Mark J. Kohler is a CPA, Attorney, Radio Show host, author--and practitioner instructor for our Tax & Legal Strategies series of courses in our training program. Mark is a hands-on professional who helps students and clients build and protect wealth through wealth management strategies and business and tax remedies often overlooked in this challenging, ever-changing economic climate. His seminars have helped tens of thousands of individuals and small business owners navigate the maze of legal, regulatory and financial laws to greater success and wealth.
Mark’s invaluable advice can be found in his powerful first book, “Lawyers Are Liars: The Truth About Protecting Our Assets.” Mark’s much anticipated new book, “What Your CPA Isn’t Telling You – Life Changing Tax Strategies,” published by Entrepreneur, is a fictional story that brings tax planning alive. He also shares his knowledge and has created a loyal following of fans through his weekly radio show, which can be accessed here.
Mark is a proud father of four beautiful children and husband to his lovely wife, Jen. They reside in Orange County, California, where Mark practices his surfing skills and loves to exercise in the outdoors and play tennis. Mark will now teach you how to write-off things you may not have ever thought of. All this and more can be found in Mark's series of classes in our training program.
Technology and gadgets to help us succeed in business are an ever-increasing expense. Moreover, as small business owners utilize technology to do business nationwide, if not worldwide, these expenses (sometimes used personally), should be a deduction in their business. In fact, think about the following items and how you may use them in your business operations:
If you use any of these items to make money in your business, there’s a good chance they are a 100% deductible! Track all of these items, keep receipts and discuss them with your tax professional at the end of the year.
I always want to think of a business purposes for a technology item before I would ever purchase it. However, in the same breath I don’t want to throw good money at bad and buy something useless simply for the tax write-off.
“My wife would argue that my Phantom II Drone purchase was simply for personal use, but I assured her it was critical for footage from the sky of our office and enhanced our website with video and photos of our office building and company employees”
The Strategy for Your Cell Phone
In the Small Business Jobs Act of 2011, Congress removed the cell phone from the ‘listed property’ list. What this means is that you can write off 100% of your cell phone, correlated devices and service, as long as you meet certain criteria. Moreover, the IRS issued guidance with Notice 2011-72 clarifying the rules and Congress’s intent.
Essentially, this move by Congress and IRS was motivated by the fact that it was a constant fight in Court with taxpayers trying to prove what ‘percentage’ of their phone was business use versus personal use. In the end, the cell phone and service boiled down to a 100% deduction if you comply with the following criteria:
DON’T FORGET– If you have your family members legitimately working in the business and they need to use the cell phone for the operations of the business, as well as need to be accessible for business duties, there cell phone will be deductible as well!!
Is my Smart Watch Tax Deductible?
Under IRS Code, any expense that’s ordinary and necessary for that business is deductible, and would typically include related telecommunications equipment like a Bluetooth or headphones and mic for those important business calls. (IRC Section 162).
Many of a Smart Watch’s features (thing Apple Watch) are similar to a smartphone or Bluetooth device and can enhance your business sales and work productivity. Some of these features include calendar alerts for business appointments, business related texts, business calls, work email, social media for your business, Apple Pay for quick business purchases and immediate access to Apple’s business-friendly apps. Not to mention the added benefit of a built-in speaker and microphone that gives you hands-free ability to take that conference call while on the road (as well as look like Sean Connery from a 1970s James Bond movie).
Currently the IRS hasn’t taken a position on the new devices and with their current understaffed work load, it probably won’t be any time soon. Bottom line, at least some portion of your Apple Watch should be tax deductible, and it will depend on your business use of the functions.
NOW, to the CAR.
First and foremost, remember the auto deduction isn’t travel, but expenses for your car or truck. Also, remember this includes ALL your vehicles as long as they have some sort of business use, i.e. an RV, van, delivery truck or motorcycle used in your business (more articles to come)!
There are TWO MAIN OPTIONS to write off auto expenses: MILEAGE AND ACTUAL EXPENSES! You can learn about all this and more right here!
