Transcription
Do you want the deduction with the IRS today or a year from today? You get to choose.
We might be giving you permission to go buy the new truck. You may say, "Ooh, ooh, I want a tax write off. I'm going to write off the whole 100 grand." Just because I can doesn't mean you should. You just created a taxable event. Holy crap. I [music] really didn't need it. It was on the bubble and now it's cost.
Treating this like you're in elementary school. When's the last day to turn in my assignment? Get it in now. You have to get it in by December 31st. Bonus depreciation can be a trap and we don't want to let the tax tail wag the dog. [music]
Welcome everybody to another episode of the Main Street Business Podcast with yours truly, Mark Kohler and the amazing Matt Sorenson. Fellow business owners, real estate investors, retirement account, self-directed masters, we are here to help you with your year-end tax plan. I love this time of year because you're giving yourself an extra gift at Christmas if you do it right. But if you don't, you could end up with a lump of coal in your stocking and you do not want that. So Matt, tell us tell everybody our topic. I'm excited about this.
Yeah. We're going to talk about whether you can buy a vehicle or equipment in your business, whether that makes good tax sense amongst all those other things Mark said about us. We are two tax lawyers. So we might be giving you permission to go buy the new truck. I don't know. You might be able to go to your spouse, you know, and say, "Hey, Matt and Mark said, you know, this is a good tax decision for us, so we just I need the new truck or whatever this piece of equipment might be in your business."
Yeah. You [clears throat] tell your spouse, direct all your hate mail to Mark and Matt. Here's their address. [laughter] Uh, but >> we're backing you up on some of this, but not all of it. We're going to get into that. We're going to get into why this might make sense and why it may not make sense. Because we get this question from a lot of our clients in our law firm, KQS Lawyers at year end who are like, >> "Oo, I've heard about this bonus depreciation and maybe this big beautiful bill. It's now a time to buy some equipment in my business. Does that help me from a tax standpoint?"
Well, let's dive right into it. And we've got to talk about several concepts. And I I this will really pay off in a lot of your long-term tax planning as well. And the first one I want we're going to talk about just because I can doesn't mean you should. That's going to be a theme.
The first one I want to talk >> most people start figuring that out around like 25 26 [laughter] years old in life, you know. Usually your morning after age 21, it starts hitting you like a brick. Yeah. So, [laughter] uh, okay. So, but the first one I want to talk about is the difference between a tax deduction and a tax credit. Now, why does that matter? Let's just I'll I'll take first stab at this. Matt and I say things different ways and and it it's just perfect for a lot of our audience. It can resonate in with one of you vice versa in a in a different way. I think it's it's super powerful to hear it stated with a different example or metaphor.
I want to start the ball rolling here, Matt, with saying, let's say I've got a $10,000 purchase. It could be a new oven for our restaurant. It could be uh a new lawn mower for my landscaping business. It could be a new piece of equipment in the doctor's office. Whatever your business is, it could be a new computer system if you're working online doing computer work. [snorts] So, you've got this $10,000 expense. You may say, "Ooh, ooh, I want a tax write off. I'm going to spend that 10 grand. This is a smart move." Well, now it doesn't mean you get a dollar fordoll tax benefit. So if you owe 10,000 in tax, it doesn't mean if I spend 10,000 I get I I save 10,000 in tax. You have to look at what is your tax rate. So if let's say you're 25 fed, five state, so you're kind of an effective tax bracket of 30%. Which is the swath of most Americans right there. You're pretty safe saying 30 30%. Um, some states are higher, sometimes your feds higher, whatever. 30%. So, if I take a $10,000 expense and go buy that piece of equipment, whatever it is, I'm going to save $3,000 in tax because my my profit went down by 10 grand cuz I spent money. And so, I'm going to pay tax on $10,000 less of income. Well, I'm in a 30% rate. So, I save $3,000 in tax by spending that money. So then we have to go, is that a real good use of $7,000 of mine? Did I really need that equipment? So that's my take at that point. And because credit's different, Matt, you've been kneede in credits lately, too. You again, you might have a different way of explaining this.
