20-25% as 7-year property, and the remainder as either 27.5- or 39-year property.

Pictures around this post show some illustrations of tax savings with cost segregation.

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Finding a Good Accountant

The topic of finding a qualified tax professional is common in my mailbox. There is no pat answer for each request so I generally ignore them. Another common request is for a referral if I am too busy. It is true I only accept a small fraction of the requests for service, but the good news is I have more staff this tax season and have been accepting more new clients than last year. The bad news is that I don’t have someone to refer you to in your area.

Yesterday I received an email that touched me. Long emails usually die before I read more than three sentences due to time constraints. This email was different. The sender asked to remain anonymous and I will honor that request. He asked: How do I go about finding a good local accountant? He wants someone local he could shake hands and sit down with to discuss his tax and financial matters. I get it. He continued: I am hoping for an idiot-proof, step-by-step guide. I don’t know where to start searching, never mind narrowing the choices.

Finding qualified professionals is a difficult task. I wish it were as easy as an idiot-proof guide, but there is no such thing. My goal today is to share ways to increase the odds you have a good tax professional on your side.

Good tax professionals are a busy group, especially this time of year. The industry has consolidated over the last few decades and many top notch accountants have retired. Making matters worse is fewer people entering the field. CPAs frequently seek employment in government and large corporations or large accounting firms. The small and mid-sized accounting practice is a dying breed. These are the same firms serving the average American family’s tax preparation and planning needs. Finding an awesome tax professional to work with you is getting harder by the day. I have a few ideas to help you land a good one, but you might not like what you here.

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Deal Breakers for Investors and Business Owners

The most dreaded words a salesperson can here are, “I need to talk it over with my accountant.”

Accountants have a reputation for breaking deals. Behind the scenes we are actually called ‘Deal Breakers’ as a derogatory term. But the name isn’t fair. What we really are doing is protecting our clients.

The investor or business owner already thought of all the things that can go right. Accountants throw cold water on the deal by examining the numbers. They don’t always stand up to the hype.

And then there is my last blog post where I play a Sad Gus with robo-investing and Betterment. I think a lot of people really believed the tax benefits were much higher than they really are. There are real benefits, just not as many as some would have you believe.

That is where accountants shine. If you are going to serve your client you had better have the stomach for laying the truth on the line, even if the client doesn’t want to hear it.Continue reading

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Tax-Loss Harvesting is Killing Your Nest Egg

Sophisticated investors have been harvesting losses manually for decades to acquire tax benefits. Betterment and Wealthfront made harvesting losses easier and more efficient than ever since 2008. Betterment alone has reached $5 billion under management.

Personal finance bloggers tend to love tax-loss harvesting without much mention of risk. A few bloggers have expressed doubts over the whole process, but their numbers are few and their voices drown out by the scream of the crowd. Betterment’s affiliate program has caused concern positive reviews are biased. Betterment’s affiliate program has tightened for bloggers investing with the company and with published reviews due to recent SEC rule changes. As a result, many bloggers must end their affiliate relationship with Betterment or take down their reviews of the company.

The truth about TLH is not as clean cut as some would have you believe. Taxes and performance are two issues every investor needs to consider prior to investing with any company engaged in TLH.

How TLH Works

Tax-loss harvesting is when you sell a security at a loss for tax purposes. The IRS knows this strategy can be used to generate substantial phantom tax losses by taxpayers. There are rules to prevent doing just that.

Sales of a security at a loss are not deductible if you buy a substantially identical stock/security within 30 days of the sale. This includes the purchase of options to purchase a substantially identical security. Disallowed loses from a wash sale are added to the basis of the purchased substantially identical security.

Wash sales in a traditional IRA are lost forever! Using Betterment or other similar programs increase the risk you will have a wash sale. When Betterment sells a security at a loss and you buy a substantially identical security in your IRA unwittingly, the wash sale loss is disallowed forever. The taxpayer’s basis in the IRA is not increased by the amount of the disallowed loss. Understand now? No? Then you either must allow Betterment to handle all your investments or don’t use them at all. It is the only way to steer clear of this pitfall.

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March 27, 2017
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