Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

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Derivative
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Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Derivative » Wed Dec 06, 2017 12:44 pm

I have a church friend who owns a small (less than 1000 sq ft) computer/cell phone/electronics repair & sales/trade store buys a lot of stuff because he want's to reduce his tax liability. He is in a huge amount credit card debt, has no money in his retirement accounts (due to no savings), is in his late 50's, and is still buying a bunch of stuff. I am seeking help for him because his wife is very distressed and she has already taken out a second mortgage on their home to give him money to run his business. He makes less than 50k a year and spends everything on stuff (new phones, electronics, eating out, new computers, new gadgets, etc.). His garage and home is filled with some of the stuff from his past business locations that he is now no longer using (or them becoming obsolete) or not having sold. He is the only employee and his financial net worth is less than 300k (all in house equity) with no savings or retirement account savings. The friend has only a high school degree from Korea. His wife has been fighting with him over 20+ years to stop running his business (due to no money/savings) and instead wants him to work as an employee but he doesn't want to.

Is my friend's thinking flawed? His thinking is that he has to pay so much in taxes as a sole proprietor and that he may as well buy a lot of things with the money he earns than give it to the government.

To my knowledge, the deductions are minuscule compared to the amount you save by not buying things in the first place. I believe the deductions only reduce your tax liability by 15% or so percent? Can anyone give me the exact numbers and how I show hard numbers to my friend as to why NOT buying things and instead just paying the full amount in taxes nets you more money than buying things and claiming them as (business) deductions?

Thank you so much!
Last edited by Derivative on Wed Dec 06, 2017 1:06 pm, edited 2 times in total.

HIinvestor
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by HIinvestor » Wed Dec 06, 2017 12:50 pm

Yes, your friend’s thinking is very flawed. He’s paying all kinds of interested on the 2nd mortgage and his CCards for the very high interest rates. Paying taxes because one has income seems preferable to paying exhorbitant interest rates to CCard companies.

Rwsavory
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Rwsavory » Wed Dec 06, 2017 12:52 pm

Yes, obviously your friend's thinking is flawed. Running a "business" with the main objective to avoid income tax is counterproductive. Would I rather make $10,000 and pay a percentage of that to the government, or just spend the 10K on things that I don't need? The answer is obvious.

All that being said, good luck trying to talk your friend out of his magical thinking. You can put all the numbers in front of folks like this and it still won't do any good. You are a good friend for trying, however.

Derivative
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Derivative » Wed Dec 06, 2017 12:53 pm

HIinvestor wrote:
Wed Dec 06, 2017 12:50 pm
Yes, your friend’s thinking is very flawed. He’s paying all kinds of interested on the 2nd mortgage and his CCards for the very high interest rates. Paying taxes because one has income seems preferable to paying exhorbitant interest rates to CCard companies.
Okay what if he doesn't have any CC debt/2nd mortgage? I am assuming that buying things would not very be a good investment vs paying taxes and saving the money he earns?

miamivice
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by miamivice » Wed Dec 06, 2017 12:54 pm

Money spent on non-business expenses does not reduce one's tax liability.

The money he spends on things that are considered business expenses reduce the income tax he has to pay, but only by his marginal tax rate. For example, a $100 business expenses reduces his taxes by $100 * .15 (if he is in the 15% tax bracket) or $15.

The larger issue is that if he is buying things he does not need and calling them business expenses, that is misapplication of tax code (tax fraud). Only items necessary for the business can be used as a tax write off against business income.

Derivative
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Derivative » Wed Dec 06, 2017 12:55 pm

Rwsavory wrote:
Wed Dec 06, 2017 12:52 pm
Yes, obviously your friend's thinking is flawed. Running a "business" with the main objective to avoid income tax is counterproductive. Would I rather make $10,000 and pay a percentage of that to the government, or just spend the 10K on things that I don't need? The answer is obvious.

All that being said, good luck trying to talk your friend out of his magical thinking. You can put all the numbers in front of folks like this and it still won't do any good. You are a good friend for trying, however.
His thinking is that he sees it as an investment in his business and that he is buying them to use for his business and/or to sell. When would it be logical for him to buy all of these new electronics/gadgets?

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by CaliJim » Wed Dec 06, 2017 12:59 pm

When?

