Career 12 March 2017
As we dive through tax season and start looking at numbers, many small business owners and investors alike are thinking of that sweet word that is magic to their ears—deduction!
Go-To Tax Deductible Investments
IRA’s, 401ks and SEPs are well-known tax shelters that are common in many investors and small business owners portfolios. Nearly all advisors will direct their clients to maximize these deductions to the fullest extent possible.
However, some tax advantages decrease or phase out completely with increases in income. And long-term capital gains on stock investments are taxed at 0, 15, 25 or 28 percent based on which tax bracket an investor falls into — and many investors, especially high net worth investors typically fall into the highest tax bracket, granting Uncle Sam a 28-percent chunk of those stock investment gains.
The combination of income restrictions and high potential tax liability has left many investors thinking outside the box when it comes their tax savings strategy.
Oil & Gas Deductions: Big Benefits Without Big Name Recognition
For investors and small business owners, investing in oil and gas can be very beneficial from a tax savings perspective. But CPAs who don't specialize in oil and gas investing aren't likely to bring it up — which puts the onus on the investor to do their research beforehand and present the option to their tax or financial advisor.
Here's some ammo to bring to the table for investors planning to have that pre-tax season conversation:
One considerable benefit is that an investor can deduct intangible drilling costs (IDCs) for drilling or preparing a well for the production of oil and gas. Tangible drilling costs (TDCs) are depreciated according to standard IRS depreciation rules over seven years.
EnergyFunders CEO Philip Racusin poses this example to illustrate the tax benefits of oil and gas investing:
"Say an investor puts $100,000 into oil and gas venture. In the first year, that investor can deduct $80,000 for the IDCs and $2,858 for the TDCs. This comes to a total tax deduction of $82,858 in just the first year for IDCs and TDCs alone. But oil and gas investors also get a 15 percent tax-free depletion allowance of the annual production revenue. So, for example, if that project produced $86,158 in the first 12 months of production, the investor would enjoy an additional $12,924 in tax reduction benefits."
The little-known tax advantages available to investors in this industry make oil and gas a sometimes surprising avenue to consider for investors unfamiliar with the industry. But, as demonstrated above, it's one with high potential to fire up a portfolio's means of mitigating tax liability.
Add to the tax savings the fact that OPEC production cuts stand to create a boom in private equity investing directly into oil wells and the benefits of this investment are overwhelming.
Real Estate Deductions: Tax Advantages More of Us Have Heard Of
Commercial real estate investing is a little more common on the tax-benefit radar. Though, because it's not always a CPA's bread-and-butter, it's often left out of the conversation when it comes time to talk tax planning. Here's what investors should know when the time comes to bring it up:
A poll by Landlord Station reports that over 28 million Americans are investing in real estate. Real estate investments can often have regular cash distributions and feature the stability of a physical asset behind the investment. However, the real power can be in the deductions.
There are a number of ways real estate is tax deductible, interest expense on the mortgage, operating expenses (like costs for placing ads and repairs to property), property taxes, insurance and depreciation.
In many real estate investments, investors can recover the cost of property depreciation over 27.5 years. However, many property investment firms and funds use accelerate depreciation methods—which can add a powerful punch.
"Multifamily real estate is one of the most attractive investments for a tax strategy called cost segregation. By conducting engineering audits of these types of properties, an investor could potentially accelerate depreciation by segmenting certain parts of the real estate as personal assets, and possibly move from a 27.5 year depreciation schedule to a 5 to 7 year schedule. In some cases, the audit may also show that certain parts of the asset can recapture depreciation from previous years in the current year — allowing for an even larger write-off."
As many investment firms additionally offer investors a way to diversify amongst a number of assets, it can have some pretty strong investment advantages.
Don't Let All This Info Feel Too Taxing
The bottom line is tax efficient investments allow investors to keep more of their return — otherwise known as more of their money. That makes it worth it to do a little digging when it comes to your options, but you don't need to know everything.
Your CFA and CPA are the experts on what strategy makes the most sense for your unique portfolio. They can provide you with more detail on your options in the oil and gas and real estate spheres — as well as additional industries you may not have yet considered.
And all you need to know is if it's worth it to you to pose the question.
3 Min Read
With a lack of certainty surrounding the future, being and feeling healthy may help bring the security that you need during these unpredictable times.
When it comes to your health, there is a direct relationship between nutrition and physical activity that play an enormous part in physical, mental, and social well-being. As COVID-19 continues to impact almost every aspect of our lives, the uncertainty of the future may seem looming. Sometimes improvisation is necessary, and understanding how to stay healthy and fit can significantly help you manage your well-being during these times.
Tip 1: Communicate with your current wellness providers and set a plan
Gyms, group fitness studios, trainers, and professionals can help you to lay out a plan that will either keep you on track through all of the changes and restrictions or help you to get back on the ball so that all of your health objectives are met.
