This is a great question, and unfortunately is probably one of the most misunderstood and underutilized benefit regarding section 179.
Properly structured, section 179 can save high income W-2 wage earners hundreds of thousands of dollars on their taxes. Let's look at a real life example of a client that did exactly that:
Brian and his wife are in their mid 40's and are successful engineers at Netflix and have $1.2 million of combined W-2 income in 2024. They don't have enough Itemized deductions to exceed the $29,200 Standard Deduction for a married couple filing jointly, and want to know of there is anything they could do to legally reduce their looming $358,321 tax bill caused by their high W-2 income.
I crunched some numbers for them and found out that a properly structured Section 179 plan could save them $83k on their 2024 taxes, and provide them with hassle free cash flow of $1,200/yr for the next 30 years.
$83k invested at 8% for the next 30 yrs = $835k. Saving a little now can really add up!
Here's how it works:
I recommended that Brian start a new business as a single member LLC leasing tiny homes to oil and gas workers in Oklahoma and Texas. The cost of the tiny home is $375k and qualifies as a qualifying asset under Section 179, therefore the entire $375k purchase price of the tiny home can be counted as an expense and be used to reduce his $1.2 m of w-2 income.
Brian doesn't have to spend $375k to get the full deduction, as qualifying section 179 assets that are financed can also be fully counted as expenses against both ordinary income and W-2 income. The in house financing terms that are offered by the manufacturer as as follows:
$100k down, $275k financed with an interest free loan for 360 months
The monthly payment is $763/month
3 + Tiny Home purchases = 10% price reduction to $90k/each, or $270k total
A unique feature about this purchase, is that in addition to offering in house financing at 0% for 30 years, Brian can also sign a Lease Agreement on the same day that he purchases the Tiny Home to IMMEDIATELY rent his unit to a 3rd party. This 3rd party Lessee will sign a corresponding 360 month non cancellable lease agreement whereby they promise to sublease the Tiny Home out to other Section 179 eligible parties and pay Brian $863/month for 360 months.
The Leasing company will purchase insurance on the unit, manage the tenants, sign the sublease agreements, cover any damages, and provide a "hold harmless" indemnity guarantee that protects Brian from any litigation from the tenants. If the unit needs to be moved to another location, the leasing company will pay for all costs involved in the transportation. The monthly payment that Brian receives from the leasing company for $863/month will first go off to paying off his $763/month financed cost and his LLC will profit the $100/month difference. By having the leasing company pay the financing company directly, Brian's LLC never takes receipt of the payment and is therefore not taxed on that income.
Here are the results of the Tax Savings alone for Brian in tax year 2024:
1. Current 2024 Projected Income: $1.2m =$358,321 federal taxes
2. 1 Unit for $100k reduces taxable income by $375k
a. $875k income = $239,071 taxes
b, $119,250k tax savings
c. Net savings of $19,250
3. 2 Units for $200k reduces taxable income by $750,000
a, 450k income = $90,029 taxes
b. $268,292 tax savings
c. Net savings of $68,292
3. 3 Units for $270k ($90k each) reduces taxable income by $1,125,000
a. $75k income =$5,032 taxes
b. $353,289 tax savings
c. Net Savings of $83,289
Note that the 3 Unit purchase has a total deduction = $1,125,000 which is below the Section 179 maximum of $1,220,000 for 2024. Any excess amounts not used will be carried over to 2025.
Brian is able to reduce his 2024 taxes from $358k in taxes to $5k in taxes!
Furthermore, his taxable income is reduced from $1.2m to $75k, putting him under many of the means tested thresholds in the tax code that exist around Adjusted Gross Income, thereby allowing him to contribute to Roth IRA accounts for himself or his spouse that he otherwise would not have been eligible to do.
Additionally, if Brian really wanted to be proactive, he could Roth Convert $125k of his 401(k) to a Roth 401(k) at a roughly 10% effective rate! When else in his working career would he be able to do that?
Additional savings can be derived by investing his $83k tax savings, $83k invested at 8% in the market for the next 30 yrs = $835k. A 12% rate = $2.5 million! Saving a little now can really add up.
How is all of this possible? A properly structured Section 179 asset purchase before the end of 2024. Is this difficult to set up? Not really:
Brian contacts the IRS and gets a EIN number for his LLC at no charge
He then sets up LLC documents with his state, opens up and funds his new business banking account.
All of these steps can literally be accomplished in about three day.
Are you a high income W-2 earner and are looking for a safe and conservative way to reduce your W-2 Income/Salary and reduce your taxes? A properly structured Section 179 asset purchase may be the way to go.
If you want to get more information, reach out to one of our tax planning specialists by BOOK A MEETING now for more information or send me an email, Dave@OptimalTaxplan.com
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