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Posted: 2/1/2011 3:27:09 PM EDT
My CPA is advising me I should buy property to put up a building for my growing business. One of his reasonings is the interest and property tax deductions.

Can someone explain how this works? Lets say property tax is 15k and interest on loan is 8k a year. So I am guessing my taxable income drops by 23k? Is this correct?
Link Posted: 2/1/2011 3:30:09 PM EDT
I don't think either of those apply to business properties. I am not a CPA though.
Link Posted: 2/1/2011 3:30:23 PM EDT
IIRC, mortgage interest is no longer deductable
Link Posted: 2/1/2011 3:33:52 PM EDT
[Last Edit: 2/1/2011 4:51:48 PM EDT by anr6t]
Originally Posted By ZedsDeadBaby:
IIRC, mortgage interest is no longer deductable


Bullshit. Link please....
Link Posted: 2/1/2011 3:34:08 PM EDT
Originally Posted By RuskEnt:
My CPA is advising me I should buy property to put up a building for my growing business. One of his reasonings is the interest and property tax deductions.

Can someone explain how this works? Lets say property tax is 15k and interest on loan is 8k a year. So I am guessing my taxable income drops by 23k? Is this correct?


Dumb advice. Your still paying out $23k a year. Sure you may get it back, but can't you put that money to good use in your business and make more from it? Property isn't the best investment right now. Sure its a buyers market, but what good is it if you can't sell it? If it goes up in value, it will cost more in taxes. All this property is why our economy is in the shitter.
Link Posted: 2/1/2011 3:34:51 PM EDT
Originally Posted By Nlinc:
I don't think either of those apply to business properties. I am not a CPA though.


I believe this is correct and is limited to primary residences. I could be wrong though, not a business owner.

Otherwise, mortgage interest is deductible....just used it as part of my tax filing.
Link Posted: 2/1/2011 3:46:12 PM EDT
Simplification:

A business entity (corporation) gets to have it's gross income, then pay all expenses, then pay the government taxes on the net profit.

A W2 wage-slave or business owner filing self employed gets his or her gross income, but then must pay the government first, and then pays his or her bills after that, possibly being allowed to itemize certain items instead of taking the standard deduction.

If your business is growing, then trading the cost of purchase and holding/maintaining the property against renting the same building is worth figuring. Especially if you have no desire to have a lease pulled from under you.

Link Posted: 2/1/2011 3:47:23 PM EDT
Business expenses are deductable.

Spending more money on growing the business means there's less profit to tax.

If you're bringing home more money than you need to live on and then investing it elsewhere your CPA is giving you really good advice, invest in yourself and keep more of your money out of the mans hands.
Link Posted: 2/1/2011 3:54:06 PM EDT
Originally Posted By K2QB3:
Business expenses are deductable.

Spending more money on growing the business means there's less profit to tax.

If you're bringing home more money than you need to live on and then investing it elsewhere your CPA is giving you really good advice, invest in yourself and keep more of your money out of the mans hands.


Yes, the key is expensing all your profits so you have no income to tax. Banks don't like it if your looking for loans, but having assets that the company bought and expensed (NFA) can have its benefits, and banks will loan against them.
Link Posted: 2/1/2011 3:59:05 PM EDT
You need to fire your CPA and find a new one.

Basically, you stated the interest and taxes add up to $23K. Lets say, just as an example you make $100K per year. You don't pay taxes on the 100K, instead you deduct the $23K and pay taxes on $77K. The current federal tax rate for $77K is 25% (for married filing jointly). So you pay $19250 at $77K in taxes instead of $25000.

In other words, you pay out $23,000 to the bank and in property taxes in order to save $5750 in taxes. For some reason or another this doesn't sound like a very good plan to me. You could donate the $23,000 to a charitable organization and get the same tax deduction. Me personally, I had rather give it away than hand it over to the bank. Then again, I like to be in control. Also, there is a huge element of risk involved in borrowing money.
Link Posted: 2/1/2011 4:03:46 PM EDT
Originally Posted By 418cwc:
You need to fire your CPA and find a new one.

Basically, you stated the interest and taxes add up to $23K. Lets say, just as an example you make $100K per year. You don't pay taxes on the 100K, instead you deduct the $23K and pay taxes on $77K. The current federal tax rate for $77K is 25% (for married filing jointly). So you pay $19250 at $77K in taxes instead of $25000.

