What Types of Investment Property Expenses are Tax Deductible? – Videos
Video 1 Transcript
John Hyre: Let’s go back to the bookkeeping. We’re going to teach you how to spend money now. We’ve taught you how to put money into the company via income loans or equity. Now, we’re going to teach you how to spend it. We’re going to give you several sets of rules and we’re going to talk about the tax consequences that often drives, again, what goes on the books and what goes where.
You guys tend to have a hard time distinguishing between expenses and assets. What’s the difference? An expense, from a tax standpoint, is something that you can write off immediately. An expense can be written off immediately. An asset lasts and you write it off a little bit at a time over time. For example, a rental house is an asset and you can write it off a little bit at a time. How much? Well, it’s a 27.5 year schedule, which comes out to about .036% per year.
Now, we’re going to talk to you about some tricks to accelerate that and get more money out of the house faster. By and large, you get little bitty deductions every year for most assets. Some assets, like land, you don’t get anything out of them until you sell them. No deduction until you sell them. Expenses give us a deduction today. How do we distinguish an expense from an asset?
A very simple definition. I’m not going to be the tax code definition. There are thousands of pages defining what’s an asset versus what’s an expense. You do not want us to go through that trust me. Would a nice lawyer lie to you? Trust him. You don’t want to go through those pages.
Let me give you the basic definition. An expense lasts for less than a year. An asset lasts for more than a year. Very basic definition, an expense lasts for less than a year, an asset lasts for more than a year. For example, a utility bill, how long does that last? Less than a year? That was a trick question. I’m a lawyer, that’s how I roll. It depends.
Let me give you more details. It’s December 31, in an effort to jack up my deductions, I pay $5,000 to the electric company. My average monthly electric bill is $100, how long does that last- that payment if my average doesn’t change?
Particpants: A little over four years.
John: Well over four years. Is it an asset or an expense? It’s an asset. It’s an asset. I would have to put it on the books as prepaid utilities and then, as we use it, I would convert it little by little every month into an expense. Now, if I paid $900, December 31, for electric, is it theoretically an expense? Yes. Why? Because it lasts for less than a year.
You still may not be able to deduct it all at once. There are other rules, but from an asset versus expense standpoint, is it strictly speaking an expense? Yes, because it gives me a benefit for less than a year. Very simple distinction, but there are exceptions. Always. You should not leave things within reach of the lawyer, unless– It’s a heavy pen. This is like titanium kryptonite stuff.
This pen, let’s say, is guaranteed to last for 20 years, is it an asset? We’re going to put it on our books, they’re $5 asset? No. Why? Again, size sometimes does matter. That pen– Some of your blushing, it’s so charming. That pen is too small to put on as an asset, we’re just going to write it off as office supplies. Likewise, let’s say, I go buy Rich Dad, Poor Dad or any of the Kiyosaki his other books, which are functionally the same book-
I paid $20. Is the book going to last more than a year? Yes. Am I going to write it off as probably educational expense? Yes. Why? Too small. What’s the size? Depending on how you keep your– I’ve changed my number. For those of you who have heard previous recordings, I used to say $250, the IRS just made a massive major change on its rules. Functionally, for most of you, if it’s $500 or under, I tend to write it off.
There’s an exception to the exception. Oh, yes, this is the tax code and all of its complex glory. A simple flat tax would make so much political sense. Why is Congress both sides of the aisle, Republicans in this respect, are no better than their evil brother? Why do they not do this? It makes so much sense.
John: The ability to grant deductions to favorite constituencies gets lobbying money for both sides. Not a chance in Hades, not a chance they’re going to give up that power. No. There is an exception to the exception. If you have what’s called a listed asset, I want you to capitalize it even though it’s under $500. If it’s a listed asset.
What is a listed asset? Pretty much anything you can have fun with. The IRS has a list of assets- that’s why they call them listed assets because they’re really creative people. They have a list of assets that basically you can have fun with and they’re suspicious about it. We need to capitalize those if they’re over $100.
What are listed assets? Computers, printers, cars, cell phones, anything you can have fun with. What’s the rule? $500 or under, I expense it even if it’s technically an asset. What’s an asset? It lasts for more than a year. If it lasts for more than a year, it’s an asset. If it lasts for less than a year, it’s an expense. If it’s under 500, I’m probably just going to write it off as an expense unless it’s what?
Participants: A listed asset.
John: A listed asset. Any listed asset that’s over $100, I’m going to put on my books as an asset, including printers, computers, etc. Why? Because my accountant needs to see them. I still may be able to write them off in one year, but I need to have them on the books as an asset.