Yeah. And I think that the tax credits, the instances where you get a tax credit, it is it's more of a no-brainer because that is dollar for dollar. If I can spend 10 grand and pay the IRS $10,000 less because I get a dollar for-doll tax credit, I'm I'm already break even. I presume anything I'm spending that 10 grand on is going to provide some value or benefit in my business. And so if even if that value is $1, I've won on the tax credit side. So, but when we're talking about buying equipment here or the new vehicle that you use in your business, we're not talking tax credits. We're talking tax deductions. And this is why the clients that are rushing at year end because they want to get on their 2025 return and they want to save money for 2025 tax purposes is we still got to make the analysis. And I like how you said it, Mark, in that example. It's like there still needs to be value of this in the business. It's still costing you in Mark's example $7,000. So is that7,000 is that going to add that much value to your business for purchasing it? It doesn't need to add 10,000 of value because I did get the tax deduction, but it needs to at least add the seven or whatever your tax bracket might be.
Yeah. If we juxtapose this, which that's a big word, but we compare it to I don't know where I came up with that word, but um if we compare it to like maybe you've got kids helping you in your business, you're already giving them money. You're help already under age 18, over age 18. You might be supporting them in some way. a cell phone, helping them with school costs, tuition, a new a car, whatever, under age 18, over age 18, you're spending that money anyway. So, when you go put, we get that on the books in a proper fashion. And please, that's a year-end strategy. You got to go listen to some of our other podcasts on that. That's one I'm spending the money anyway. So, converting it into a tax deduction legitimately is super powerful. But with that 10,000 for that equipment h I have a choice and I want to make a wise choice that's business I so here's my point of this in in this conversation this concept is let's make a good b business decision first and then consider the tax ramification or benefit second and we don't want to let the tax tail ra wag the dog is what many of you have heard me say before Matt
Yeah. No, I I love that. Um, and let's get into I think like that they're like I love that you're spending that money anyways. Now we're talking about outlaying new money and does that make sense? And so sometimes people think, well, let's go back to the vehicle. This is kind of this decision. Well, I'm going to use it personally, so I was going to personally buy it anyways. Then is that a business expense? Cuz if you only get to take a 100% deduction if you use that that vehicle 100% in the business.
If you're using that vehicle, you know, let's say that let's say the vehicle was 50 grand. This is a new truck, a delivery truck, or you're a contractor going around job sites, whatever it is, and you're like, "Well, I use that truck 60% for business, 40% personally. It cost you 50 grand." Well, that means you're Oh, I can't I got to do the math on a hard one. [laughter] you get about a $30,000 write off, you know, out of
Yeah. There you go. So, it's like that wasn't a $50,000 deduction. That's a $30,000 deduction. All right. And so, but that cost you 50 grand. Now, you might not have outlaid the 50 grand. You could have got a loan for that and you put some money down possibly. Um, but but so just start, we want to get your brain thinking in the right way of making a good business decision and not being um talk don't talk yourself into this because of the tax deduction. We want you to get the tax deduction and maximize as much as possible. And this bonus depreciation and the big beautiful bill that that went into effect this year reincentivizes you to frankly buy the new vehicle or equipment in your business. But it is not giving you money to do this. This is costing you money as we've been talking about here.