In other words, you pay out $23,000 to the bank and in property taxes in order to save $5750 in taxes. For some reason or another this doesn't sound like a very good plan to me. You could donate the $23,000 to a charitable organization and get the same tax deduction. Me personally, I had rather give it away than hand it over to the bank. Then again, I like to be in control. Also, there is a huge element of risk involved in borrowing money.


But atleast with buying property/building I have something to show for my money then paying it to the gov or a charity. I guess the idea is i buy the property under a new LLC and rent it to my current one. I get to then depricate the building, and also the money I collect as rent is taxed at a lower rate?
Link Posted: 2/1/2011 4:09:15 PM EDT
Originally Posted By Texas_Infidel:
Originally Posted By K2QB3:
Business expenses are deductable.

Spending more money on growing the business means there's less profit to tax.

If you're bringing home more money than you need to live on and then investing it elsewhere your CPA is giving you really good advice, invest in yourself and keep more of your money out of the mans hands.


Yes, the key is expensing all your profits so you have no income to tax. Banks don't like it if your looking for loans, but having assets that the company bought and expensed (NFA) can have its benefits, and banks will loan against them.


Its hard to find legitmate assets too buy that wont depricate that much. My excavator dropped in value 40% in the last 3 years.
Link Posted: 2/1/2011 4:13:17 PM EDT
Originally Posted By 418cwc:
You need to fire your CPA and find a new one.

Basically, you stated the interest and taxes add up to $23K. Lets say, just as an example you make $100K per year. You don't pay taxes on the 100K, instead you deduct the $23K and pay taxes on $77K. The current federal tax rate for $77K is 25% (for married filing jointly). So you pay $19250 at $77K in taxes instead of $25000.

In other words, you pay out $23,000 to the bank and in property taxes in order to save $5750 in taxes. For some reason or another this doesn't sound like a very good plan to me. You could donate the $23,000 to a charitable organization and get the same tax deduction. Me personally, I had rather give it away than hand it over to the bank. Then again, I like to be in control. Also, there is a huge element of risk involved in borrowing money.



It isn't anywhere near that simple, first of all the personal income tax rate has little to do with the total tax burden on a business owner, you have no idea what his current facilities cost him or if they're adequate, if his business is growing or shrinking, you basically know nothing about this guys business except his CPA says it's time to buy a building and he should fire them? Neither of us can say whether he should buy a building or not, all he did was give us some hypothetical numbers and ask if he understood the way it worked correctly.

This is the area where a lot of small business owners destroy themselves, if you're not tax-efficient you're trying to swim upstream. You can significantly reduce your tax burden by investing in your business and then the growth pays you back a lot more than you would have gotten in the first place.

This is also one area where I think the GOP has tax policy all wrong, constantly trying to encourage business owners to pull capital out of their businesses, and discourage them from adding payroll, via the tax code.
Link Posted: 2/1/2011 4:14:11 PM EDT
Originally Posted By RuskEnt:
My CPA is advising me I should buy property to put up a building for my growing business. One of his reasonings is the interest and property tax deductions.

Can someone explain how this works? Lets say property tax is 15k and interest on loan is 8k a year. So I am guessing my taxable income drops by 23k? Is this correct?


Your CPA is most likely giving you an alternative to paying rent expense, which is usually very comparable to owning a building, for which you would have interest expense and tax expense. Don't listen to folks telling you that your CPA is wrong, as the amount of information you have given is inadequate for providing competent advice.

With that said, are you currently operating a business and renting a space? Or, are you about to expand and need advice on whether to rent or buy? Or, is the CPA simply advising you to go ahead and buy a property in anticipation of the expansion because it will benefit you from a strategic tax standpoint? There are many questions that need to be answered here. ARFCOM is not the best place to inquire about opinions on CPA advisement, especially when the facts and circumstances as they pertain to your situation have not been fully delved into. No, I did not stay at a Holiday Inn last night, but I am a CPA. And I have a master's degree in taxation.
Link Posted: 2/1/2011 4:18:10 PM EDT

Originally Posted By RuskEnt:
Originally Posted By 418cwc:
You need to fire your CPA and find a new one.

