Have any of you purchased a vehicle in late December to receive that coveted tax deduction that year? If you answered yes, you were able to receive “temporary tax deduction.” (TTD) That is to say you accelerated a tax deduction into the current tax year to save taxes immediately. However, the tax savings you thought you had was unfortunately just an illusion in the big tax picture of the IRS Code. That is because as you saved taxes in year one, you did not necessarily save taxes in year two, unless you somehow were able to convert the TTD to a “permanent tax deduction. “(PTD) That is to say instead of saving taxes just one year, you would be saving taxes every year. How cool would that be? So if you are interested in learning more about how to convert TTDs to PTDs, stay with us on TaxView with Chris Moss CPA as we delve into the bizarre world of temporary vs permanent tax differences to create PTD tax strategies to permanently save you taxes and to create wealth for you and your family.
So what exactly is a TTD? If you all want to see how one taxpayer behaved at year end to receive a fleeting TTD, let’s review together Michael and Mary Brown’s timing saga in a US Tax court case recently decided in December of 2013.Brown vs IRS Brown is a successful insurance agent who purchased a Bombardier Aircraft (Challenger) to visit his clients on December 31, 2003. Brown deducted almost $11M in depreciation on the Challenger in his 2003 tax return. The IRS audited Brown for that year and disallowed the deduction on the grounds that the Challenger was not in service until 2004. The Brown’s appealed to US Tax Court Brown vs IRS. Judge Holmes takes off immediately to the issue of “timing”. The IRS says the Challenger is deductible in 2004 and Brown says 2003. Ultimately the question presented to the Court was whether or not Brown put in use the Challenger in 2003. The Court ultimately concluded that Brown did not put the Challenger “in use” until 2004. IRS wins and Brown loses.
Now that we understand the simple TTD, let’s travel out of the world of timing differences to a better more secure place, the world of PTDs more much complex and much more rewarding. For most American taxpayer’s the easiest way to create PTDs is through a 5-10 year long range financial plan. Our first example is about a family who has decided their passion is real estate. They have annual conversion of TTDs through the use of leverage and the acquisition of commercial and residential property. For a husband wife both working two jobs earning $200K with two children ages 8, and 11 that could mean a 5-10 year financial plan with the goal of creating as many PTDs as legally possible. One spouse would need to cut back on hours at his or her full time job and head up newly created Family LLC which would purchase one property with each succeeding year leveraging the appreciation on preceding properties. As you purchase and then improve each property for potential sale you meet regularly with your tax attorney to bullet proof against an IRSmaterial participation attack to your Family LLC. Please review Chris Moss CPA material participation article. Each property is deductible in accordance with IRS regulated TTDs but taken together in the 5-10 year financial plan, you have successfully converted TTDS to PTDs. If you acquire the right property in the right location for the right price you have not only created PTDS and saved taxes, but substantially increased your net worth. In other words PTDs create wealth.
Continuing with the same family, once the Family LLC is set up, TTDs constantly become converted to PTDs. In your financial plan transportation perhaps should be as important as the actual purchase and sale of real estate. For example, if you purchase or lease a Bombardier Challenger, if you have a 5-10 year financial plan, it really does not matter which year you get the deduction. Because in your 5-10 year financial plan you have already determined that either you or your spouse is going to visit real estate you own, and real estate you want to purchase with perhaps someday your son or daughter piloting the plane. Again if you purchase or lease a small fleet of company owned cars and trucks, TTDs are constantly being converted to PTDs as you continually trade in older for newer models. This could be said of your office equipment and furniture as well as your office headquarters and possibly satellite offices around the country. Which leads us to al startling observations: As your business grows TTD to PTD accelerates exponentially, creating tax deductions and substantially increasing your net worth. Indeed, PTDs create wealth.
Let’s look at yet another family in another example with a very different 5-10 year financial plan. Our second family is a young couple with no children, and both husband and wife are working jobs earning $150K annually. This taxpayer’s 5-10 year financial plan focuses on purchasing a territory in their location for a franchise type of business. They are not sure whether to own a fast food franchise like a McDonalds or perhaps a less known franchise selling yogurt, or perhaps they will create their unique storefront business that could franchise out to others someday. In this example you are concerned about losing income if one of you quits your full time position. Your financial planner custom creates your financial plan so that both of you continue to work your current jobs in years one, two and three, allowing you the flexibility to start-up your franchise at night and on weekends. Since your 5-10 year financial plan calls for losses the first few years, you make sure your tax attorney bullet proofs you all against hobby loss attacks by the IRS. Please review Chris Moss CPA hobby lossarticle. Your PTDs in this unique 5-10 year plan would be focused on trademarks, copyrights and brand promotion. You would be converting TTDs to PTDS related to “branding” including advertising, marketing, and public relations. As you can see in this unique 5-10 year financial plan you are creating your net worth by development of a “brand” or the creation of good will. Goodwill is just as valuable an asset as real estate and can create a viable brand to sell goods and services in the community and around the nation creating wealth for you and your family just as valuable as wealth created by real estate.
So what is your 5-10 year financial plan to convert TTDs to PTDs? Don’t’ have one? It’s not too late to start. Seek out a qualified financial planner and create your 5-10 year financial plan. Round out your team with a good insurance agent, banker and Tax Attorney to protect you from the IRS traps and road mines that await you as you move forward with your financial plan. Finally, create your own path to fit your own unique family’s goals to guide you to a better American dream of financial independence and the creation of wealth for you and your family. There has never been a better time to convert TTDs to PTDs. Perhaps I will see you next time at the Mercedes dealer last week in December for that easy TTD. Better yet would be to know you are working those PTDs for your family to save taxes and create wealth. Thanks for joining us on TaxView with Chris Moss CPA.
Submitted by Chris Moss CPA