Investments That Can Lower Tax Liability

Investments That Can

Lower Tax Liability

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As we dive through tax season and start looking at numbers, many small business owners and investors alike are thinking of that sweet word that is magic to their ears—deduction!

Go-To Tax Deductible Investments

IRA’s, 401ks and SEPs are well-known tax shelters that are common in many investors and small business owners portfolios. Nearly all advisors will direct their clients to maximize these deductions to the fullest extent possible.

However, some tax advantages decrease or phase out completely with increases in income. And long-term capital gains on stock investments are taxed at 0, 15, 25 or 28 percent based on which tax bracket an investor falls into — and many investors, especially high net worth investors typically fall into the highest tax bracket, granting Uncle Sam a 28-percent chunk of those stock investment gains.

The combination of income restrictions and high potential tax liability has left many investors thinking outside the box when it comes their tax savings strategy.

Oil & Gas Deductions: Big Benefits Without Big Name Recognition

For investors and small business owners, investing in oil and gas can be very beneficial from a tax savings perspective. But CPAs who don’t specialize in oil and gas investing aren’t likely to bring it up — which puts the onus on the investor to do their research beforehand and present the option to their tax or financial advisor.

Here’s some ammo to bring to the table for investors planning to have that pre-tax season conversation:

 One considerable benefit is that an investor can deduct intangible drilling costs (IDCs) for drilling or preparing a well for the production of oil and gas. Tangible drilling costs (TDCs) are depreciated according to standard IRS depreciation rules over seven years.

EnergyFunders CEO Philip Racusin poses this example to illustrate the tax benefits of oil and gas investing: 

“Say an investor puts $100,000 into oil and gas venture. In the first year, that investor can deduct $80,000 for the IDCs and $2,858 for the TDCs. This comes to a total tax deduction of $82,858 in just the first year for IDCs and TDCs alone. But oil and gas investors also get a 15 percent tax-free depletion allowance of the annual production revenue. So, for example, if that project produced $86,158 in the first 12 months of production, the investor would enjoy an additional $12,924 in tax reduction benefits.”

The little-known tax advantages available to investors in this industry make oil and gas a sometimes surprising avenue to consider for investors unfamiliar with the industry. But, as demonstrated above, it’s one with high potential to fire up a portfolio’s means of mitigating tax liability.

Add to the tax savings the fact that OPEC production cuts stand to create a boom in private equity investing directly into oil wells and the benefits of this investment are overwhelming.

Real Estate Deductions: Tax Advantages More of Us Have Heard Of

Commercial real estate investing is a little more common on the tax-benefit radar. Though, because it’s not always a CPA’s bread-and-butter, it’s often left out of the conversation when it comes time to talk tax planning. Here’s what investors should know when the time comes to bring it up:

A poll by Landlord Station reports that over 28 million Americans are investing in real estate.  Real estate investments can often have regular cash distributions and feature the stability of a physical asset behind the investment. However, the real power can be in the deductions.

There are a number of ways real estate is tax deductible, interest expense on the mortgage, operating expenses (like costs for placing ads and repairs to property), property taxes, insurance and depreciation.

In many real estate investments, investors can recover the cost of property depreciation over 27.5 years. However, many property investment firms and funds use accelerate depreciation methods—which can add a powerful punch.

John Latham, CIO of The PPA Group, a real estate investment company, weighs in on strategies for accelerating depreciation for maximum tax benefits:

“Multifamily real estate is one of the most attractive investments for a tax strategy called cost segregation. By conducting engineering audits of these types of properties, an investor could potentially accelerate depreciation by segmenting certain parts of the real estate as personal assets, and possibly move from a 27.5 year depreciation schedule to a 5 to 7 year schedule. In some cases, the audit may also show that certain parts of the asset can recapture depreciation from previous years in the current year — allowing for an even larger write-off.”

As many investment firms additionally offer investors a way to diversify amongst a number of assets, it can have some pretty strong investment advantages.

Don’t Let All This Info Feel Too Taxing

The bottom line is tax efficient investments allow investors to keep more of their return — otherwise known as more of their money. That makes it worth it to do a little digging when it comes to your options, but you don’t need to know everything.

Your CFA and CPA are the experts on what strategy makes the most sense for your unique portfolio. They can provide you with more detail on your options in the oil and gas and real estate spheres — as well as additional industries you may not have yet considered.

And all you need to know is if it’s worth it to you to pose the question. 

Joy Schoffler

Joy Schoffler, principal of Leverage PR, is a nationally recognized author and speaker in the field of innovative financial services marketing and communications. An active leader within the technology community, Joy sits on the board of SXSW V2V and is a mentor for the Yodlee Interactive Incubator helping to guide the next generation of financial technology companies.

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