Basically, you stated the interest and taxes add up to $23K. Lets say, just as an example you make $100K per year. You don't pay taxes on the 100K, instead you deduct the $23K and pay taxes on $77K. The current federal tax rate for $77K is 25% (for married filing jointly). So you pay $19250 at $77K in taxes instead of $25000.

In other words, you pay out $23,000 to the bank and in property taxes in order to save $5750 in taxes. For some reason or another this doesn't sound like a very good plan to me. You could donate the $23,000 to a charitable organization and get the same tax deduction. Me personally, I had rather give it away than hand it over to the bank. Then again, I like to be in control. Also, there is a huge element of risk involved in borrowing money.


But atleast with buying property/building I have something to show for my money then paying it to the gov or a charity. I guess the idea is i buy the property under a new LLC and rent it to my current one. I get to then depricate the building, and also the money I collect as rent is taxed at a lower rate?


This is true but don't do it just for the tax deduction and don't get so hung up on the numbers that you forget the risk involved with taking out a loan.
Link Posted: 2/1/2011 4:18:20 PM EDT
Originally Posted By K2QB3:
Originally Posted By 418cwc:
You need to fire your CPA and find a new one.

Basically, you stated the interest and taxes add up to $23K. Lets say, just as an example you make $100K per year. You don't pay taxes on the 100K, instead you deduct the $23K and pay taxes on $77K. The current federal tax rate for $77K is 25% (for married filing jointly). So you pay $19250 at $77K in taxes instead of $25000.

In other words, you pay out $23,000 to the bank and in property taxes in order to save $5750 in taxes. For some reason or another this doesn't sound like a very good plan to me. You could donate the $23,000 to a charitable organization and get the same tax deduction. Me personally, I had rather give it away than hand it over to the bank. Then again, I like to be in control. Also, there is a huge element of risk involved in borrowing money.



It isn't anywhere near that simple, first of all the personal income tax rate has little to do with the total tax burden on a business owner, you have no idea what his current facilities cost him or if they're adequate, if his business is growing or shrinking, you basically know nothing about this guys business except his CPA says it's time to buy a building and he should fire them? Neither of us can say whether he should buy a building or not, all he did was give us some hypothetical numbers and ask if he understood the way it worked correctly.

This is the area where a lot of small business owners destroy themselves, if you're not tax-efficient you're trying to swim upstream. You can significantly reduce your tax burden by investing in your business and then the growth pays you back a lot more than you would have gotten in the first place.
This is also one area where I think the GOP has tax policy all wrong, constantly trying to encourage business owners to pull capital out of their businesses, and discourage them from adding payroll, via the tax code.


I realize this. Tax planning has to be something you think about all the time, not just when your doing your year end taxes.

Link Posted: 2/1/2011 4:20:18 PM EDT
[Last Edit: 2/1/2011 4:21:40 PM EDT by America-first]
Originally Posted By RuskEnt:
My CPA is advising me I should buy property to put up a building for my growing business. One of his reasonings is the interest and property tax deductions.

Can someone explain how this works? Lets say property tax is 15k and interest on loan is 8k a year. So I am guessing my taxable income drops by 23k? Is this correct?


It can drop by more than that, you can also deduct the cost of putting up the building and then depreciate it over time.

As well as any maintenance, landscaping, utilities and upkeep.

If the property is priced properly, is in a good location, and your business can use the space; "jump in it".


Link Posted: 2/1/2011 4:22:14 PM EDT
[Last Edit: 2/1/2011 4:25:55 PM EDT by ma96782]
Originally Posted By 418cwc:
You need to fire your CPA and find a new one.

Basically, you stated the interest and taxes add up to $23K. Lets say, just as an example you make $100K per year. You don't pay taxes on the 100K, instead you deduct the $23K and pay taxes on $77K. The current federal tax rate for $77K is 25% (for married filing jointly). So you pay $19250 at $77K in taxes instead of $25000.

In other words, you pay out $23,000 to the bank and in property taxes in order to save $5750 in taxes. For some reason or another this doesn't sound like a very good plan to me. You could donate the $23,000 to a charitable organization and get the same tax deduction. Me personally, I had rather give it away than hand it over to the bank. Then again, I like to be in control. Also, there is a huge element of risk involved in borrowing money.


You NEED the building RIGHT?

And..........

You will USE the building RIGHT?

Then...........