How can I write an asset off in one year? Code Section 179. What does it say? Pretty much anything that’s personal property, which most of those things are, can be written off in one year if you meet certain rules, which I’m not going to get into. They’re too complex. Just assume most personal property can be written off in a year, but it has to be filed on a certain form. If you put it on your books as an expense, your accountant may not put them on the right form and you may lose the deduction.
That’s my basic rules. We’re going to go into other rules for properties in a little bit. How do you put flips on the book? How do you put rentals on the books? Back to the cars. Here’s how I recommend you track your miles. You do need to track them. First of all, there are apps that do it. I don’t know any of them because I’m primitive. I don’t do that. I just write on a piece of dead tree and still old-fashioned IRS agents like that. They get a sense of– You can make it look used, put your coffee cup on it, let it stain a little, blur a little bit of the ink. Just so it looks authentic. I’m not saying lie, but you got to give old Slick Willy credit. If you’re going to lie, be good at it.
We don’t want to lie to the IRS. That’s a bad idea. On the car mileage, here’s what I recommend. The IRS will take samples, you can pick a few months of the year. I prefer to pick one week per month and I document the heck out of that week. Every mile I drive, I document which business and what it was for. I mean, just totally anally. This is where the engineers and the software people are blessed. This is a good time to look at just the tree and not the forest and doing the little thing that you do.
You document for a week the mileage, totally anally. Otherwise, all you do is take a picture of the odometer the first day of the month and in doing the math, you can figure out how many miles you drove a month. That second week, whatever percent it has, let’s say it’s 77.37 to take out four places. 77.37% multiplied by the total miles driven for the month, that’s your business use for the month. It’s a lot easier to do with that way. I’ve never seen an agent not accept that. I know it’s annoying for that week. By the way, which week of the month do we select?
Participant: The second
John: Have you heard me speak before? Okay. You’ve read my mind. At least one of us should be appalled. I like how he thinks. The second week of the month, why? The least holidays, right? If you pick the third or fourth week, you got Christmas and Thanksgiving, which will probably screw up your business percentages. Pick a week that favors you, the second week of the month. Little details like that add up.
Now, here’s how we write off vacations. I go to several places. Among them, I go to Chicago once a year for at least a week. How do you write off trips and meals and how do you make vacations happen? There are two separate components, getting there and when you’re there.
Getting there, in other words, the travel cost is all or nothing. You get all of it or nothing. The trip has to be predominantly business. Usually, they measure it by the day. There are other ways to do it, but usually, it’s by the day.
What’s a business day? You’re going to like this. A business day is a day that you work four hours and one minute. You get to screw around for the rest of the day. Four hours and one minute a day of business, makes it a business day, less than that, makes it not a business day.
For example, I go to Vegas for a seminar. I’m in a seminar at least four hours and one minute a day for three days. I gamble and drink and do other sorts of naughty things for two days. Is it a primary business trip? Yes. Either the mileage of the car to get there are written off or the plane flight is written off completely. You want to schedule your trip so it works out that way. Now, let’s say I drove to Vegas. I’m running off by mileage, does it change anything if my kids are in the car?
No. How do we write off vacations? For me, it’s very easy. I speak nationally, I have clients everywhere. You guys have real estate in different places. Now, some of it is in places you don’t want a vacation. For example, “Congratulations, your Wichita property cash flows, enjoy the visit.”
You go to seminars or whatever else it is you do for business. What about the hotel and the meals? Those can be written off for people who are part of the business. In my case, when I travel to do this– Carolina didn’t come with me this week because she’s at a wedding in South Carolina and it was on the beach and there was a beach house. She likes the Bay Area, but she likes the beach better.
You can tell, again, the pattern for Carolina is very clear. Where are you going this week? “I am going to Tampa. I like Tampa. I’ll go too.” She will network. She gets me clients because she is the nice side of the family. Charming, attractive, that works well, also works for the business, does some bookkeeping, some returns, enough that I can write her off when we go.
The kids I can’t really write off. They work for me but not enough to justify them on the trip. Although, I bet you my eldest one, at this point, probably could network really well. I’m thinking about being able to write her off on trips.
How does that work? The hotel room, I write off when I would’ve paid had I been alone. I normally stay in a hotel like this. When I go with the kids, we normally stay in a Marriott Residence Inn. It has an extra bedroom and it’s more expensive.
How much do I write off? Whatever this would cost locally. How about the meals? Same thing. It’s day by day. The business days, I can write off the hotel, the non-business days, I cannot. The business days, I can write off the meals for whoever is part of the business and on the non-business days, I cannot. Here’s a question, which days do you go to Morton’s, which days do you go to Wendy’s?