When he can make >50% gross margin on each purchase.
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miamivice
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by miamivice » Wed Dec 06, 2017 1:00 pm

Derivative wrote:
Wed Dec 06, 2017 12:55 pm
Rwsavory wrote:
Wed Dec 06, 2017 12:52 pm
Yes, obviously your friend's thinking is flawed. Running a "business" with the main objective to avoid income tax is counterproductive. Would I rather make $10,000 and pay a percentage of that to the government, or just spend the 10K on things that I don't need? The answer is obvious.

All that being said, good luck trying to talk your friend out of his magical thinking. You can put all the numbers in front of folks like this and it still won't do any good. You are a good friend for trying, however.
His thinking is that he sees it as an investment in his business and that he is buying them to use for his business and/or to sell. When would it be logical for him to buy all of these new electronics/gadgets?
I have no idea whether buying these new electronics/gadgets is a good choice or not.

But if he is not selling the inventory and it's simply accumulating in his garage, it's probably not correct application of tax code to use those purchases to reduce taxes.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by smitcat » Wed Dec 06, 2017 1:01 pm

Derivative wrote:
Wed Dec 06, 2017 12:55 pm
Rwsavory wrote:
Wed Dec 06, 2017 12:52 pm
Yes, obviously your friend's thinking is flawed. Running a "business" with the main objective to avoid income tax is counterproductive. Would I rather make $10,000 and pay a percentage of that to the government, or just spend the 10K on things that I don't need? The answer is obvious.

All that being said, good luck trying to talk your friend out of his magical thinking. You can put all the numbers in front of folks like this and it still won't do any good. You are a good friend for trying, however.
His thinking is that he sees it as an investment in his business and that he is buying them to use for his business and/or to sell. When would it be logical for him to buy all of these new electronics/gadgets?
I ridiculous conversation all the way around.
Yes- he would be much better off being am employee somewhere. But after so many years of this pattern I doubt you are going to make a dent in this situation other than get him really angry at you.

Derivative
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Derivative » Wed Dec 06, 2017 1:01 pm

Rwsavory wrote:
Wed Dec 06, 2017 12:52 pm
Yes, obviously your friend's thinking is flawed. Running a "business" with the main objective to avoid income tax is counterproductive. Would I rather make $10,000 and pay a percentage of that to the government, or just spend the 10K on things that I don't need? The answer is obvious.

All that being said, good luck trying to talk your friend out of his magical thinking. You can put all the numbers in front of folks like this and it still won't do any good. You are a good friend for trying, however.
Basically I think he is spending too much on his business and on buying stuff for his business. He is basically putting all of the money he earns back into his business and many of the things he buys he ends up not really using or not being able to sell to customers. Is an electronics sales/repair business a sinkhole for many entrepreneurs to spend as they want?

PVW
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by PVW » Wed Dec 06, 2017 1:03 pm

Sounds like your friend is a compulsive hoarder and the tax write-off is just the excuse. You can't fix compulsive hoarding with logic. If you want to help, then your best avenue might be to provide support to his wife and suggest some counseling resources.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Inframan4712 » Wed Dec 06, 2017 1:03 pm

Friend sounds like a hoarder.

racy
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by racy » Wed Dec 06, 2017 1:05 pm

I'd give up on him and encourage his wife to get a job & save/invest herself. I feel sorry for her.

KlangFool
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by KlangFool » Wed Dec 06, 2017 1:05 pm

OP,

With Solo/Individual 401K, he would not have to pay tax on his small business income. So, why is he spending money to save tax?

KlangFool

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Dottie57 » Wed Dec 06, 2017 1:07 pm

Think you friend has a spending problem and uses his business as an excuse to spend.

Derivative
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Derivative » Wed Dec 06, 2017 1:07 pm

KlangFool wrote:
Wed Dec 06, 2017 1:05 pm
OP,

With Solo/Individual 401K, he would not have to pay tax on his small business income. So, why is he spending money to save tax?

KlangFool
I don't think he knows about the solo/individual 401k or maybe thinks that investing is riskier. I know that he only picked individual stocks before and lost a lot of money in them before. I will ask him if he knows the solo 401k.

Is there any other things that I can get him to do that he can "spend" (i.e. invest) on that will result in him increasing his net worth vs. decreasing his net worth?