Yeah. Now, I love Matt brought us perfectly to the next conversation point or two and that is 100% bonus and buying it with credit. Now, this is where there could be some major pitfalls people. So, talk conversation is not over yet. You may say, "No, I really need this." Okay. Okay. If you and I think there's this level, in fact, I want to say there there may be like, "I really got to buy this. I need to have this." Okay. there. Let the tax chips fall where they may. Um, now we got to talk about the method of buying it or how are you going to deduct it. We'll come to that in a moment. But if you're on the bubble, that's where we've got to really think twice of now if it's just a want. Okay, so we got want on the bubble absolutely need it. I think as business owners over 25 years, Matt and I would say please don't buy the wants, unless you are that financially stable that you're buying it for a want because it's a want. Don't do it for a tax reason. But um, but on the bubble, okay, so one big beautiful bill, their goal was to stimulate the economy. Trump, Congress, whatever. Uh, it was like let's give incentives to business owners to help them stimulate the economy. If a business owner here buys a $10,000 worth of equipment, there's a business on the other end of that transaction that's just made $10,000 and they're going to take that and go buy more stuff in their business. And it's got this ripple effect that $10,000 and I've seen, you know, economists would say that $10,000 deduction for the first business owner creates a almost an $80,000 ripple effect in multiple businesses down the line. That stimulates gross national product in our economy. That's a good thing. So that's why this is a hot topic, too, because in most instances, if you choose, which we're going to come to, that bonus depreciation allows you to write off 100% of the business use. I love that Matt distinguished that because the vehicle may not be 100% business use. So 100% bonus is the 100% bonus on the business use. It's not 100% of the piece of equipment. You got to do that extra math of is this all all business? So Matt, I love that angle you brought in there cuz I
Yeah. >> It's a deceptive one.
Yeah. And let's talk about just like a piece of equipment and how you typically write it off. Let's say you bought Let me just do a h 100red grand here so I can freaking do the math this time. [laughter] Let's say you bought a piece of equipment vehicle doesn't matter, but it's $100,000. All right. And generally you don't get to deduct $100,000 in year one. You have to amateurize this over time. And let's say it's something that's depreciate this. is you're advertising over time and you're depreciating over time. And so let's say that it's this type of equipment has a 5year lifespan. Okay? So you're going to be taking 20 grand a year as an expense that gets to reduce your your taxable income. I don't get to take 100k unless I'm utilizing some other strategies here. But typically I'm I'm writing this off over a period of time. And this could be 7 years, 10 years, depends on what the type of equipment is. There's different schedules schedules on this. So, just know the general rule of thumb when you purchase equipment is this has a lifespan. You write it off over time as you own as you own that piece of equipment.
Okay. Now, I'm going to do my best to not cause any of you to fall asleep here or want to throw something out a window, but I've got I'm going to give you all the tears of how you go through that decision making process of depreciating it bonus or not. And this is important because you as a business owner might think it's a certain way and you go tell your accountant or you might even be doing your DIY taxes on Turbo and make a major mistake. So, let's just I'm just going to hit this quickly. Matt says we buy a piece of equipment for 100 grand. Standard depreciation would be, let's say it's 5-year equipment, 20,000 a year. That's option one. Option two is I could do what's called 179. I could depreciate. I could take as much of a write off I'm allowed to up to the amount of income in my business. So if I made $50,000 in income, I could write off up 50,000 of that equipment. The remaining 50,000 would have to be over 5 years. So then I'd do 10 grand a year for the next 5 years. But 179 lets me take it enough ride off to bring me to zero. That could be a good thing because you're like, "Why don't I save the next 50 grand write- off for the next 5 years? Why do I need to go negative? I'm in the lowest tax freaking bracket. I'm going to make more money next year. I'd like to save that 50 grand over and above the 179 because I'm going to be in a higher bracket next year. Why use it up on a 10 or 15% bracket?" Third, you go, I'm going hard. I'm going 100% bonus. I'm going to write off the whole 100 grand. Okay. Did you pay cash for this? Cuz if you did, that's cool. You have basis. I put in 100 grand in the business. I wrote off a h 100 grand. I bought equipment. I bought I write off 100 grand. But if you put down $1,000 and get a loan for 99,000 and say, I'm going to write off the whole 100 in an S corporation, you don't have basis. But in a basic sole proprietorship or LLC, you would. But if you've made an S election and you get a loan for $99,000 and you try to write that off, you can't because you have no basis. Debt is not basis like you would normally have in an LLC with a rental property. So you go to do that 100% bonus, you've now taken a dis deduction in exceeding basis. You're taxed on that. You've just created a taxable event by buying that equipment for 100 grand because you did it with debt with no basis. And this is a major pitfall that accountants have to unravel doing unique journal entries to put a loan from you into the business. And it's it's a train wreck for an accountant come next spring and you don't get the write off you thought you did either. And now all of a sudden you're like, "Holy crap, I really didn't need it. it was on the bubble and now it's cost. So that was a Matt that was a little lengthy. Maybe you could unpack that and tell me how you would interpret that.