Mileage. On ANY of your vehicles you can use mileage as an EXCELLENT method to expense the business use of your vehicle. In 2016 your mileage deductions are as follows:
90 percent of our clients use mileage because it’s SIMPLE, EASY and a LARGE deduction, but keep in mind almost every situation with business owning taxpayers will vary and several MAJOR factors will impact the analysis. Consider the following:
If it is a NEW purchase, you may want to go with the Actual Method and get some bonus depreciation in the year you purchase, or maybe with a truck, van, SUV or RV you could even get more depreciation expense. However, most of our clients find the mileage deduction to be ultimately the best long-term decision when it comes to cars. It’s important you do your best to track your mileage.
Actual Expenses. The second method in deducting automobile expenses is by using the actual expenses for the vehicle. When you use this method you CANNOT use mileage. Essentially, you track your fuel, repairs, maintenance, insurance, tires and then also “depreciate” the vehicle or a portion of the lease payment if leasing.
The PROBLEM with actual is that depreciation expenses are drastically limited for cars, somewhat better in the year of purchase for a 6,000lb vehicle and then only really opens up for large trucks, vans and RVs in certain instances.
So this is where things get crazy. You have to consider issues such as the size of the vehicle, did you buy it this year (regardless of whether it was new or used), are you leasing, how much do you actually use it for business versus personal?… ALL OF THESE FACTORS play into your analysis as to what your deduction may be and if it is better than mileage.
Here are a few Special Circumstance Vehicles in this area of “actual expenses.”
SUV or Truck with Less than 6’ Bed. Both of these vehicles are treated the same. Yes, some of these trucks are more like an SUV when they have the two-row seating and a short bed. Thus, the IRS says they are treated the same for tax purposes.
Large Trucks and Vans. If the truck or van is over 6,000 pounds and the truck has a 6 foot bed or greater or is an enclosed delivery truck, then the $25,000 SUV limitation in the year of purchase for deprecation DOES NOT apply. In fact, you can deduct up to $500,000 in the year of purchase for the cost of the vehicle (limited to the business use percentage of the Truck or Van). Of course, there a number of other variables, but it is a common and often used deduction by small business owners. Moreover, any remaining basis unused with the 179 deduction, can then be depreciated in years to come in conjunction with the actual expenses of the vehicle.
Amazing Benefits of 179 Deduction. Bottom line, if you are in the business of buying a truck, Van, or RV, it’s critical you understand the 179 deduction and what it entails.
Leased Vehicles. Leasing is a phenomenal deduction, but not without its drawbacks. The tax benefits are phenomenal. You can again take all the actual expenses, including the lease payment (based on your business use percentage) and also save on the cost of a luxury car when monthly payments may be cheaper when leasing.
I suggest you create a spreadsheet to analyze the situation for your car. It doesn’t have to be complex either. Just think through your options AND realize that if you are going to spend THOUSANDS OF DOLLARS on this vehicle, it’s valuable to take a few minutes to analyze the various tax deduction options. Establish columns to compare mileage, to purchase, to lease, and then your rows can be different types of vehicles and different scenarios. You can do some initial research and calculations by simply pulling information off the web and then have your accountant/tax preparer fine tune your analysis!! It could save you A LOT of money to go through this analysis and process.
When it comes to these ever increasing expenses and strategies to make us more successful in our business, we should be looking for ways to deduct them. In fact, I argue that you should FIND reasons to use the technology you are already purchasing personal and convert them to a business use and asset in your business!! Make these items a deduction as you blow up your Social Media outlets and marketing plan. Don’t forget the little things my friends.
Mark Kohler teaches our Tax & Legal Strategies course as part of our Training Program, click here for more information. For more information on Mark, visit www.markjkohler.com.
There’s a reason so many dating websites exist. Not everyone is a good match, and the process of finding ‘the one,’ for many people, is just that… a process. At the same time, limitless factors and human intricacies come into play: personality, lifestyle, goals and preference just to name a few. Investing in real estate can be likened to the world of dating. Not every investor or aspiring investor is best suited for every deal. Real estate is a robust industry with investment options running the full gamut of size, complexity and risk. Understanding your personal real estate investing profile, and within that the types of real estate investments that best suit you as an individual, is a personal decision. One we believe not only worth exploring, but paramount to your success.
