Bonus Depreciation Explained: The Tax Strategy Everyone Gets Wrong

Everybody, please. I know how bad you want that tax write-off, but does the investment make sense without it?

It didn't save me $100,000. It cost me $100,000 to make $37K. So if I lose everything on that investment, I'm down $63,000. You've lost money.

Ask your accountant, what is your commission on this deal? Because these promoters are paying the CPA under the table to sign off on these deals, and they're big money.

Let's say you do get audited and you lose. That's your butt on the line.

Welcome everybody to the Main Street Business Podcast. My name is Mark Kohler. I'm here with the incredible Matt Sorenson, my co-host, my law partner, my best friend, just, you know, my all-around man, just, you know, my mentor.

I'm just, I'm just happy to be here because Mark is going to be carrying the show today as he does many times. You know, I'm just going to be you know, comedic relief, color commentary today. But, uh, Mark's like, I got a big topic we need to talk about. Well, truth about bonus depreciation. And I'm like, I need to hear some of that myself, actually.

Well, uh, thank you for those kind words. I— you carry the show many times, or we're team effort here. So everyone here, this is a critical topic, and it is about The truth of bonus depreciation, and I'll give you the spoiler alert right now, material participation. And this is something a lot of very aggressive accountants trying to sell an expensive strategy will gloss over. And we just covered an audit that in our training program for our accountants this 2 weeks ago with Farrah Salas, she's a IRS resolution expert. She broke down the entire case for us on a short-term rental material participation issue, which frankly is one of the easier ones. So we're going to be talking about this today. Everybody's looking for that hot tax strategy before April 15th. You're like, well, I'll extend and we'll massage this. And there's a lot of promoters out there selling strategies like solar equipment leasing, Crypto mining rigs, Turo, Waverly, short-term rentals, long-term rentals, real estate professional, the Hollywood production tax credit, oil and gas, all of these are related to material participation.

[Speaker:MARK KOHLER] Yeah, it's the promotion of this strategy is endless because there's always someone on the other end who knows that you hate taxes more than you like making money. And that's, that's like, I'm so serious. Like, I meet so many clients, they hate paying taxes more than they make— more than they like making money. And because of that, people raising money or they got some investment strategy, they lean into that. And so they're going to say, this is a great tax write-off because you can use this loss if you just invest in my thing. You can use this loss to offset your day job, your W-2, your business income. And the reality is, is that's very limited and how you're able to do that. And a lot of times we as tax lawyers in our law firm at KQS Lawyers and Mark and I, as we're speaking around the country, are like kind of bursting people's bubble. There are some ways to do it, but 9 times out of 10, we're bursting someone's bubble and saying, I don't think that's going to work.

Yeah. And we're going to break down— I want to start with an example just so everybody can get in context what the issue is. Then I want to talk about some political industry factors I think we need to have on the table. And then we're going to break down what do you need to unlock bonus depreciation? What is this material participation? What are the risks? How does it work? And I think really put to rest what the issues are, and you'll be able to make an informed decision with your tax advisor. It's really not that complicated. And so regrettably, and we're going to talk about those political dynamics and where this, why this gets promoted so often. So, Let's start with an example. Now, and I'm going to probably give two because the most common is real estate. In fact, Matt, why don't you give a real estate example and then I'll maybe give an equipment leasing or some other option that could be out there that's a little more unique. But whether it's short-term rental, long-term rental, what do you see so often?

Yeah, I mean, you— everybody says buy real estate, the tax benefits are great. Okay. All right. I like that. There's some reality to that, even without this taking these losses and trying to offset other income concept. But when you buy rental real estate, whether short-term or long-term, you get to depreciate this. If it's residential, it's over a 27.5-year lifespan of the asset. So if that was $275,000, to buy that property, and this is the building only, you don't get to depreciate the land, you're taking a $10,000 depreciation every year, right? Now we can accelerate that. You can do a cost segregation, you can start taking much greater write-offs. Now when you acquire that asset, and that is a lot of what gets promoted, is let's take these write-offs. And when you get these losses, because the rental income that you're going to get is gonna— that's gonna all get offset by these losses from depreciation, especially if you're accelerating them. But what's left over, usually that just sits as a passive loss on your tax return. Well, the promotion is, well, how do I get those losses? I'm a doctor or physician. How do I take those losses and get them to reduce my income as a doctor? That's what I'm paying 37% on. I want to get it over here. And that's what we're talking about here is how do I move that over there instead of it staying stuck as a passive loss and getting bottled up to only be used against passive income?