It’s not a big threshold. I mean, for me, I can work anywhere. Next summer, we’re going to go to Chile for three months. We screw up the kids summer. We’ve done this before where we go to Chile during our summer, their winter- which their winter is like 60 degrees. They’re wearing parkas, they’re so cute.
We put the kids in a school there during the summer, which is kind of evil but really helps their Spanish. I work off the laptop. I can do that anywhere. If we go to Chicago, what do I have to do to make it a business day every day? Bill four hours a day.
How do I do that? I bill it, I send an invoice to the client. That’s my documentation. A lot of you do stuff that can be done anywhere, I’ll bet. The nature of Bay Area work, a little more techy, a little more laptop-y, a little more thinking. Okay. We can write off the meals and the hotels the days that are business days.
Let me give you another trick. The personal days can be written off if they’re on a weekend and it’s cheaper to stay. Let me repeat that, then, I’ll give an example that illustrates it better. The personal days, you can write off the hotel and the meals if they’re on the weekend and it’s cheaper to stay. Here is what I’m contemplating doing, in fact, I want to get some feedback from you.
Cathy and I are talking about doing a full hardcore two-day IRA 401k boot camp. There are ways I’m contemplating doing this, either a Saturday-Sunday. Okay, fine. That’s works. I’m thinking of doing the boot camp Friday and Monday, why? Then, you all stay the weekend, it’s cheaper. They’re personal days. All you do is gamble and drink, but you should still write them off.
Why? Is it cheaper to fly back to California for the weekend and come back Monday or is it cheaper to stay in Vegas on the personal days? I can create two deductible vacation days for you by having the meeting on Friday and then, Monday.
Now, from my standpoint, what’s the downside? Probably, a fewer people can do four days than two days. I may shoot myself on the foot for the number of audience, people, by giving you a really cool tax advice.
Video 2 Transcript
John: It’s a lot of little things with taxes. There are really three ways to save on taxes. The income is exempt. That’s what we’re talking about this afternoon, the IRAs and 401ks. Deductions, and most of those are a bunch of little ones that add up, and once in a blue moon, a silver bullet. A silver bullet is, for example, two companies are merging and there are ways to make it non-taxable if you do certain things. That’s a silver bullet. Those are the three ways.
We had an interesting case out here recently. There was a realtor here in the Bay Area, who makes stupid money because your properties are insanely inflated and what he does to attract the really high-end clients, he gives out serious, serious promotions. He buys expensive wine, takes his clients to really nice skiing, a ton of stuff that we have an agent out here who wouldn’t let him deduct it. The tax code says you can’t be extravagant, but it’s based on the circumstances.
There was a case, for example, where a realtor wrote off a Mercedes. Why? Because all the clients drove similar cars and he had to fit in and the tax court bought it. There’s a lot you can do, but it’s a lot of little things and it influences how you do your books.
Let me give you one more deduction I want you to think about, I’ll take questions, then, we’re going to enter. We’re going to buy a computer, a printer, and ink and it’s going to display how we do these general expenses in QuickBooks. Again, true to my word, I said the how, “The ‘how’ will take less time than the ‘why’ or the ‘what.’”
One other deduction- this one I’ve never seen another accountant think about. It’s just so basic. How do you write off beautiful furniture, beautiful carpets, lamps, high-end shotguns?
Guys, I’m a Midwesterner. I need my boomstick. How do you write those things off? If you have an office and it’s legit for your type of business that you need– I’m a lawyer. I bring in some pretty high net worth people. They expect a certain level of class in spite of my words and actions, so I have nice furniture in the office. How long does it take to depreciate the nice furniture? Five years. What happens when you take nice furniture out of a regular LLC? It doesn’t work with a corporation, be it S or C.
How does it work when I take furniture out of an LLC after five years? There’s no gain when I take it out. There’s no tax impact. I take it out on a zero basis. If I ever sell it, I have a gain. What do I do after five years of having furniture in an LLC? I distribute it like a dividend. Remember the distribution? I would distribute the furniture.
John: You got it. It’d be zero because I’ve depreciated it to zero. The asset balance on the books for the furniture would be whatever I paid for it minus the depreciation, which are the same number if I depreciated it to zero. It’s a distribution. It shows up on the books, zero. How do I execute that? A bill of sale. You can get those online for five bucks, a template of one. I distribute it, but did I do it with a gun?
Participant: You distribute it too.