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by KlangFool » Wed Dec 06, 2017 1:15 pm

Derivative wrote:
Wed Dec 06, 2017 1:07 pm
KlangFool wrote:
Wed Dec 06, 2017 1:05 pm
OP,

With Solo/Individual 401K, he would not have to pay tax on his small business income. So, why is he spending money to save tax?

KlangFool
I don't think he knows about the solo/individual 401k or maybe thinks that investing is riskier. I know that he only picked individual stocks before and lost a lot of money in them before. I will ask him if he knows the solo 401k.

Is there any other things that I can get him to do that he can "spend" (i.e. invest) on that will result in him increasing his net worth vs. decreasing his net worth?
Derivative,

1) He does not have to invest in his Solo/Individual 401K account. It could be in a money market fund.

2) In fact, his income is low enough that he may qualify for the tax credits if he contributes to Solo/Individual 401K. So, he may get tax refund instead of pay taxes.

3) But, there may be a deeper cultural issue here. Unless you are a respected and senior ranking member of his society/church/family, he won't listen to you. He definitely would not listen to his wife. Your best bet is to ask the church minister to talk to him.

KlangFool
Last edited by KlangFool on Wed Dec 06, 2017 1:16 pm, edited 1 time in total.

ResearchMed
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by ResearchMed » Wed Dec 06, 2017 1:15 pm

Derivative wrote:
Wed Dec 06, 2017 12:53 pm
HIinvestor wrote:
Wed Dec 06, 2017 12:50 pm
Yes, your friend’s thinking is very flawed. He’s paying all kinds of interested on the 2nd mortgage and his CCards for the very high interest rates. Paying taxes because one has income seems preferable to paying exhorbitant interest rates to CCard companies.
Okay what if he doesn't have any CC debt/2nd mortgage? I am assuming that buying things would not very be a good investment vs paying taxes and saving the money he earns?
What is his/their goal?

To accumulate storage sheds of "stuff", including probably mostly stuff that seriously DEpreciates to almost nothing some years into the future?

OR to minimize the amount of taxes paid, no matter what?

OR to accumulate some savings (actual money/investments that have a good likelihood of holding value or appreciating) to use for retirement or other emergencies?

Most people have this last as at least part of their financial goal, even if they aren't particularly successful in meeting that goal.

Does your friend actually understand finance, savings, investments (including simple bank accounts/CD's), and the need to have money when one is older (um, including his wife, when she is older)?

Any chance he has some sort of "hoarding" disorder?

RM
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by smitcat » Wed Dec 06, 2017 1:46 pm

Derivative wrote:
Wed Dec 06, 2017 1:07 pm
KlangFool wrote:
Wed Dec 06, 2017 1:05 pm
OP,

With Solo/Individual 401K, he would not have to pay tax on his small business income. So, why is he spending money to save tax?

KlangFool
I don't think he knows about the solo/individual 401k or maybe thinks that investing is riskier. I know that he only picked individual stocks before and lost a lot of money in them before. I will ask him if he knows the solo 401k.

Is there any other things that I can get him to do that he can "spend" (i.e. invest) on that will result in him increasing his net worth vs. decreasing his net worth?
After 20 years I doubt this is a good fight....but fwiw
- solo 401K
- Roth
- HSA
Are good places to start.

MrJones
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by MrJones » Wed Dec 06, 2017 1:53 pm

Rwsavory wrote:
Wed Dec 06, 2017 12:52 pm
All that being said, good luck trying to talk your friend out of his magical thinking. You can put all the numbers in front of folks like this and it still won't do any good. You are a good friend for trying, however.
+1. Your friend sounds like a compulsive hoarder. Presenting a logical argument is unlikely to change his habits. A counselor or psychologist might help.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by goblue100 » Wed Dec 06, 2017 1:58 pm

Derivative wrote:
Wed Dec 06, 2017 1:07 pm

Is there any other things that I can get him to do that he can "spend" (i.e. invest) on that will result in him increasing his net worth vs. decreasing his net worth?
Yeah, paying off the credit card debt. No other use of the money will be as beneficial.