And a great example, and we could spend the entire show just on that strategy, and we have before, whether it's a long-term rental, a short-term rental, Do you or your spouse qualify as a real estate professional? That, those are going to be, that could be a factor, especially in the long-term rental. But in a short-term rental example, just to isolate this so you all get the point, is if I can put in enough time decorating, staging the short-term rental, maybe painting a few walls, get it on the market, I can even hire a manager. To be my Airbnb manager, but I put in enough time, you cross this threshold of material participation and the IRS says, ooh, if you get that material participation, that loss becomes an active loss. You now qualify as an active trader business is the concept under these 7 tests. You just got to meet one of them. And when we meet that test, in the example of a short-term rental, then I can unlock all of this, well, a good chunk of that depreciation and take it all in the first year that I bought this property. And you may be putting money down and getting a loan. So you could put, say, $50,000 or $100,000 down on an acquisition, but end up with a $300,000 write-off. Now that's pretty sexy. So that is where that, short-term rental strategy finds its, finds its legs. A long-term rental strategy, you've got to be a real estate professional and then show, um, material participation. So if you're a physician, doctor, maybe your spouse is going to manage the rental properties for the family. That's very common. So another example, just to— that very— has really gotten a lot of traction, but got shot down or modified in the one big beautiful bill was the solar strategy. You're going to go buy these solar panels, use leverage, and then these solar panels are going to go on the rooftop of a residential home or a commercial home depending on which strategy you were using. And then some solar company's going to manage the whole process for you. But for some magical way, you have material participation learning about this by going to a conference one weekend and then having a little laptop application or phone app that allows you to manage your solar project to the point you have material participation. Bullshit. So anyway, that gets to be one of those abused areas. Well, the solar strategy is coming to a close this year under the one big beautiful bill. But now there's equipment leasing, the production tax credit in Hollywood. You've got people buying mining rigs for crypto and depreciating the mining rig, accelerating those. So these little things pop up all the time and it's like whack-a-mole. So for any of you accountants listening, I know you're torn 'cause on one hand you're like, man, I got to bring my client something. Maybe this is a possibility. But then you've got others that are almost forced to do it. Their client finds this strategy, they show up and go, I want to do this and I'm going to fire you if you don't do it. And man, it gets to, if the accountant never ever had an ethical issue, this is where it starts to become a problem.

[Speaker:MARK KOHLER] Yeah, and I think this is with so much tax principles, just speaking to the investor here is, you know, a lot of these assets you can be investing in in real estate, there is so much truth to, there's great tax incentives for it. Even if I don't get to take this, passive loss to make it active and offset other income. You know, I'm buying just a rental property, short-term, long-term, I don't care what it is. After all my expenses, I've made $20,000 in net rental income, and I probably have a $20,000 depreciation expense that year. Boom, zero. I have $20,000 of income in my pocket from cash flowing that property over and above expenses, but because of that depreciation loss, It is offsetting that income. So it's good already. It's people saying, but what if that loss was $30,000 and I had an extra $10,000 over and above the rental income to wipe out? I want to use that. And that's what we're talking about here. But I also— and it could be other strategies here, as Mark was talking about. But I just want to say we're not crapping on chasing tax losses and good tax planning and making investments in assets that are tax efficient. We love that. Let's just get a reality check on how these losses can offset your other income.

