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Investments That Can Lower Tax Liability

Career

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.

John Latham, CIO of The PPA Group, a real estate investment company, weighs in on strategies for accelerating depreciation for maximum tax benefits:

"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.

Our newsletter that womansplains the week
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Lifestyle

Going Makeupless To The Office May Be Costing You More Than Just Money

Women have come a long way in redefining beauty to be more inclusive of different body types, skin colors and hair styles, but society's beauty standards still remain as high as we have always known them to be. In the workplace, professionalism is directly linked to the appearance of both men and women, but for women, the expectations and requirements needed to fit the part are far stricter. Unlike men, there exists a direct correlation between beauty and respect that women are forced to acknowledge, and in turn comply with, in order to succeed.


Before stepping foot into the workforce, women who choose to opt out of conventional beauty and grooming regiments are immediately at a disadvantage. A recent Forbes article analyzing the attractiveness bias at work cited a comprehensive academic review for its study on the benefits attractive adults receive in the labor market. A summary of the review stated, "'Physically attractive individuals are more likely to be interviewed for jobs and hired, they are more likely to advance rapidly in their careers through frequent promotions, and they earn higher wages than unattractive individuals.'" With attractiveness and success so tightly woven together, women often find themselves adhering to beauty standards they don't agree with in order to secure their careers.

Complying with modern beauty standards may be what gets your foot in the door in the corporate world, but once you're in, you are expected to maintain your appearance or risk being perceived as unprofessional. While it may not seem like a big deal, this double standard has become a hurdle for businesswomen who are forced to fit this mold in order to earn respect that men receive regardless of their grooming habits. Liz Elting, Founder and CEO of the Elizabeth Elting Foundation, is all too familiar with conforming to the beauty culture in order to command respect, and has fought throughout the course of her entrepreneurial journey to override this gender bias.

As an internationally-recognized women's advocate, Elting has made it her mission to help women succeed on their own, but she admits that little progress can be made until women reclaim their power and change the narrative surrounding beauty and success. In 2016, sociologists Jaclyn Wong and Andrew Penner conducted a study on the positive association between physical attractiveness and income. Their results concluded that "attractive individuals earn roughly 20 percent more than people of average attractiveness," not including controlling for grooming. The data also proves that grooming accounts entirely for the attractiveness premium for women as opposed to only half for men. With empirical proof that financial success in directly linked to women's' appearance, Elting's desire to have women regain control and put an end to beauty standards in the workplace is necessary now more than ever.

Although the concepts of beauty and attractiveness are subjective, the consensus as to what is deemed beautiful, for women, is heavily dependent upon how much effort she makes towards looking her best. According to Elting, men do not need to strive to maintain their appearance in order to earn respect like women do, because while we appreciate a sharp-dressed man in an Armani suit who exudes power and influence, that same man can show up to at a casual office in a t-shirt and jeans and still be perceived in the same light, whereas women will not. "Men don't have to demonstrate that they're allowed to be in public the way women do. It's a running joke; show up to work without makeup, and everyone asks if you're sick or have insomnia," says Elting. The pressure to look our best in order to be treated better has also seeped into other areas of women's lives in which we sometimes feel pressured to make ourselves up in situations where it isn't required such as running out to the supermarket.

So, how do women begin the process of overriding this bias? Based on personal experience, Elting believes that women must step up and be forceful. With sexism so rampant in workplace, respect for women is sometimes hard to come across and even harder to earn. "I was frequently assumed to be my co-founder's secretary or assistant instead of the person who owned the other half of the company. And even in business meetings where everyone knew that, I would still be asked to be the one to take notes or get coffee," she recalls. In effort to change this dynamic, Elting was left to claim her authority through self-assertion and powering over her peers when her contributions were being ignored. What she was then faced with was the alternate stereotype of the bitchy executive. She admits that teetering between the caregiver role or the bitch boss on a power trip is frustrating and offensive that these are the two options businesswomen are left with.

Despite the challenges that come with standing your ground, women need to reclaim their power for themselves and each other. "I decided early on that I wanted to focus on being respected rather than being liked. As a boss, as a CEO, and in my personal life, I stuck my feet in the ground, said what I wanted to say, and demanded what I needed – to hell with what people think," said Elting. In order for women to opt out of ridiculous beauty standards, we have to own all the negative responses that come with it and let it make us stronger– and we don't have to do it alone. For men who support our fight, much can be achieved by pushing back and policing themselves and each other when women are being disrespected. It isn't about chivalry, but respecting women's right to advocate for ourselves and take up space.

For Elting, her hope is to see makeup and grooming standards become an optional choice each individual makes rather than a rule imposed on us as a form of control. While she states she would never tell anyone to stop wearing makeup or dressing in a way that makes them feel confident, the slumping shoulders of a woman resigned to being belittled looks far worse than going without under-eye concealer. Her advice to women is, "If you want to navigate beauty culture as an entrepreneur, the best thing you can be is strong in the face of it. It's exactly the thing they don't want you to do. That means not being afraid to be a bossy, bitchy, abrasive, difficult woman – because that's what a leader is."