My suspicion is the wife is working and subsidizing the business, which is actually losing money. She should cut him off from her funds and get rid of the credit cards, and let his business sink or swim on its own merits. He might not find the need to buy so much stuff.
Some people are immune to good advice. - Saul Goodman

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by bottlecap » Wed Dec 06, 2017 2:03 pm

Derivative wrote:
Wed Dec 06, 2017 12:44 pm
He is in a huge amount credit card debt, has no money in his retirement accounts (due to no savings), is in his late 50's, and is still buying a bunch of stuff.
I would say that this is proof positive that his thinking is flawed.

JT

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by edge » Wed Dec 06, 2017 2:29 pm

deeply flawed

aristotelian
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by aristotelian » Wed Dec 06, 2017 2:30 pm

A simple way to explain it is that each 15 or 25 cents he is saving in taxes is costing him a dollar in useless items. If I gave him a quarter, would he give me a dollar? No!

Now, this would be a reasonable strategy if the items somehow turned into business profit and he got the dollar back in revenue, but that does not appear to be the case here.

It does sound like he needs help, both individually and as a couple (because she is enabling him with the second mortgage). I fear divorce is in their future.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by greg24 » Wed Dec 06, 2017 2:50 pm

His entire financial life it messed up, not just buying stuff in a misguided attempt to reduce tax liability.

Good luck.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by englishgirl » Wed Dec 06, 2017 3:17 pm

If he's not making a profit consistently, then doesn't he risk the IRS regarding his business as a "hobby" and then he would not be able to deduct any losses beyond the business/hobby income. See: https://www.irs.gov/newsroom/is-your-ho ... t-endeavor

His thinking is messed up. I mean, I buy stuff for my business, and yay, I get to write off those expenses. But I hope to be able to sell the inventory, and get annoyed if I have to bring it home when it has expired and either try to use it up myself or discard it. It can easily get to the point where there is too much stuff for me to be able to get through it. Anything that ends up in the garbage is a complete waste of money and resources. It is much better if I limit my spending on stuff and keep my inventory down to levels that I can actually sell. If I really want a tax deduction, I'd much rather put the money in my SEP-IRA or spend it on things that are absolutely necessary for me to keep running my business (rent, phone, insurance, supplies, education, license fees).

Here's an example of things you can do if you're selling things. Let's say you invest $5 of own money into inventory. You sell that inventory for $10 to customer A, making a profit of $5. Let's also say the tax rate is 25%. What do you think is the better option?

Option a) pay $1.25 tax (25% of profit), put $8.75 back into pocket and walk away. Net profit = $3.75. This is not a business, it's a one off sale. But hey! you made a profit, so that's nice.
Option b) pay $1.25 tax (25% of profit), put $5 back into business by buying more inventory. Net profit into pocket = $3.75. Repeat as often as possible to keep generating profits that you can live on. This is a business. Yes, you pay tax as you go along, but you're generating money for groceries.
Option c) use the $10 you have on hand to buy $10 of inventory, sell to customer B for $20. You now have $20 for your $5 initial investment, but you've got expenses of $15 you can write off on your taxes. So your profit is still $5, on which you pay $1.25 tax. But you can reinvest $20 into more inventory and repeat as often as possible so the money keeps rolling in. This is also a business. Again, you're paying taxes as you go along, and you may forego taking money out to put into your pocket for a while, but as you start to grow and churn more profits, pretty soon you can afford a new car on top of groceries.
Option d) spend $10 on stuff and have it sit in garage to write off as a business expense. No profit, no taxes, no money in your pocket. No business.
Sarah

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Sandtrap
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Sandtrap » Wed Dec 06, 2017 3:26 pm

One of the business owner "myths" to those not familiar with business is the ability to "write off" expenses so deeply that the deduction is equal to or greater than the purchase price of the goods or service.
It makes zero sense, yet the myth endures.
j :D

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Watty » Wed Dec 06, 2017 3:27 pm

PVW wrote:
Wed Dec 06, 2017 1:03 pm
Sounds like your friend is a compulsive hoarder and the tax write-off is just the excuse. You can't fix compulsive hoarding with logic. If you want to help, then your best avenue might be to provide support to his wife and suggest some counseling resources.
+1

His wife might want to talk to a lawyer too about how she can protect herself since if he dies or they get divorced she will likely be stuck with all of his debt. The details of what she can do will vary greatly depending on her state laws.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by rec7 » Wed Dec 06, 2017 7:16 pm