When you finally sell the business..............you get the added price/value of the building, to your price of your business, All the while you had UNCLE SAM letting you take the tax deduction.

For some (years down the line)..........you might be in a lower tax bracket and you'll able to spread the sale price over several years..........since you're RETIRED and /or OUT OF THE BUSINESS.

BUT..........I'M NOT A CPA.

Aloha, Mark

Link Posted: 2/1/2011 4:26:42 PM EDT
Originally Posted By ricky_45:
Originally Posted By RuskEnt:
My CPA is advising me I should buy property to put up a building for my growing business. One of his reasonings is the interest and property tax deductions.

Can someone explain how this works? Lets say property tax is 15k and interest on loan is 8k a year. So I am guessing my taxable income drops by 23k? Is this correct?


Your CPA is most likely giving you an alternative to paying rent expense, which is usually very comparable to owning a building, for which you would have interest expense and tax expense. Don't listen to folks telling you that your CPA is wrong, as the amount of information you have given is inadequate for providing competent advice.

With that said, are you currently operating a business and renting a space? Or, are you about to expand and need advice on whether to rent or buy? Or, is the CPA simply advising you to go ahead and buy a property in anticipation of the expansion because it will benefit you from a strategic tax standpoint? There are many questions that need to be answered here. ARFCOM is not the best place to inquire about opinions on CPA advisement, especially when the facts and circumstances as they pertain to your situation have not been fully delved into. No, I did not stay at a Holiday Inn last night, but I am a CPA. And I have a master's degree in taxation.


Its more about the strategic tax standpoint and the fact that 'real estate is a good investment'.

Right now I dont rent business space. I currently have my equipment spread all over town. But we are in a great position to expand and we are going to need space in the next 1-3 years. I currently rent an apartment where I live. The whole idea was to build a shop building with an apartment above it. Then when I get married I could rent that apartment out or covert it to more office space or whatever.

I am in the early stages of planning all this. Having a mortage scares the shit out of me though!!!
Link Posted: 2/1/2011 4:32:34 PM EDT
Originally Posted By ZedsDeadBaby:
IIRC, mortgage interest is no longer deductable

so... if you neither own property nor know tax law, perhaps you might think about using Google prior to hitting the reply button.

"in on one" doesn't mean anything in this non-epic, non-lulz thread.

ar-jedi
Link Posted: 2/1/2011 4:38:39 PM EDT

Originally Posted By K2QB3:
Originally Posted By 418cwc:
You need to fire your CPA and find a new one.

Basically, you stated the interest and taxes add up to $23K. Lets say, just as an example you make $100K per year. You don't pay taxes on the 100K, instead you deduct the $23K and pay taxes on $77K. The current federal tax rate for $77K is 25% (for married filing jointly). So you pay $19250 at $77K in taxes instead of $25000.

In other words, you pay out $23,000 to the bank and in property taxes in order to save $5750 in taxes. For some reason or another this doesn't sound like a very good plan to me. You could donate the $23,000 to a charitable organization and get the same tax deduction. Me personally, I had rather give it away than hand it over to the bank. Then again, I like to be in control. Also, there is a huge element of risk involved in borrowing money.



It isn't anywhere near that simple, first of all the personal income tax rate has little to do with the total tax burden on a business owner, you have no idea what his current facilities cost him or if they're adequate, if his business is growing or shrinking, you basically know nothing about this guys business except his CPA says it's time to buy a building and he should fire them? Neither of us can say whether he should buy a building or not, all he did was give us some hypothetical numbers and ask if he understood the way it worked correctly.

This is the area where a lot of small business owners destroy themselves, if you're not tax-efficient you're trying to swim upstream. You can significantly reduce your tax burden by investing in your business and then the growth pays you back a lot more than you would have gotten in the first place.

This is also one area where I think the GOP has tax policy all wrong, constantly trying to encourage business owners to pull capital out of their businesses, and discourage them from adding payroll, via the tax code.


I realize it's not that simple, my response was strictly based on what the OP said. He didn't mention he was incorporated until later. I meant for it to be a simple example of how the deduction works.

What they don't tell you in all those graduate accounting classes is the risk involved with borrowing money. A lot of business professionals have no real-world exprience and give advice based strictly on the numbers. I've seen time after time small businesses fail because they too heavily leveraged.

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