Yeah. And before we unpack material participation, everybody, we're going to tell you what qualifies and what doesn't. But, but Matt, I love what you brought up right now because this is one of those political dynamics we have got to talk about. And I say political, or I mean, it's a, it's a factor you investors have got to take into account, and I'm going to restate what Matt said in this way. So many taxpayers let the tax tail wag the dog. They're just chasing the next cool tax strategy and literally have blinders on and don't care if it makes money at the end of the day. 'Cause they're saying, if I spend X and I get a tax write-off better than that, I don't care if it makes money. Do I need to go back to the savings and loan crisis in the 1970s where People were buying properties that were complete failures just to chase a write-off. And then Ronald Reagan put a stop to that with the 1984 Tax Act. And that created, that's when material participation was first introduced to the tax code. Investors could not just go buy a crappy building funded by a savings and loan and take a write-off and have no business involvement. Wrong. And then Ronald Reagan added to that, you have to have basis. You have to have basis in the project. You just can't, meaning recourse basis, that you're on the hook for this. You can't just say I am and get a write-off. So that's where this all started. But Matt's point, I want to just reemphasize this, everybody, please, I know how bad you want that tax write-off, but does the investment make sense without it? That's your first question. And that's where I had a problem with solar. I couldn't even make sense of it. I mean, what the hell do I have 10 years from now? Does it even make me money? Oh, but don't worry about it. You get the tax write-off. No, no, no, no. Tell me my money was spent wisely. That's what I mean. Can you reemphasize that too, Matt? I know that you just, you kind of, you brought it up, but I mean, we really, I really want to drive this home. Yeah.

I mean, if let's say you made a $100,000 investment and they're like, well, you can get a loss of $100,000 back in year 1, the whole thing. Okay. You're in a 37% tax bracket. Did that save me $100 grand? No, that saved me $37,000. It didn't save me $100,000. It cost me $100 grand to make $37K. So if I lose everything on that investment, I'm down $63,000. You've lost money. Okay. So, so let's have perspective here. Let's not get too anxious about the tax benefits. To me, the tax benefits are the fringe of why I'd invest in this over something else. Like, for example, if you could say, well, Matt, you could make, you know, if you put in $100 grand in the stock market, you can make 10% and have $110 grand, or you could make, you know, put in $100 grand, you could make $10,000 and be $10K, but it not be taxable because it was real estate and that cash flow because of depreciation. I'd be like, I'll take that. I'll do the $110 in real estate, but I'm, I'm, it's still got to make money.

Yeah. Well, and let's bring this home because this is a variation To the first point is, does the investment, is it sound? Number 2, what is the tax write-off with the net tax benefit? 'Cause I love your example, Matt. You put in $100,000, you get $100,000 write-off. Well, unless you're in 100% tax bracket, you're losing, right? And so this is where solar, which thank goodness that does not exist. Yeah, yeah, we don't want that either. But, and I'm beating up solar because it was such a blatant abuse of this strategy. But everybody, please take note of this. We would have constantly a turnstile of clients coming through our office the last 5 years trying to take advantage of the solar strategy. And they would say, well, I'm putting in $100 grand, but my tax write-off is $300. And I go, "Oh, so you're signing on debt, huh?" They're like, "No, I'm not signing on debt." I go, "Really? Show me the prospectus or the contract that you're doing with this promoter." And in the last page or two, there's that, okay, well, there is recourse debt here. You're actually buying $300,000 worth of solar panels with a $100,000 down payment. So you're signing on debt of $200,000. Now we're going to get rid of that later 'cause we're going to donate what's left to charity or we're going to sell it sell it or whatever, you will not have to pay that. I go, are you sure? And so many clients were like, whoa, I did not know I was signing on debt. And I said, well, how in the hell did you think you were getting a $300,000 write-off with only $100,000? You have to have basis. And that's when a lot of times—

There's only one way.

The train stopped. Yeah.

Yeah, there's only one way that that's happening. You're guaranteeing debt. You're signing on to debt, which now is adding risk to the investment, which is probably something you're not controlling. You're not having eyes on anymore. And so, um, so these have been a problem. Let's just like, yeah, I mean, okay, I think we've like put the nail in the coffin here. Yeah, this has created a problem.