He could put all the money in a no interest checking account. That way he would have all the money and no tax liability. He does not have to spend it.
But paying down all his debt is a much better idea. Then he could move on to the no interest checking account if he is so worried about tax liability. All of this can be done with 0 taxes.
Last edited by rec7 on Wed Dec 06, 2017 7:33 pm, edited 3 times in total.
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Thesaints » Wed Dec 06, 2017 7:22 pm

How is your friend saving on taxes by "buying stuff". If he deducts cost as a business expense (lunches too ?) he better have an authentic business operation in place. Business with the only objective of creating losses can be construed as fraud by the IRS and, anyway, businesses which have no reasonable expectation of producing a profit cannot generate tax deductions.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by WhiteMaxima » Wed Dec 06, 2017 7:30 pm

Capital depreciation write off to save tax. But goods purchased loose it's value. Save tax by wasting money? Don't understand.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Carefreeap » Wed Dec 06, 2017 8:06 pm

Sandtrap wrote:
Wed Dec 06, 2017 3:26 pm
One of the business owner "myths" to those not familiar with business is the ability to "write off" expenses so deeply that the deduction is equal to or greater than the purchase price of the goods or service.
It makes zero sense, yet the myth endures.
j :D
:thumbsup

And the tip off of the flawed thinking is that they are in CC debt and apparently living off the equity of their home.

This is not going to end well.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Sandtrap » Wed Dec 06, 2017 9:18 pm

Carefreeap wrote:
Wed Dec 06, 2017 8:06 pm
Sandtrap wrote:
Wed Dec 06, 2017 3:26 pm
One of the business owner "myths" to those not familiar with business is the ability to "write off" expenses so deeply that the deduction is equal to or greater than the purchase price of the goods or service.
It makes zero sense, yet the myth endures.
j :D
:thumbsup

And the tip off of the flawed thinking is that they are in CC debt and apparently living off the equity of their home.

This is not going to end well.
I've been in business for most of my life up through retirement and I have always heard it from non-business (wage earners) or otherwise, "you can afford it, you can "write it off"". As if I can buy more trucks for my crews or additional appurtenances for my buildings for "free", because it's a "write off". I have heard this from university professors, upper level career gov't workers, etc, and many who are "smart".
Incredibly, I have also seen this with new business owners or fledglings. . . prosperity happens, then there's a buying spree. . . until the bills come due.
Apparently the financial logic inherit in Bogleheadville as "common sense" is not so common.
Actionably: I think that in the "wage earner" world and newbie business world, having "business deductions" is as mysterious as asset allocation in investment finance. We discuss it here. As Bernstein had pointed out, many do better with a FA and paying AUM fees than on their own. Perhaps there's the same relationship to newbie or uninformed business owners.. . at least until the bills are due.
Is this the same logic as folks who have to have a mortgage so they can "write off" the interest?
j

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by MrPotatoHead » Thu Dec 07, 2017 1:22 am

It depends on the implementation. I have several very wealthy clients who do something analogous. However they do not buy rapidly depreciating assets and buy capital assets. They amount of income they realize is what they need not what they earn, they plow the difference into business assets.

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Afty » Thu Dec 07, 2017 2:16 am

Sandtrap wrote:
Wed Dec 06, 2017 3:26 pm
One of the business owner "myths" to those not familiar with business is the ability to "write off" expenses so deeply that the deduction is equal to or greater than the purchase price of the goods or service.
It makes zero sense, yet the myth endures.
j :D
Obligatory Seinfeld reference:
https://youtube.com/watch?v=XEL65gywwHQ

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by MrJones » Thu Dec 07, 2017 2:22 am

Afty wrote:
Thu Dec 07, 2017 2:16 am
Obligatory Seinfeld reference:
https://youtube.com/watch?v=XEL65gywwHQ
Hahaha, I was just going to post this. Such a classic!

