Heavy expenses or heavy depreciation what looks better?

3 Replies

So getting ready for the year end taxes and thinking about our 2018 goals has left me with a question. In 2018 we want to have as much borrowing power as possible. This in turn would mean making our business and taxes look good for the years past, only problem is we do not like paying high taxes just so our business can look good on paper. So in my opinion there are a couple different ways to do our books and I want anyone’s advice to which way is better then the other. These are just examples on a real estate LLC. That makes $100k a year 1.HeAvy expenses. Profit $100k year, but keep track of every last dollar spent on every move we make and have 90k in expenses. So 10k profit for the year. Will not have to pay a lot of taxes but it does not look good to show the bank you only made 10k profit for the year 2. Lower expenses but heavy depreciation on all assets. Profit $100k year , 20k expenses. So 80k profit for the year. But then do itemized depreciation on all properties and vehicles to total -70k. So 10k profit. Looks good to show the bank the business was 70k more profitable then above, but still only show 10k profit to the IRS because of the depreciation. Now I know in the big picture mixing one and two together to show a loss for the year would be best for tax purposes, when you go to get a loan and show them you are losing money they usually do not want to give you tons more to invest. Does option number 2 look better on paper when you go to a bank to get a loan or do they both look the same?

I don't think you can arbitrarily decide what is an expense and what is depreciable. IRS has guidelines. Sure, you can do some stuff under the "safe harbor" statutes, but new flooring, new roofs, etc are not expensable in the first year but must be depreciated per IRS regs. DO take every legal legitimate write off. Even when I go through a toll booth, I keep the receipt and reimburse myself. NO sense in paying more than legally owned. Also, a good NOI at the end of the year makes a lender more inclined to do business with you. No profit means---no money to cover debts.

@Anthony Conway

How can I stay in shape but not watch the calories, because I like pizza and ice cream? Answer this one for me, and I will answer yours. :)

You're right. Obviously, lenders want to see high income. Less expenses = higher income = better loans. However, not deducting expenses that you're eligible for is not only causing you to overpay taxes - it is actually against the IRS rules.

The loophole that you're talking about is to replace some of the deductions with depreciation. It is OK if done correctly, and it might help you, but it depends on the lender. Some of the lenders will add depreciation back when evaluating your income, and others won't. It also depends on what you are depreciating and what is your business model. 

I doubt you can find a good answer without having an accountant go thru your options and your numbers AND also verifying with your future lender that their underwriting will make the desired adjustment for depreciation.

Thanks guys, I went and sat down with both our residential lender and commercial lender( same office) today. What we came up with is a mixture of what you guys said and what my two options were. But in the big picture both of them said it is easier to add the depreciation back into the deal then it is to add expenses back. Also to keep good track of the one time expenses like roofs and HVAC,s so they can easily add those back in and not have to play the guessing game. I understand that it is not legal to not expense some things and expense others but I am one of those people that keeps track of every Litlle move I make ever day and I could lighten up a bit when I want to use my borrowing power. A uncle of mine often said the more taxes you pay the better you are doing. One of the bankers said today if I pay the government a little more it could mean the difference of borrowing more for another multifamily that in turn will produce enough income to cover the taxes paid. I guess you got to pay to play.