Yeah. So I think for an S corporation owner in particular, let's just focus on that. A lot of our small business owner clients that are operating businesses making money. Let's go to the doctor. Okay. Let's just say they want to buy that $100,000 piece of equipment. They're making a million bucks this year. They only want to be taxed on 900,000, you know, [laughter] and uh and they've done everything else. Of course, they've got down to a million. So now they spend the 100 grand. Like they have the money in the business, right? They're making good money. They're at the highest tax brackets. So they spent that 100 grand on that piece of equipment 5 years. Otherwise would have done 20, 20, 20, right? Over 5 years. Now, so what Mark's saying here is you can take that 100k. You spent it. You bought it from the business, right? You spent that 100k. Now, let's go to contractor because this I don't want, you know, pick on the contractor, but this is the one that they want the new truck, but they don't want to buy it. Maybe they put the money down and they get the loan on it and they use it 100% in the business. Let's say that they really do like this is the truck they use to go to the job sites, loading stuff. They actually, this is like real like use in the business. Um, so this would be one where you're not getting the full juice out of the squeeze here. Um, because and I should say the IRS is being like, "Yeah, you didn't really put the juice in like because you've just got debt on this." So what what is are there any workarounds? This is more educational for me. Mark's gone down, you know, the path than I have. It's like
I know you've got a trick or something. You've got some tip here. You've got some tip. I know.
Well, there's a couple tricks here. Um, Yes. And planning in advance helps it significantly. Not just going out and buy wild and crazy doing this. This is why we're so busy at the firm doing year-end tax consults. And if any of you are listening already going, "Okay, I got some ideas." Book a book a year-end consult with us. You can take that information and talk with your accountant about it. Maybe it's time to upgrade. We've got a network of accountants that we work with, that we've trained. Um, so down below in the description, you can book a year-end tax consultation with the tax lawyer and apply all this knowledge and about 50 other things to bear on your situation. So, just an aside, don't feel like you have to figure this out yourself.
Okay, so Matt, I love your example. He had a doctor that was making a million bucks anyway. a contractor that might be making a 100red or 200 grand, but they've got a lot of expenses and they're they're maybe a little more u lean and mean.
And so buying that truck might actually put them in a a loss that they could use as a deduction against other income. Let's say their spouse has a day job and the contracting business, man, if it generated a loss, we could we could write that off against other income or and so they're kind of more on the bubble. And the way Matt explained that was perfect because if the doctor's making a million, he can go get debt and buy that piece of equipment or pay cash. He's got basis cuz he earning money in the business increases your basis. Taking money out personally and using it and going on a trip around the world reduces your basis. So the doctor in that situation usually has enough basis that we're going to be okay. But the business owner that this contractor that's making 200 grand a year takes all the money out to support his family basis is not an issue of um even what's it's it's almost like I guess in a sense what money is left in the bank because if you drain that S corporation to support your family you may have still paper income and your K1 shows profit and you got a W2 you're like I made money yeah you did but you also drained the company that is what relates to basis. You don't have more money in the company to buy that truck, so you're going to go get a loan. Now, that would make logical sense. And I would say do it, but don't do bonus on it because if you take the bonus, now you're driving yourself into a negative basis. You're now are you're you're getting that truck on the books with debt, not new money, because you've drained the business to live. So, I I know that sounds a little tricky, but for any of you that are >> really living on your escorp, it's it you're you're draining it for the most part, which is what most of us do. Um, which you should. You don't want to leave a lot of money in your escort. Buying the truck if you need it or it's on the bubble is good and spreading out the deduction is better. What bonus depreciation can be a trap. And so, that's the my message. Don't get too excited to write that truck off entirely if you're doing using debt. Your accountant can do a workaround with a loan onto the business and we might be able to generate a better write off, but you still may not get bonus because you're using debt to do it. Um, I did that make sense, man? I mean, it is.