Yes.

Clients overlooking the overall merits of the investment simply because of the tax pitch.

Yep. Now I want to say this too, Matt, something you said a minute ago, that we're going to break down these, these ways you could qualify, you know, like say, so say you weed through the crappy investments, all right? You understand, is there debt involved? What is my investment return? What is my tax benefit? Let's say you go through stage 1 and you're ready to go to stage 2. Well, now I want to analyze this and say, is this bonus depreciation going to benefit me on my tax return? Do I qualify to take the write-off? Maybe they're saying I get the write-off, but they're not the ones signing the tax return. You are. You are the one ultimately on the hook signing this tax return. Do I qualify for this? And I want to just say bonus depreciation's great. This is not a bad thing. This is what stimulated the economy in a huge way. The one big beautiful bill, Donald Trump helping spearhead that, of course, love him or hate him, don't worry about that, is Hey, if I go invest in real estate and help stimulate the economy and develop better equipment or more manufacturing and or whatever, then I can accelerate the depreciation. And as long as I'm making good cash flow and building equity in the property, sign me up. So it's— we're not trying to, like Matt said earlier, poo-poo the idea. Just let's go in with our eyes wide open. So I wanted to not sound like the sky's falling either.

So yeah, and look, we're going to give you some, some ways that do work and some things that we have seen that do work too. So this is not all just like, no, no, no, no, no, no. You know, the worst lawyers in the world are only the ones that tell you what you can't do. Like, okay, great. Like, give me a— find the value of a lawyer is when you can figure out how to make it work, give you options of what's possible.

Okay, so let's set the table. We, we now need to determine, do I qualify to take this depreciation and write it off against my ordinary income? That's the Holy Grail. Well, the concept is, unless there's an exception, I need to show that I am materially participating in this. I'm not just a passive investor. If you're a passive investor, like Matt said, That depreciation will be there for you in the future. Oh, you'll get it. You'll get it as a carryforward until you sell other passive investments. Not a bad thing. But if you want to accelerate it, you've got to show you're actively materially involved in this and it rises from an investment to a business unless there's an exception. So let's talk about the exceptions for a moment. Oil and gas. Oof, so cool. If you want to invest in an oil and gas exploratory investment in the US on US soil, you have what's called the IDC, intangible drilling cost, and you can depreciate, accelerate depreciate the oil rig and tangible and intangible costs. Very, very common. We have got oil and gas companies and drilling companies that work with Directed IRA, work with our clients that have great projects that make ROI, return on investment sense, but you don't have to have material participation. That's an exception. That's a good thing.

Yeah.

Matt, the self-rental. You love this one.

Yeah, yeah. I mean, like the, if you're owning a building in your business or for your business, this can be in a separate entity, a separate LLC, but you rent it to yourself, your operating company, you can take the losses on that real estate and offset your business income because they're grouped together as one thing. This real estate is still real property. We can set up a separate entity for asset protection, but the activity of it with the operational business— let's say you're the dentist, okay? You got the dental office, you're drilling and billing all day long, making money. You also own the real estate that your dental practice is in. You own the building. Well, we're taking— let's say you can accelerate depreciation or even just your normal depreciation. You end up with a $50,000 loss on the building. Well, that $50,000 loss doesn't get bottled up over here with your other passive income. It can fly over here now to your dental income and reduce it $50K there. So that's the self-rental rule. So it's got to have common ownership though. And this is the renting to your business.