As an industry, real estate has been around since mankind planted roots, post our hunter gatherer days. Real estate as an area for investing and growing wealth has become increasingly popular over the last five decades. Since before the Pacific Railroad, the first transcontinental railroad in the US, people have laid claim and profited from the sale of raw land. Even today, people continue to buy land hopeful its value will appreciate. Typically in raw land deals investors rely on a long term buy and hold strategy. Others purchase land with the intention of making improvements to add value as their strategy. Take for example a little area of Central Florida Swampland that now houses the largest, most visited theme park in the world. External factors can increase land value as well, like when municipalities invest in redevelopment efforts turning previously dilapidated areas into hip entertainment districts. Just ask Tony Hsieh of Zappos who moved his company headquarters and his personal home to downtown Las Vegas just steps away from the famous Freemont Street Experience.
Single Family Homes, Rehabs & Vacation Rental Properties
In today’s day and age, single family homes are one of the most common real estate investments in the US. Even people who don’t consider themselves real estate investors take pride in their primary residence as an investment vehicle. Some attempt to monetize their home by dividing their primary residence into multi-family housing, like the Greeks in Astoria Queens or the Irish in Boston. Many are successful, but just as many run into trouble with inspectors based on zoning regulations or when trying to sell their single family home that has been subdivided to include four kitchens.
Other investors in the single family home sector typically use one of a few strategies. Some buy homes to use as rentals. As a long term strategy investors hope to generate cash flow while covering the mortgage and property carry costs, while in theory the home appreciates overtime. Investors looking for shorter term strategies in this sector tend to buy homes with the intention of making enough improvements to able to sell them for a profit without the long term carry costs. Most recently when we think of investors rehabbing properties we think of the short sale and foreclosure properties, but in the early 2000’s, some investors were able to turn profits by buying into new home developments, holding for a few months and then selling. Rehabbing, or property flipping as deemed by the reality TV shows that glorify real estate investing, continue to gain attention as federal and financing regulations come into play; a topic we’ll save for it’s own future discussion.
Another strategy in the single family home market is to buy a property in a major tourist market that can be used as a vacation rental. The explosion of web-base ecommerce has made this sector even more accessible and popular with sites like airbnb.com and VRBO.com offering investors self management tools. Investors interested in vacation rental properties need to pay close attention to local and state regulations. Hawaii continues to increase regulations for investors with rental properties. For example, absentee investors who aren’t full time Hawaiian residence pay an increased property tax rate and may be required to register for an annual business license with strict stipulations. One requirement currently in consideration in Hawaiian legislature is that investors be required to have an on island property contact. If you didn’t factor professional property management costs into your vacation rental overhead, that could have a serious impact on the profitability of your investment.
Multi-family homes as investment continue to be a hot and expanding sector in the US. We shared more on that topic in our last blog post here. Multi-family homes, like duplexes, triplex and quads, are typically viewed by banks, for financing purposes, the same as single family homes. This allows investors to realize economies of scale since one loan can secure multiple units. Investors are able to generate income by renting out all of the units, or occupying one as their home and renting out the rest. Fewer buyers are looking for multi-family homes than single family homes, so investors in this sector face less competition.
Within residential real estate, investors categorize apartment buildings into two groups: small and large. Since the definition isn’t set in stone, generally speaking, apartments with less than fifty units are categorized as small, and those with more than fifty units large. Apartments are categorized by their size due to the differences in associated financing parameters. Small apartments typically rely on commercial lending standards. Instead of being valued based on comps, like single and multi-family housing, small apartments are priced and sold based on their income. Meaning, how many units are rented and their current average rent. Investors interested in exploring small apartment buildings as an option need to evaluate the strength of the rental market in the building’s area; specifically, a markets vacancy and delinquency rates. Often small apartment buildings utilize onsite staff for management and maintenance who will work for significantly reduced labor costs in exchange for being able to live on site. Small apartment buildings are among the less competitive real estate investment options since the more difficult financing keeps many small investors away, but the small size keeps them below the interest threshold of professional real estate groups. Investors who are able to add value by increasing rent, or decreasing expenses and increasing management efficiencies can realize significant returns.
