Top 10 Frequently Asked Questions
How to Legally Pay ZERO taxes on $1 million W-2 or Roth IRA Conversion Income
Q. How can I Legally reduce taxes on w2 income and Roth conversion income?
A. Reduce your taxable income via deductions and credits
A. Personal deductions -Schedule A tax return
Medical expenses
Mortgage interest
Charitable donations, etc.
B. Business Deductions
Business expenses
Advertising
Vehicles, travel, cell phone, utilities
Depreciation of business equipment
Use qualified Section 179 expenses to offset ordinary income
Q. What is Section 179 & how can it reduce my W2/Roth IRA Conversion Income?
A. Section 179 of the U.S. internal revenue code is an immediate expense deduction that business owners can take for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over a period of time. From the IRS webs site:
“Section 179 of the tax code allows business taxpayers to deduct the cost of certain property as an expense when the property is first placed in service.
This deduction applies to tangible property, such as machinery and equipment purchased for use in a trade or business. Eligible property includes qualified real property and certain property used to furnish lodging. Qualified real property includes improvements to roofs, HVAC, fire alarm systems and security systems to nonresidential real property.”
“Section 179 deductions are purchases that can be used to lower a business’s [or an individuals W-2/ordinary] taxable income in the year the purchased items are put into service. Items that fall under Section 179 may be deductible at full value rather than depreciated.”
Q. What is Section 179 Property & what types of business assets qualify?
A. Simple definition: Instructions Form 4562- Depreciation & Amortization
“Property that you acquire for purchase for use in active conduct of your trade or business, and is one of the following:
Qualified Section 179 Real Property
i.e. Roof on your business
Tangible Personal Property (tax term–feel, touch, move, i.e. furniture, office equipment, machinery)
Cell phones and telecommunications equipment
Air Conditions/Heating units
Certain property used mainly to furnish lodging or in connection with the furnishing of lodging”
TIP: Purchase Section 179 property that is used mainly to furnish lodging as a business expense to reduce your taxable income. i.e., Tiny Homes
Q. How do tiny homes qualify as section 179 property?
A. Tangible personal property used to furnish lodging to accommodate tenants on a transient basis if the rental period is normally less than 30 days qualifies as Section 179 property. The tiny homes are classified as business equipment, the State of Utah issues a (VIN) on each unit manufactured, and classifies them as a “trailer” for registration purposes.
Not real estate–it is a trailer-5 yr depreciation schedule
“a taxpayer may elect to treat the cost of any section 179 property as an expense that is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service
Section 179(d)(1) Defines Section 179 Property: “property which is:
Which is
i. Tangible property to which Section 168 applies
ii. Computer software
b. Which is
i. Section 1245 property
ii. Qualified real property
c. Which is acquired by purchase for the use in active conduct of trade or business
Such term shall not include any property described in section 50(b) (other than paragraph (2) thereof)
Paragraph 2 from Section 50(b) provides an exception:
“Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients.”
26 C.F.R. § 1.48-1(h)(2)(ii) Defines Property used by a hotel or motel.
“Property used by a hotel, motel, inn, or other similar establishment, in connection with the trade or business of furnishing lodging shall not be considered as property which is used predominantly to furnish lodging or predominantly in connection with the furnishing of lodging, provided that the predominant portion of the living accommodations in the hotel, motel, etc., is used by transients during the taxable year. For purposes of the preceding sentence, the term "predominant portion" means "more than one-half".
Thus, if more than one-half of the living quarters of a hotel, motel, inn, or other similar establishment is used during the taxable year to accommodate tenants on a transient basis, none of the property used by such hotel, motel, etc., in the trade or business of furnishing lodging shall be considered as property which is used predominantly to furnish lodging or predominantly in connection with the furnishing of lodging. Accommodations shall be considered used on a transient basis if the rental period is normally less than 30 days.”
Q. What case laws are there that support the definition and usage of Tiny homes (i.e. travel trailers used for transient lodging) as Section 179 Assets?
A. There are three IRS tax court laws than validate Tiny homes as Section 179 Property.
Evans vs Commissioner– 2014 Boise, ID
General contractor bought a motor home + Trailer and depreciated it because he was sponsoring his teenage son in amateur moto X.
IRS said NO at the administrative level asserting that he was writing off the as a marketing expense, since he was sponsoring his son. IRS said No at the administrative level.
