All Forum Posts by: Michael Plaks

Thanks for the mention @Daniel Hyman!

@Michael Delmont

Yes, you report it when purchased. But you do not deduct it until the year of sale. End-of-year inventory is the mechanism to accomplish this.

@Jorge Perez

Consider the 3rd option: Qualified Opportunity Zone funds. You can pocket the return of principal as capital reserve and roll capital gains into a QOZ fund, deferring taxes and opening the door to huge tax benefits long-term.

@Michael Delmont

I believe you're asking about the second page of Schedule C, Cost of Goods Sold.

On both lines 36 (purchases) and 41 (end of year inventory), you put the full purchase price of the condo.

@Jameson Sullivan

I see several separate issues in your question.

1. Claiming v. not claiming deductions for expenses you paid for. This is not a choice, you must claim them. If you paid $5,000 for a marketing campaign and choose not to deduct it for lending purposes - you may be committing mortgage fraud and sometimes tax fraud.

2. Deferring deductions. Some deductions can be legally pushed into future tax years, partially or even in full. For example, if you buy $5,000 worth of equipment, normally you can deduct $5,000 right away. But you also have an option of slowly deducting (depreciating) it over 7 years. If you take a $5,000 training program, you may deduct it immediately or sometimes treat it as a start-up expense for some future business and thus delay deducting it. 

3. Choosing a method of deduction. If you bought $2,000 worth of appliances for your rental property, you have more than one method of deducting it. You can deduct it as repairs/maintenance ("de minimis safe harbor") or you can deduct it under bonus depreciation or you can deduct it under Section 179. The last two of the three methods are forms of depreciation, and most lenders will disregard it, known as add-back. In other words, the first method reduces your income for lending purposes, and the other two do not. 

4. Choosing a lesser deduction when a choice is available. The best example is business driving. You (sometimes) have a choice of using either mileage allowance or actual expenses. You can choose the lesser of the two deductions if you're trying to minimize your deductions. Keep in mind that you're intentionally overpaying taxes this way. In other words, you're paying Uncle Sam a premium in order to qualify for a loan. It may or may not be worth it.

5. Income-based borrowing. Ultimately, you want to transition to asset-based lenders, as in private lending and commercial lending. They lend you money based on your assets and your credit, as opposed to your income.

Tax errors you were able to catch. How can you catch an error in their asset protection until it's tested by a lawsuit? In other words, what makes you so confident that their law side was great? Just the level of customer service?

Browse the forum, and you will see contributions from 20+ tax professionals specializing in real estate. Hint: a few of them/us replied to your question.

@Shelby Hensley

Here in Houston or anywhere else - start with an LLC. It can later be converted to an S-corp when you business grows and it makes tax sense. C-corp is the next level up.

If you already have a sizeable business, then it's time to discuss your specifics with a tax professional.

It was not condescending, sorry if you took it this way. 

Neither you nor I are lawyers, so we cannot know whether an LLC would have limited his legal exposure. But this incident illustrates that your recommendation to rely on insurance alone was possibly/probably flawed.

Ironic, isn't it, how on another post an hour earlier you typed "Save your money and get an umbrella policy."