A perfect way of explaining it, Matt. And for you tax advisors out there, it's called the Dash 4. And what you're doing is creating an economic unit. And that's what gets you over the material participation test because your hours in the operational business count towards the real estate. So you are exempt from this special rule that just applies to the real estate. It's wonderful. And people, the self-rental trap is not making the election. So you accountants out there are like, I've had to fight accountants going, yeah, but that's a bad deal 'cause of the self-rental trap. Yeah, the trap is not taking advantage of the strategy, but that's a whole other topic for another day. Okay, so there's our two classic exceptions, oil and gas and a self-rental. Well, let's say I'm going to do the short-term rental. I'm going to go buy a little property and put it in an Airbnb scenario, and we'll come to equipment here. Oh, okay, we'll use the equipment. Let's knock out two birds with one stone. Or I'm going to go buy an expensive, excavator or a truck or back, you know, some front loader or something in the construction industry. And you're going to buy this equipment and rent it to other contractors, or you're going to buy mining rigs and put it in a crypto mine scenario. Okay, same concept. It's all assets and you're going to rent them to other people, not to yourself. So it can't be a self-rental. You're going to rent this equipment to someone else or make money off of it. Well, there's 7 ways that you could qualify as material participation. And if you can show that you check the box on one of those 7, you just morphed all that, those write-offs into ordinary write-offs. Now, the one that's of these 7, I'm going to tell you the one that's most common. Well, the first 3, I'm going to tell you the first 3 Which are the most common? One, you participate in the activity for more than 500 hours, period, during the year. Now, if you're married, you and your spouse's time combined can count towards that. But you put in 500 hours. Well, people, that's 10 hours a week. I mean, are you really going to put in?

That's a lot.

And you may say, I put in 10 hours, but then you've got to say, do those hours qualify? Watching a computer screen make you money on your mining rig is not managing the mining rig. Having a property manager over your short-term rental and giving them a call once a week is not going to graduate to 10 hours. However, giving them a call does count. So you, oh, there's 20 minutes. So you've got to, not only make sure that time qualifies, but that you actually put it in. So number 1 could be a little hard.

Yeah, let me say just on those hours too, that if it's like work done is like in the capacity of an investor, like analyzing stuff, you know, reviewing financial statements and stuff like that, um, monitoring things and analyzing stuff, that's not the hours we're talking about here. That's investor hours. You do not get to count those.

Correct. And there's a lot of case law and IRS regs on these. A lot of times they're specific to the industry too, 'cause if you're talking about real estate, they're going to say what qualifies. Putting on a tool belt, going out and working on the property is one of the cleanest, best. Going to a conference on how to invest in real estate is not going to count. And if someone tells you that it does, Say, great, will you sign my tax return?

Yeah.

And if I get audited, will you stand behind it? They're going to change their tune real quick. Well, they're going to say, well, go talk to your accountant. But I know, I'm sure. Well, I've never been audited. Yeah, you just got lucky. Doesn't mean it's okay. Oh, hell. All right. Number 2, your participation was substantially all of the participation in the activity of all the individuals, meaning you pretty much ran the show. Now, this is a hard one when you need a third party to do the real work. Mining rig operation. You go out and buy $100,000 worth of mining rigs with debt for $25,000. You get a $100,000 write-off even though you only put in $25,000. And you know what? That investment, in my opinion, I own mining rigs, it's pretty sound. You are going to make money on those rigs. You will get your money back. You just have to figure out what's my ROI and was it worth it? But you're going to accelerate all those write-offs. Do you know how to run a mining rig? Are you the one managing that operation? Is the mining rigs in your basement or in your building, or are they in some warehouse in the desert of Nevada and some IT guru is running the whole show for you? If they are, you are not substantially the one running the operation more than anyone else and in charge of it. You're not. Don't fool yourself. Number 3.

Yeah, can we just make a point here? Can we just make a point here on that one? Because sometimes, like in the real estate context, and I know you're giving examples here of equipment and crypto and construction equipment, which is important, Notice what Mark's not giving an example of is your rental property. Because you might be like, hey guys, I do all the work at the rental property. I go over and I visit it. I'm mowing the lawn or, you know, whatever. Like, and it's not 500 hours, but I'm the guy doing most of the work. And I maybe got a handyman that comes in that does the hard stuff if I don't know what I'm doing. Does this mean I materially participate? It's a rental property though. We're not talking about other types of equipment.

Yeah, you're in, right? Because there's no one else involved.

I got to be a real estate professional?

