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.
I walk into a room full of men and I know exactly what they're thinking: "What does she know about whisky?"
I know this because many men have asked me that same question from the moment I started my career in spirits a decade ago.
In a male-dominated industry, I realized early on that I would always have to work harder than my male counterparts to prove my credibility, ability and knowledge in order to earn the trust of leadership stakeholders, coworkers, vendors and even consumers of our products. I am no stranger to hard work and appreciate that everyone needs to prove their worth when starting any career or role. What struck me however, was how the recognition and opportunities seemed to differ between genders. Women usually had to prove themselves before they were accepted and promoted ("do the work first and earn it"), whereas men often were more easily accepted and promoted on future potential. It seemed like their credibility was automatically and immediately assumed. Regardless of the challenges and adversity I faced, my focus was on proving my worth within the industry, and I know many other women were doing the same.
Thankfully, the industry has advanced in the last few years since those first uncomfortable meetings. The rooms I walk into are no longer filled with just men, and perceptions are starting to change significantly. There are more women than ever before making, educating, selling, marketing and conceptualizing whiskies and spirits of all kinds. Times are changing for the better and it's benefitting the industry overall, which is exciting to see.
For me, starting a career in the spirits business was a happy accident. Before spirits, I had worked in the hospitality industry and on the creative agency side. That background just happened to be what a spirits company was looking for at the time and thus began my journey in the industry. I was lucky that my gender did not play a deciding role in the hiring process, as I know that might not have been the case for everyone at that time.
Now, ten plus years later, I am fortunate to work for and lead one of the most renowned and prestigious Whisky brands in the world.. What was once an accident now feels like my destiny. The talent and skill that goes into the whisky-making process is what inspired me to come back and live and breathe those brands as if they were my own. It gave me a deep understanding and appreciation of an industry that although quite large, still has an incredible amount of handmade qualities and a specific and meticulous craft I have not seen in any other industry before. Of course, my journey has not been without challenges, but those obstacles have only continued to light my passion for the industry.
The good news is, we're on the right track. When you look at how many females hold roles in the spirits industry today compared to what it looked like 15 years ago, there has been a significant increase in both the number of women working and the types of roles women are hired for. From whisky makers and distillers to brand ambassadors and brand marketers, we're seeing more women in positions of influence and more spirits companies willing to stand up and provide a platform for women to make an impact. Many would likely be surprised to learn that one of our team's Whisky Makers is a woman. They might even be more surprised to learn that women, with a heightened sense of smell compared to our male counterparts, might actually be a better fit for the role! We're nowhere near equality, but the numbers are certainly improving.
It was recently reported by the Distilled Spirits Council that women today represent a large percentage of whisky drinkers and that has helped drive U.S. sales of distilled spirits to a record high in 2017. Today, women represent about 37% of the whisky drinkers in the United States, which is a large increase compared to the 1990s when a mere 15% of whisky drinkers were women. As for what's causing this change? I believe it's a mix of the acceptance of women to hold roles within the spirits industry partnered with thoughtful programs and initiatives to engage with female consumers.
While whisky was previously known for being a man's drink, reserved for after-dinner cigars behind closed doors, it is now out in the open and accessible for women to learn about and enjoy too.
What was once subculture is now becoming the norm and women are really breaking through and grabbing coveted roles in the spirits business. That said, it's up to the industry as a whole to continue to push it forward. When you work for a company that values diversity, you're afforded the opportunity to be who you are and let that benefit your business. Working under the model that the best brand initiatives come from passionate groups of people with diverse backgrounds, we are able to offer different points of view and challenge our full team to bring their best work forward, which in turn creates better experiences for our audience. We must continue to diversify the industry and break against the status quo if we really want to continue evolving.
While we've made great strides as an industry, there is still a lot of work to be done. To make a change and finally achieve gender equality in the workplace, both men and women need to stand behind the cause as we are better collectively as a balanced industry. We have proved that we have the ability to not only meet the bar, but to also raise it - now we just need everyone else to catch up.