Yeah. And I think that that contractor making 200 grand that buys the, you know, 100,000 piece of equipment here, it might not be the smartest way to use that all in one year, right? Like that 100 grand is actually more valuable to me to take over time because I'm in higher brackets rather than going down all, you know, taking 100,000 and going down a couple brackets to where the value of that deduction isn't worth as much. If you know your business is going to sustain and make at least that much money or more the following years, it actually might have more value later on.
Yeah. And Matt, you've talked about this a lot recently where there's some big jumps between the um 10 and the 22% tax bracket.
Yeah. >> And and I would >> around that 200k, you know, especially married filing joint, you know, you're right around that someone in 100 to 200k. That's about where you start jumping up and now you're starting to hit the high 20s and 30s in terms of your tax rate.
Yeah. And so people, what we're talking about here is the sweet spot. What we're shooting for are enough write-offs to keep our bracket at the 10%. But don't get greedy and go to zero. keep it at the 10 or keep it at the 22 or keep it let let's find the bracket that sweet spot that works for us and um and and not just because we can take the ride off doesn't mean you should boy there's a lot of parallels in life there and I'm not going to say anything that's where my inside voice Patty said Mark that would be a wonderful joke around a dinner party but do not
This is where our editors like edit out what Mark said and then we come back in the podcast they make it sound like you know
[laughter] >> I know if I say anymore, I'll offend someone, I'm sure. But, um, yeah, there's a there's a sweet spot you can find here with a little study, conversation, lots of communication, and practice. [snorts]
I'll just leave it at that. I think it's a very good tax principle.
Yeah. Yeah. A lot of lot of life tips in there. A lot of life tips bring you some happiness. Um, okay. So, let's [laughter] let's just I want to tie one other thing in here is just this big beautiful bill that we've been hearing about was had some big beautiful things in there from a tax planning standpoint. and this ability to take bonus depreciation up to 100% that's effective for 2025. It was otherwise going to be only up to 40% of the uh of the asset. So that that was a a good thing here. But as we've talked about through the podcast, you want to be strategic about how you take that whether you gobble it all up in one year. Make sure you're considering the basis consideration Mark talked about. And also think about your tax rates and where you might be and the value of that deduction gobbling up in one year. And think of the doctor who's, you know, making a million that they're 37% anyways, you know, but this 100 grand that takes them down, they're still 37% of every additional dollar. That contractor making 100 to 200k, >> it might actually make more sense for them to be taking it over time anyways.
Yeah. Now, one last concept. This is an important one. It's called the time value of money. So, I'll ask all of you driving down the road. You're on a treadmill right now. Would you like a $1,000 deduction with the IRS today? You're going to spend $1,000. Do you want the deduction with the IRS today or a year from today? You get to choose. Now, setting aside Matt's point for a moment that you've got to look at your bracket situation because if you're in a higher bracket a year from now and you are pretty confident kicking that deduction to next year is going to have more bang for its buck. Okay. But if not, holding things constant with the same tax bracket today and a year from now, I think all of you should answer. The correct answer would be today. That $1,000 is worth more to you today cuz the IRS has given you kind of an interest free loan on that money even if you have to give it back when you sell the equipment with recapture. But the point is, a deduction today is always better than a deduction tomorrow if you're going to spend the money anyway and if you're in the same bracket. So that brings us to December. If you're looking down the barrel at expenses in January, supplies, equip, you know, minor items, new computers for this part of the office, a fridge, little smaller piece of equipment. Holy crap. a bunch of stuff you need at Home Depot, you know, you're going to buy in January, go buy it in December because you're going to spend the money in the same 35day period, 60-day, whatever, but I want to get that write off now rather than pay for it in January and have to wait a whole year to get the write off.