Yeah, yeah, you're good. And that part number 2, your participation was substantially all of the participation needed to operate the activity. And so you're like, guys, I am so good at this. I didn't put in 500 hours. "So, but no one else is doing it. I'm in charge of everything." Okay, you can make that argument. I can live with that. I'm going to have a hard time with that in equipment rental, but maybe in a short-term or a long-term rental property scenario, you could make it. Now the third one, and this gets very, this is the one Patty and I have used. I have personally used this, and Matt knows, I brag with Matt all the time. I'm so excited. I love the short-term rental strategy. Patty and I are putting a fourth one online this year. Last year we put a third one online. We love to, rather than stay up sometimes and watch Netflix, we do have a couple shows we like, but we'll put on our tool belts and we love just working on the real estate together in the evenings and on the weekend. We geek out on that. So we love rule, test number 3, you participate in the activity for more than 100 hours during the tax year, and it's more than anyone else. So I could have a property manager, but I put in more time than them. I could have a handyman, a contractor come in and do something. So I get my 100 hours and I make sure no one else puts in more than 100 hours. I can check number 3 because I'm not going to reach number 2. I'm going to use a property manager, I'm going to use other people. So I can't say I substantially do everything. And frankly, I want a property manager. I want to get in, get my 100 hours, and get out. So I like number 3. If you want to Google this, go out on AI, you can read the other 4. They're going to be more challenging. But the first 3 are where most taxpayers live. So if your accountant, in summary, and I'm going to, I want to talk about this audit example that I just referenced at the beginning of the show. If your accountant is glossing over this or making it sound too good to be true, and on one breath they're going to go, this is so easy, you don't have to do anything. And then the next statement they're going to go, but you got to show 100 hours. Whoa, whoa, whoa, you just told me I don't have to do anything. Now you're telling me I have to put in time. Which one is it? And they tell you anything you want to hear to get you to buy. Be careful.

Let's talk about real estate because I want to clarify this. And this is something— and this is a— I think a lot of investors get stuck on this, and this is why the short-term rental loophole is called a loophole. I just want to make sure we're on the same page here. Um, but I mean to say, I want to make sure I'm not— I understand this right. Is, okay, let's say I can hit any one of those three. I got my rental property, long-term rental.

Okay.

I'm business owner, Matt. I'm not a real estate professional. I can meet one of those three tests for the amount of hours. I've got $20,000 in losses from depreciation. I want to bring that over and offset my business income. Or I'm the physician. The dentist, whatever. I'm not a real estate professional.

Okay, here's the problem there.

I get there.

Yeah, here's the problem in that fact pattern. You— I thought you said it was a long-term rental. And I know, Matt, you have long-term. I did. Yes.

Yes. See, I'm wrong.

Yeah.

I'm trying to illustrate here.

Yes.

Problem where most people get stuck.

Yep. In— it is very important in this analysis that people understand the difference between a long-term rental and a short-term rental. And I'll say it now, a short-term rental means your average stay of all the people that stayed there during the year is less than 7 days. So you can have someone rent it for 2 weeks, but someone rents it for 2 days. At the end of the day, you've never had a tenant, all of your tenants stayed for an average of less than 7 days. Number 2, you did not put in substantial services. You did not act like a hotel. You didn't clean it every day. You didn't act like a hotel. You are doing the basic Airbnb, VRBO thing, okay everybody? So those are the, now if you have a long-term rental, that means it could be midterm, you're renting it for 3 months at a time or 12-month leases, that's long-term rental. In the long-term rental context, you have to meet 2 tests. You or your spouse have to be a real estate professional then you've got to get material participation. And I've actually sat at the table with an IRS agent, with my client next to me, in a case just like this. He was a realtor, he was a broker. Now the real estate professional status is it's your primary job and you put in at least 750 hours. Anybody in real estate knows that, that's a real estate professional. If your spouse qualifies, you both qualify, love it. Primary occupation is real estate, contractor, realtor, broker, whatever, and 750 hours a year, you're a real estate professional. Then when I was at this case at the IRS Service Center on 400 South in Salt Lake City, Matt, it was like awesome case. It was the, you know, steel table, cold room with VC tile, and there was a hot lamp on my client. You know, it was, I mean, it was a classic, right? And the IRS agent said, He's a broker with 30 agents. I mean, he was a real estate professional in every sense of the word. And he had 32 rental properties. And they're like, you don't materially participate. You have a property manager with all those properties. So you're not doing the work, you're not doing 100 hours, you're not doing this, that, because all these other people put more time in than you. And they disallowed all of his depreciation. So now this was about 15 years ago. It was an awesome case. I've written about it and talked about it a lot. And I said, well, Mr. IRS agent, we have 7 ways he can materially participate and we're going to make the 469 election and group this 32-property scenario where all as a group, he can now qualify under one of these 7. So I chose one of the 7. We grouped the properties, case over, we won. And that was an example of how a real estate professional can grab the write-off if they qualify as a real estate professional, but they still have to hit material. With short-term rentals, you don't have to be a real estate professional.