Tax Court reversed the administrative opinion saying that the expense should be based on the functional use of the asset placed in service. They evaluated it and found that the Asset was purchased by the company, was used to provide for a specific sponsorship, BUT it was used for transportation and transient lodging.
Functional use applied, not normal use….if the RV wasn’t there, he would have to go to a hotel, rent a U-haul truck, etc.
The Court reversed the administrative/Commissioner’s opinion and granted the deduction
Mobile home park for tenants that averaged 9.9 weeks and tenants that averaged 1.7 weeks. The IRS disallowed deduction on mobile home units that had long term tenants and ALLOWED the full 179 deduction on mobile homes used for transient lodging.
The Question: When a vehicle is used for both lodging and transportation which one is the primary use?
Robert and Ana Shirley-vs Commissioner -2004 Oregon residents
Owned Motor Home Rentals- rented and sold RVs.
Expensed a 1998 Gulf Stream RV (MH #22) purchased for $48k
IRS said no because it was primary used for transportation, Shirley said it was used for lodging. It qualifies for the exception to the exclusion because the lodging is used by transients, i.e. short term renters.
Argued and won that their RV Rental deduction should count as Sec. 179.
“We conclude, that motor homes, like Shirley’s, used by renters mostly for periods of less than 30 days, are section 179 property.”
Q. What is the amount of the deduction from my Section 179 purchase and how much will I save in taxes?
A. Generally you can deduct your cost for the asset dollar for dollar against ordinary income (W-2, salary, Roth conversion, and other business income) up to the Section 179 limit for 2024 $1,220,000.
Section 179(a) Treatment as Expense
“A taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service.”
Basis of an Asset Per the IRS:
“The cost is the amount you pay in cash, debt obligations, other property and services…Basis is the amount of your capital investment in property for tax purposes. Use your basis to figure depreciation, amortization, gain or loss, etc.”
You can purchase the Tiny home 179 asset for $375k purchase price
$100k down
$275k financed at 0% for 360 months
Monthly payment of $763
In house manufacture financing
You’ll receive a deduction for the purchase price, including the financed cost of $375k which will reduce your ordinary (W2, Business, and Roth IRA conversion) income dollar for dollar.
You’ll save roughly $140k-$150k in taxes for for every unit you purchase if you are in the 40% tax bracket
Q. How many units can I purchase?
A. You can purchase as many as you want, but to fully utilize the 2024 Section 179 deduction limit for 2024 of $1,220,000 you would purchase 3.25 units at $375k each.
Q. Where in the tax code does it say that I can use Section 179 expenses to reduce my W-2 income?
“The total cost you can deduct is limited to your taxable income from the active conduct of a trade or business during the year. You are considered to actively conduct a trade or business only if you meaningfully participate in its management or operations.”
Individuals:
Enter.....the total taxable income from any trade or business you actively conducted... Also, include all wages, salaries, tips, and other compensation you earned as an employee (from Form 1040, line 1)
Tax law treats the employee as being in the business of being an employee. As in Bloomberg, the phrase used is “being in the business of being an employee.”
TIP: You can apply the Section 179 deductions against W-2 income because the tax code treats employees as engaged in the active conduct of the trade or business of their employment.
Q. How is the financing handled for the purchase of my 179 Asset?
A. The manufacture offers in house interest free financing for 30 yrs
$375k purchase price $100k down payment
$275k financed for 360 months, $763/month.
b. Security Agreement–Tiny home is used as collateral to secure the loan.
c. Recourse equipment loan-Loan is with the LLC–there is no personal guarantee
Q. How can I make money via the purchase of a 179 Asset Tiny Home?
A. You SAVE money on your taxes by reducing your taxable income and you MAKE money on your Tiny home by renting it out for monthly cash flow.
Lease agreement at closing between you and a 3rd party
360 months at $781/month (fixed)
You keep the difference between your loan payment and your rental income
Lessee pays for all insurance, maintenance, repairs, risks, etc.
Lessee cannot cancel the lease. If you find a better deal, you can cancel it if you want to
Q. This sounds too good to be true, what's the catch?
A. There is only a finite amount of transient housing opportunities that fully qualify for Section 179 deduction. Act now to take advantage of the best rates.
There is a limited amount of these section 179 eligible units
This is a business–you must keep records and be involved
WANT MORE INFO? Schedule a time to meet with an Advisor!