Most facilities and providers are setting plans to provide for their clients and customers to accommodate the unpredictable future. The key to remaining consistent is to have solid plans in place. This means setting a plan A, plan B, and perhaps even a plan C. An enormous amount is on the table for this coming fall and winter; if your gym closes again, what is your plan? If outdoor exercising is not an option due to the weather, what is your plan? Leaving things to chance will significantly increase your chances of falling off of your regimen and will make consistency a big problem.
The key to remaining consistent is to have solid plans in place. This means setting a plan A, plan B, and perhaps even a plan C.
Tip 2: Stay active for both mental and physical health benefits
The rise of stress and anxiety as a result of the uncertainty around COVID-19 has affected everyone in some way. Staying active by exercising helps alleviate stress by releasing chemicals like serotonin and endorphins in your brain. In turn, these released chemicals can help improve your mood and even reduce risk of depression and cognitive decline. Additionally, physical activity can help boost your immune system and provide long term health benefits.
With the new work-from-home norm, it can be easy to bypass how much time you are spending sedentary. Be aware of your sitting time and balance it with activity. Struggling to find ways to stay active? Start simple with activities like going for a walk outside, doing a few reps in exchange for extra Netflix time, or even setting an alarm to move during your workday.
Tip 3: Start slow and strong
If you, like many others during the pandemic shift, have taken some time off of your normal fitness routine, don't push yourself to dive in head first, as this may lead to burnout, injury, and soreness. Plan to start at 50 percent of the volume and intensity of prior workouts when you return to the gym. Inactivity eats away at muscle mass, so rather than focusing on cardio, head to the weights or resistance bands and work on rebuilding your strength.
Be aware of your sitting time and balance it with activity.
Tip 4: If your gym is open, prepare to sanitize
In a study published earlier this year, researchers found drug-resistant bacteria, the flu virus, and other pathogens on about 25 percent of the surfaces they tested in multiple athletic training facilities. Even with heightened gym cleaning procedures in place for many facilities, if you are returning to the gym, ensuring that you disinfect any surfaces before and after using them is key.
When spraying disinfectant, wait a few minutes to kill the germs before wiping down the equipment. Also, don't forget to wash your hands frequently. In an enclosed space where many people are breathing heavier than usual, this can allow for a possible increase in virus droplets, so make sure to wear a mask and practice social distancing. Staying in the know and preparing for new gym policies will make it easy to return to these types of facilities as protocols and mutual respect can be agreed upon.
Tip 5: Have a good routine that extends outside of just your fitness
From work to working out, many routines have faltered during the COVID pandemic. If getting back into the routine seems daunting, investing in a new exercise machine, trainer, or small gadget can help to motivate you. Whether it's a larger investment such as a Peloton, a smaller device such as a Fitbit, or simply a great trainer, something new and fresh is always a great stimulus and motivator.
Make sure that when you do wake up well-rested, you are getting out of your pajamas and starting your day with a morning routine.
Just because you are working from home with a computer available 24/7 doesn't mean you have to sacrifice your entire day to work. Setting work hours, just as you would in the office, can help you to stay focused and productive.
A good night's sleep is also integral to obtaining and maintaining a healthy and effective routine. Adults need seven or more hours of sleep per night for their best health and wellbeing, so prioritizing your sleep schedule can drastically improve your day and is an important factor to staying healthy. Make sure that when you do wake up well-rested, you are getting out of your pajamas and starting your day with a morning routine. This can help the rest of your day feel normal while the uncertainty of working from home continues.
Tip 6: Focus on food and nutrition
In addition to having a well-rounded daily routine, eating at scheduled times throughout the day can help decrease poor food choices and unhealthy cravings. Understanding the nutrients that your body needs to stay healthy can help you stay more alert, but they do vary from person to person. If you are unsure of your suggested nutritional intake, check out a nutrition calculator.
If you are someone that prefers smaller meals and more snacks throughout the day, make sure you have plenty of healthy options, like fruits, vegetables and lean proteins available (an apple a day keeps the hospital away). While you may spend most of your time from home, meal prepping and planning can make your day flow easier without having to take a break to make an entire meal in the middle of your work day. Most importantly, stay hydrated by drinking plenty of water.
Tip 7: Don't forget about your mental health
While focusing on daily habits and routines to improve your physical health is important, it is also a great time to turn inward and check in with yourself. Perhaps your anxiety has increased and it's impacting your work or day-to-day life. Determining the cause and taking proactive steps toward mitigating these occurrences are important.
For example, with the increase in handwashing, this can also be a great time to practice mini meditation sessions by focusing on taking deep breaths. This can reduce anxiety and even lower your blood pressure. Keeping a journal and writing out your daily thoughts or worries can also help manage stress during unpredictable times, too.
While the future of COVI9-19 and our lives may be unpredictable, you can manage your personal uncertainties by focusing on improving the lifestyle factors you can control—from staying active to having a routine and focusing on your mental health—to make sure that you emerge from this pandemic as your same old self or maybe even better.