John: Me, the owner. The furniture then leaves the office and comes to my house. It’s no longer used in a business. It’s been used in a business for five years and then, we bought new furniture. How do I do it with a gun? I know we shouldn’t say that word in California. How do I do it with– Let’s translate it into Bay Area… instruments of oppression.”
I have in my law practice a nice shotgun that I’ve never used. Who uses it? When clients visit me in Ohio, which is mostly rare– I mean, when I’m they’re there, they’ll visit. I have a few clients in Ohio. When they visit me, one of my favorite entertainment activities is we discuss business and then, we go to the gun range. It’s sort of a test really. You refuse to shoot when we come out, I fire you.
I’m just kidding. That gun is only used by clients. Instead of them renting a gun at the range, they use that one. I keep a detailed log of when it’s used, very detailed log of exactly who uses it. I never use it for personal purposes. That’s the point. In seven years, because it takes seven years to depreciate a shotgun, what do you think I’m going to do with it? What do you think the practice is going to do? New gun.
Now, let me give you the reverse. This will pay for the course and the time you took to listen to me alone. Go home and find all the things you use in your business that you never wrote off or put in the business. Did you buy textbooks textbooks in college? Are they relevant to your business? I was a business major, so I figured business major books are relevant to my business.
When you give your business an asset, so you would use a bill of sale in the other direction. You title it from you to business. You walk through your office bookshelves, lamp, desk, carpet. Everything that your business is using, that it never occurred to write off because you owned it already, and you took it and used it, goes to your business at the lesser of cost or fair market value, whichever is less, cost or fair market value. I read voraciously in college. I literally read a book a day. I was a business major, I didn’t have to go to class.
Seriously. I did a regression analysis of my tests and predicted which questions would be on the tests and then, showed up and took them and did really well without showing up to class. The professors were just like, “That’s really great. Don’t ever tell anyone you did that.”
I read a lot. I have a big library full of books and what did I do? All the business relevant books went into the business with lower cost their fair market value. The cost was right there on the cover.
What’s fair market value? In Ohio, we have a chain of bookstores called Half Price Books and the default price, unless they put them on clearance, is half the price – or used half the price or whatever. I figured that’s a great proxy. Half the price that was on the book, I put them in the business and then, I write them off as what? Education expense.
There are a lot of assets that you’re using in your business that you haven’t yet written off because the business didn’t actually buy them. Contribute them to your business and either depreciate or expense them as appropriate. Isn’t that clever? That’s so basic and I’ve never heard accountants tell people that. Just think, look at things and think.
Startup expenses. You get write-offs you’re in a trade or business. That’s a great term of art. Are you in a trader business? Did you buy yourself something? If your business is renting properties, did you buy a property and rent it out? If so, you’re in a trader business and you can write this seminar today off, assuming you paid for it. Kathy does evil things without charging people, which makes me very sad.
Are you in the trader business or are you just looking to get in the trader business? “John, I haven’t really bought a property yet.” How about if you’re flipping? When you’re in a trader business for flipping, the IRS would say you have to buy something.
I would say, “Can you show that you’re trying to acquire properties for profit? Can you show contact with a realtor making offers?” Hell, make ridiculous offers. First of all, that’s what you’re supposed to do to begin with, make ridiculous offers to realtors and document them. That’s an argument that turn a trader business.
If you’re not in a trader business, how does it work? This class, you took it, you’re not in a trader business, you’ve been thinking about real estate for the last 20 years. It’s a startup cost when you have a trader business. All the costs of the seminars, if you haven’t done anything yet, you can’t actually write off presently. You accumulate them. They become a startup costs. When you have a trader business, you write them off.
What happens with startup costs? The first $5,000 are deductible the year you start the business, the rest of it depreciates over 15 years. That’s some of the deductions that we hear about. I lied.
You can rent your house to your business. The 14 days of rental a year or less of your personal residence are not taxed to you. We get this in Columbus because we have a golf course up there, Muirfield, where Tiger Woods and others have a tournament and the house is along the golf course rent for like 2,000 bucks a day, which again, in the Midwest is real money. Here, I believe, it’s like a hotel or something.
Can you have your residence – Can your business rent your residence? Yes. Remember what we said before, it has to be real. You have to actually do something. Have a party there, invite people over, have an annual meeting and document the meeting. Research what the house is rent for when you rent them for one day in our area.
It takes a little bit of work and that’ll put a lot of you off. I get it. Cost/benefit, it may not be worth your time. Totally get it. It is worth your time. Your business can pay rent for your house and as long as it’s real, it’s bonafide, you actually do something, it’s a deduction to your business and as long as you rent the house out less than 14 days a year, no income. A lot of little tricks like this add up.