Yes. Okay. That's the big— yeah, that's the big takeaway is the long-term rentals. You've got to have both of those things, material participation and be a real estate professional. But short-term, you just need to satisfy this material participation that we've been talking about, and that unlocks it. But other stuff, the equipment examples you've been giving, Mark, those, it doesn't matter what your primary occupation is.

Right. And some of you may go—

You still have to get the hours.

Yeah. You just have to worry about one of the 7 tests, 'cause who cares if you're a real estate professional? 'Cause you're renting things in less than a 7-day format in all of those examples, or you've got an active trade or business. So you just need to hit one of those 7. Now, some of you might go, well, why is this short-term rental strategy called a loophole? People, the IRS moves at the speed of, Well, I don't know. They move so slow. And 10 years ago, short-term rentals didn't even exist. How many of you 10 years ago had a VRBO or Airbnb app on your phone? No one did. And so there's just been this period of time where the IRS and regs have not caught up yet and put the short-term rentals in the same bucket. As long-term rentals. The short-term rental is in the bucket of a bed and breakfast. That's the rule for bed and breakfast. And so—

And it kind of looks like that too, though. I mean, I think that's okay. It's true that they're behind, but it looks a lot like that. And it has more intensive work and management involved than the long-term rental too. So I think there's an argument it could stay there too, but—

Yeah, I hope it stays.

Depending on who's in the White House and Congress.

Yeah. I love it. So, well, Matt, I'm glad you provided that scenario, an example to get the distinction there.

And so let's hit a couple of things just to illustrate this, to make sure. I'm pitched an investment now. What should I be thinking about? They're starting to tell me you're going to get all these losses, Matt. You're going to use it on your— it's going to reduce your income. You're going to start going, what do I need to be thinking about? Okay, I need to be thinking about these, the 7 tests and the 3 Mark talked about.

No, no, no. I'm going to take a different place. I, I, I'm going to say number 1, I'm going to write these down too. Does the investment make sense without the tax benefit? Number 1, we talked about already.

Yeah. Yeah.

I'm just saying, what's the checklist? Okay. I'm just saying, what's the checklist? When anybody comes and pitches you, A strategy, say, okay, take the tax strategy off the table. Does it make sense? That's number 1. Okay, cool. Number 2, is there debt involved? And you want to tell them, show me where there's recourse debt and how I get a write-off bigger than the amount of investment I'm putting in. Tell me where the debt is and how that is dealt with in the future, 'cause that's recourse debt. I'm going to have to come to the plate And if it gets forgiven, I have debt forgiveness income. I don't need a 1099-C for cancellation of debt. Now I'm paying taxes on the strategy I employed. So I don't need that. So if you can get those two answers, then number three, say—

Can I, can I?

Yeah, go ahead.