Yeah. Yeah. Absolutely. That's this is the timing at the end of the year, trying to time that expense. maybe don't be so slow as collecting your AR for those of you on a cash basis, you [laughter] know, um to try to push some income into 20 into 2026 rather than gobbling it all up in 2025 to get on your return. So, um so there's a lot of strategic things here and as Mark and I talked about, we do have our law firm KQS Lawyers. There's so many strategies that you need to be thinking about here. We did a webinar on 20 different year-end strategies that our team did. So, um just be thinking about those things at year end. If you come to your tax lawyer, your CPA or accountant on April 15th being like, "All right, what sort of stuff can I do right now, the list is pretty short, the the list is long though, but by getting it done by year end." So that's why we're trying to talk about these items, get these in your brain and let you know, we're here to help to try and get that plan going so you know what makes sense in your situation, try and get done by your end. And Matt, I've got to ask you to make one quick comment because I've learned this from you and love it on the time value of money is the flip side of this. You don't have to put money in your Roth IRA until April 15th.
Yeah. >> To get a 2025 benefit or your HSA or your traditional IRA or whatever.
So, you don't have to put it in until April 15th.
Yeah. >> But should I put it in now?
The flip of this. What do your take what's your take on that?
Yeah. Yeah, I mean we want to put money in as soon as possible like just our accounts and this is even a Fidelity study that said had the same analysis was um they looked at people who have the largest accounts and these are million plus accounts that retirement accounts IAS and they said what characteristics did they have one of the common characteristics was they contributed in January or February once they had the 7,000 of earned income or whatever it might be for the account not April 15th of the next year. And the reason that their accounts were bigger is they got a head start every year by like 13 14 months on the rest of the people that wait till the deadline of April 15th the following year to get your money in. So what you should be thinking about right now is if you haven't made a contribution for 2025, get it in now. Not because you have to get it in by December 31st, but because you want to get the money working for you. Get your money invested so it's working for you. and your 2026 contribution. Let's get that in as soon as you have that income in 2026 in January, February. Don't be waiting until April 15th of 2027 and give up, you know, 14 months of investment growth and gains. So, some of those things are the characteristics of what people do. And it's it's really just about also um making investing a priority and making your assets work for you rather than, you know, treating this like, you know, you're in elementary school or high school and when's the last day to turn in my assignment and that's when I turned it in.
[laughter] >> No, [clears throat] I love perfect analogy. So, I'm going to give everybody else a couple of extra little tips here as we walk out the door. Uh, there is a tax credit for actually dollar for dollar for setting up a solo 401k with the right provisions. I'm going to leave it at that people. We've got a webinar on this on our website kossawyers.com >> where we make money setting up a solo 401k before your end and you get your money working for you as soon as possible if you so choose. So make sure you go watch that webinar right now at our website. It's exclusive to the website. It's not going to be on YouTube or the podcast. Also, this whole concept of getting these accounts going, get over to directedirra.com. One of the best Christmas gifts you can give to your kids or grandkids is open up an IRA for them. Open up a Wroth if you're going to 1099 them for helping in the business or being on your board of adviserss during the year. Say, "I'm going to pay you, but it's going to go right into this Roth account and leave that in their Christmas stocking." Hopefully, they'll catch the import of that. That's a big deal. I take that over any other candy cane in my stocking. So, get those broth accounts set up. You can get to directedirra.com. You can do it on your phone with an app within 20 minutes and there's your Christmas shopping done. Open that account, issue a 1099 and put the money in the account and you're getting a ride off for issuing the $1099 for your kids participating in the business and helping. And you're giving them a gift that's going to help them the rest of their lives for crying out loud. So, so many options here. We've got great webinars on our website, additional podcast. [music]
Matt, take us out.
Yeah. Thanks everyone for being here and tuning in. Make sure you're subscribed wherever you're listening to this. Make sure you're subscribed so you catch the next great episode of the Mure Business Podcast. Share this with your friends or family. See you next time. [music]