What are some strategies available for business owners and real estate professionals to decrease their taxes? Tim Gertz, CPA and Partner at Provision Wealth, will be exploring various scenarios with us.

For business owners, including law firms, dentists, etc, what are some tax strategies available?
The tax code is created for you. That is the incentive based model that has been created for you as a business owner to create wealth, or to create jobs, and more opportunity for them to tax more people. For business owners, the sky's the limit. In order to take a deduction under the code, it has to be ordinary and necessary for what you're doing. Every business is different, but as long as you can look at your business and make sure that you align your facts with what you're trying to do, you can duck almost everything. There are huge opportunities, we still have bonus depreciation in play. If you buy any equipment, meals, travel, auto expense, home office, it continues to go on.

The inflation Reduction Act included huge opportunities for solar, if you have a commercial office building, you can put solar on it, you can get up to a 70% tax credit this year on that. On top of that, if you don't have a tax liability, the IRS has given you an opportunity to sell your tax credits. Not only do you have the opportunity to get a tax credit, but if you can't use it, you can sell it. Secure Act 2.0, which was signed into law in December, as incentives for setting up retirement accounts, where they will pay for the setup of the retirement account. It will be a dollar for dollar credit. When you look at businesses, look at what are you trying to do, and align yourself to what you're trying to accomplish, then everything would be deductible. If you're saying: I want to do this, then how can I make that ordinary necessary? What is it that I need to do to make this an ordinary necessary deduction, so that I'm aligned with the law, and I'm not doing anything that's in the gray areas, I'm doing everything by the tax law, but it's ordinary and necessary, so I can deduct it.

Can a business owner, say a dentist that owns his practice, take advantage of bonus depreciation in a real estate investment scenario?
No, they will get a passive loss if they're not involved in that investment. But if they're a dentist, and they own the structure that they're practicing in, that's a different story, because that’s one economic unit. They would be able to do a cost segregation study and use the bonus depreciation from that asset to offset the income from their business.

The law would be the same as if he was a W-2 employee investing in a syndication, if he was investing in somebody else's deal?
Correct! His income as a dentist is active, his losses from the real estate are passive, because he's an LP investor in that.

For real estate professionals – what are the tax benefits for them? Is this the best profession for tax purposes?
It is. There are nuances here and there, a lot of times, I've a lot of people that are active in business A: the husband has a business, he is a dentist for example, and the wife is a real estate professional. That gives us an opportunity. In this scenario we don't have a lot of the hurdles to overcome that we have when we have a W-2 employee.

Real estate professionals are huge, especially after 2017 with the advent of bonus depreciation on used assets, now we are able to create this huge loss in real estate that can offset all the income in this business that the other spouse has. Being a real estate professional does open a lot of opportunities. You're investing in an asset class that has been in a storied past of growth and appreciation. It's also a great asset to invest in. It's kind of a double whammy in that regard.

That seems like a perfect combination. So real estate professionals will be able to take advantage of all the depreciation, business expenses, and everything else?
Yes, a real estate professional is converting an inherently passive activity into a trade or business. You're a business owner, but it's a real estate business that you have. Also, real estate has leverage. Historically, people don't go out and buy a piece of real estate with cash, they go out and they borrow money from a bank or a third party as such, and get access to greater deductions. Because of that, you put $100,000 into a million dollar property, when you depreciate that property you're not depreciating the 100,000, you're depreciating a million. And ultimately, it is exponential on what those deductions get you. And that's one of the big differences between a business owner and a real estate professional, is that idea of leverage and the ability to use other people's money to leverage growth and deductions.

Depreciation doesn't mean that you're not going to ever pay these taxes. However, when you do it in 10, 20, 30 years, the value of the dollar is going to be nothing.
It's the time value of money. I would rather have $1 today than $1 in 10 years from an inflationary standpoint, but also from a control standpoint, because now I've $1 that I control, and not $1 that was given to the government that I have no control over. If I can take that dollar and generate another $4, in the next 10 years, sure, I might pay some tax, but that dollar I saved today is going to create $5 down the road.

It's also important to note that the government will change these things on a regular basis in order to encourage people to behave in certain ways. Right now solar and green are supposedly what they're guiding people towards. But things do change and it's really important to work with a professional.
Yes, I would definitely say that where we are right now, solar and green energy is the way to go. The Inflation Reduction Act was huge with what it did and what it created and the opportunities that are there. Whether you're a business owner, whether you own real estate, whether you're buying an electric car, whatever it might be, talk to someone about it.

I'm working with a client right now that is putting a solar installation on their commercial building, and it is quite a large commercial building, but they're getting about a 90% credit between all the local subsidies, the grants, and the federal tax credits, which is huge. You're putting a $10 million dollar solar array, and you're getting a $9 million credit, which you can also sell, and you might be able to sell it for 90 cents on the dollar. Now, that $10 million solar array is going to pay all your electrical costs, is also going to be a return on investment, because it's going to increase the value of your business and give you $8 million in cash that you can use. It's a huge benefit. It's a huge bill. I think it's something that a lot of people should start looking at for 2023 and above.

Is there anything else that we haven't covered that you think is important for our audience to know?
The most important thing is to be proactive and to always be thinking forward. Anything is attainable, as long as you're in front of it. Once you get behind it, it's very hard in tax law to be reactionary. There's very little you can do. Always just be thinking, what is it that I want to do and what do I want to accomplish, and then sit down and put a plan in place to make that happen.

Tim Gertz