Can I jump in there? It's just like, I'm just kind of telling you guys, the only way your write-off is going to be greater than the amount you invested is if you're taking on debt. Bonus depreciation, all this other stuff, only gets you to the value of the asset, not more. It's not going to go over 100% of the value of the asset. So how do I buy more assets? If I put in $100K in Mark's example and I got a $300,000 write-off, they bought $300,000 worth of equipment. How did they do that? They got debt. How are you able to get the write-off? You guaranteed that debt, otherwise you don't get to take it. Now, so if they say, well, we're getting the debt, don't worry about it. Well, if I'm getting the write-off, that's— there's somewhere buried in there that I'm liable for that, otherwise you can't legally take that Write-off, yeah.

Now I love it. Perfect way of explaining that. So number 1, does it make sense without the deduction? Number 2, is there debt involved and how is it handled in the long run? How do I deal with that and pay it back? There's another topic that there are 2, but oh my gosh. Number 3, ask the promoter, how do I materially participate? Show me how. And I want to know that those activities are qualified activities to count and how I am gonna literally clock those hours. Now, these promoters are onto this. They'll say, we have an app where you track your time. We have a little logbook where you track your time. Say, okay, that was cool. Show me what I'm doing that qualifies under regs for the test. Which test am I qualifying under? And what is the services I'm doing and how it's tracked? They better have a darn good answer. Now, if it sounds too good to be true, people, I would ask you to— and I'll tell you what really happens— but I would have you say, well, will you guarantee that those qualify? They are not going to do that. They're going to say, well, your accountant will. Now, they love to recruit accountants to come verify for their client that this qualifies, 'cause that accountant is going to sign the tax return. So these guys are off the hook, and your accountant now takes the heat if it doesn't qualify. And the taxpayer says, hey, if my accountant's going to sign off on it and you guys are going to make sure it has a good ROI, I'm all in, what the hell? Well, ask your accountant, and if they're a CPA, they have to disclose this. What is your commission on this deal? Because these promoters are paying the CPA, quote unquote, on the side, under the table, however the hell you want to say it, to sign off on these deals, and they're big money. I have literally had accountants call me and talk about the struggle they're facing ethically, that this is their major revenue source right now, is signing off on solar deals or whatever in the past, and they don't feel good about it, but they can't turn down the money. And there— it's a struggle. That's what's happening, people. So it's, it's too bad.

So yeah, so I think— and at the end of the day, I'll just say this too, even if that accountant's like, you know, let's say you do get audited and you lose, guess who's paying the tax? If your return gets adjusted, you are. You might have a beef with your accountant and maybe they got, you know, or malpractice or— but that's actually very hard to win from a tax, like an individual client taxpayer against your tax professional. It's actually a very hard case. So if you lose, that's your butt on the line and you're the one paying that tax. Back because the loss gets disallowed.

Yeah, great point, Matt. Well, everybody, I am so sorry if we burst your bubble, whatever you want to say, but be careful chasing these write-offs. There are solid long-term Good tax planning strategies out there. Be careful what you agree to do. And I'm going to say one of the best is not pay tax anyway in the first place. Let your retirement account do the deal. Then you don't even have to plan around this kind of stuff. If you're chunking, creating Roth IRAs and Roth 401(k)s every year, there'll be a tipping point where your tax-free money is bigger than your after-tax money. And when that happens, people, it is incredible. And we have thousands of clients that have made that shift in a directed IRA. And we have a sister podcast called the Directed IRA Podcast. And go check it out because what that's all about is avoiding this whole problem to begin with.

Yeah, let us know where we can help there. We want to— if you're like, what the hell are they talking about? Well, we have another whole entire podcast on this. We've both written on it, have books on the topic, and a company helping tens of thousands of clients every day doing that. And of course, our law firm, KQS Lawyers— if you need a check on this to be like, hey, what— I need some real tax strategies, I need a reality check on some of the things I'm trying to do or I'm hearing— that's what we're doing every day with our clients at KQS Lawyers. You can book a comprehensive tax and business consult with one of our lawyers where we go over your specific situation and real strategies that could create create real savings for you on your tax return.

Thanks everyone for spending your valuable time with us. We'll be here next week and even more frequently, uh, doing open forum, uh, answering open forums, answering your questions. So please, uh, give us a like, a follow, and stay tuned for future episodes that will help you better live your American dream. Thanks.