Large apartment complexes are the ones you see all over the country. Many rich with amenities like clubhouses, workout rooms and swimming pools. While the amenities attract renters and help the complexes command higher rent, they also bring higher expenses to manage, run and maintain. Large apartment buildings or complexes also have additional expenses for advertising and marketing to fill units. These properties typically cost millions, but can produce stable returns with minimal involvement. Many are owned by syndication, which are small groups of investors who pool their resources.
Moving beyond the residential and rental sector, some investors focus on the real estate wholesale market. Wholesaling is the premise of making money in real estate by finding good deals, entering into a contract to buy, but then selling the contract to another investor. Contracts in wholesaling typically need to be assignable. Meaning the initial buyer can actually sell the contract to another buyer without the owner’s permission. Real Estate wholesalers typically earn a flat fee per transaction and have a significant network of investors willing to buy their contracts. Sometimes even sight unseen. Hard work and complex dynamics with distressed time frames makes wholesaling difficult. However, successful wholesale investors are able to invest in real estate without a significant outlay of cash since they skirt closing on properties directly.
Alternate Real Estate Investments, REITs & Tax Liens
In looking beyond the traditional real estate investment sectors we’ve discussed, significant opportunities exist for investors interested in alternate options. Perhaps you’ve heard of some of these nontraditional real estate investments as investing in paper like REITs and tax liens.
REITs, short for Real Estate Investment Trusts, originated over sixty-five years ago. They were developed to give investors the benefit of investing in real estate with the ease of traded investments like stocks and mutual funds. Investors like the liquidity of being able to buy and sell REITs like stocks while getting the scale and transparency of publicly traded corporations. Through REITs investors can invest in large scale portfolios tied to all aspects of real estate like apartments, bonds backed by mortgages, commercial developments, hospitals, hotels, nursing homes, offices, shopping malls, student housing and more. REITs are categorized into two main types: equity REITs and Mortgage REITs. Equity REITs generate income from rent or the sale of properties they own. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties. As an investment vehicle, REITs have proliferated both in the US and beyond with REIT offerings now in more than 30 countries. There are even REIT based mutual funds and ETFs (exchange traded funds).
Tax liens can be issued for all types of property – residential, commercial, raw land. When owners fail to pay their property tax, the government has the authority to place a lien against the property. The tax lien is issued for the amount owed plus any fees and penalties of course. Property with a tax lien cannot be sold or refinanced until the lien is paid. Investors can buy tax liens at auction. Tax lien holders then have two ways to make money on their investment. The first is a right to collect interest on the lien from the property holder at rates from five to thirty-six percent for up to a year. Alternately, if the owner fails to pay the monies owed to the lien holder, the investor as a right to claim their property. The laws differ by state, and property seizure will not happen without a lawsuit, that will get expensive and complicated quickly, but a determined tax lien holder will be given ownership. With such attractive returns, tax liens can be a lucrative investment, although not without risk. Individuals interested in investing in tax liens need do their homework. Investors need significant market knowledge as well as an understanding of the law and an ability to manage the complexities that can arise, like multiple tax lien holders for the same property.
How do you know what’s right for you?
Shotgun weddings don’t have a high long term success rate, neither does rushing into real estate investing without a solid understanding of the type(s) of real estate investing that suits you best. For example, not everyone is cut out to manage tenants.
Dealing with renters and property maintenance takes a certain type of hard work that doesn’t outweigh the returns for everyone. You have to take stock in what you like, what you’re good at and what style fits with your goals, both short and long term. Your availability to capital, risk tolerance and personality will all also come into play.
While we’ve hardly scratched the surface of the potential of real estate, our aim is to educate and inform you on real estate today, so that as an investor or prospective investor you are more empowered. Make sure to check out our comprehensive real estate investment training program where we will teach you all of this and more. As always, we look forward to your comments, questions and ideas. Thank you for reading!
The NEBDG Blog, by our Tax & Legal instructor Mark J. Kohler, is "The Real Estate Investment Conversation You Can Rely On." Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the books “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com. Let us know if there is a topic you would like to discuss!