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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by SrGrumpy » Thu Dec 07, 2017 2:31 am

Derivative wrote:
Wed Dec 06, 2017 12:44 pm

... his wife is very distressed and she has already taken out a second mortgage on their home to give him money to run his business ... The friend has only a high school degree from Korea. His wife has been fighting with him over 20+ years to stop running his business (due to no money/savings) and instead wants him to work as an employee but he doesn't want to.
If he's Asian, the concept of "face" may play a role in his behavior. But seeing that the wife has enabled him by taking out a second mortgage, and has spent 20 years trying to change him, you are wasting your time getting involved.

jcf
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by jcf » Thu Dec 07, 2017 2:37 am

Looks like a candidate for Marcus Lemonis to come in and talk about "Profit"

Thesaints
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Thesaints » Thu Dec 07, 2017 2:44 am

Sandtrap wrote:
Wed Dec 06, 2017 3:26 pm
One of the business owner "myths" to those not familiar with business is the ability to "write off" expenses so deeply that the deduction is equal to or greater than the purchase price of the goods or service.
It makes zero sense, yet the myth endures.
j :D
H.R.1, as passed by the Senate, makes it a reality for 2018. :)

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catdude
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by catdude » Thu Dec 07, 2017 4:05 am

Many years ago I heard a story about a small business owner who was too cheap to hire a bookkeeper or accountant. He handled the books himself. Out of ignorance, he expensed all of his inventory rather than carrying it as an asset on his balance sheet. This substantially inflated his expenses and reduced his taxable income -- ergo, much less income tax owed. Then he got audited by the IRS. They flagged the inventory issue and re-calculated his taxable income and tax liability. The IRS sent him a big tax bill, which he was unable to pay. His business went under.

OP, do you know if your friend is recording his inventory as a current expense? That's what it sounds like he's doing. If so, he could get audited someday and his efforts to avoid taxes could be an exercise in futility.
catdude | | You know you're getting old when you start looking for a smaller house with a bigger medicine cabinet.

ENT Doc
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by ENT Doc » Thu Dec 07, 2017 5:17 am

Bad logic. Tail wagging the dog or actually more pathologic as others have noted. Klangfool's recommendation regarding the church minister is a great one.

Longdog
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Longdog » Thu Dec 07, 2017 5:18 am

From what you’ve written, your friend is a financial mess as a result of a lifetime of bad decisions. He has zero credibility on financial matters. I agree with others who’ve said he is likely a hoarder.
Steve

GoldenFinch
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by GoldenFinch » Thu Dec 07, 2017 5:52 am

Longdog wrote:
Thu Dec 07, 2017 5:18 am
From what you’ve written, your friend is a financial mess as a result of a lifetime of bad decisions. He has zero credibility on financial matters. I agree with others who’ve said he is likely a hoarder.
Also if your friend is in his 50s and not the one seeking advice, you are likely talking to a wall. I do feel sorry for his wife. This couple is another example of the dangers that can occur when both members of a marriage don't work together as a team regarding their finances. Even when one spouse runs the show, the other needs be fully informed and agree with the approach. I agree with Longdog, what a mess!

mouses
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by mouses » Thu Dec 07, 2017 6:11 am

Watty wrote:
Wed Dec 06, 2017 3:27 pm

His wife might want to talk to a lawyer too about how she can protect herself since if he dies or they get divorced she will likely be stuck with all of his debt. The details of what she can do will vary greatly depending on her state laws.
An honest lawyer or some type of financial person knowledgeable about the law. If I were her I would immediately stop subsidizing his "business" and try to put her savings into something he can't touch and bankruptcy or his death can't touch.

Assuming he won't listen to the OP and there is some cultural difference here, is there anyone he might listen to? Hard to know how much of this is ignorance and how much is hoarding.

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Sandtrap
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Sandtrap » Thu Dec 07, 2017 10:34 am

SrGrumpy wrote:
Thu Dec 07, 2017 2:31 am
Derivative wrote:
Wed Dec 06, 2017 12:44 pm

... his wife is very distressed and she has already taken out a second mortgage on their home to give him money to run his business ... The friend has only a high school degree from Korea. His wife has been fighting with him over 20+ years to stop running his business (due to no money/savings) and instead wants him to work as an employee but he doesn't want to.
If he's Asian, the concept of "face" may play a role in his behavior. But seeing that the wife has enabled him by taking out a second mortgage, and has spent 20 years trying to change him, you are wasting your time getting involved.
"Face" is not only a consideration but an entire ethos. Various cultures "compartmentalize" at different levels. Western-Euro cultures, moreso.
While this is somewhat off-thread, it is still an important consideration.
Actionably, it pays to consider cultural differences (not nec. ethnicity) in business and investment finance. Western-Euro is not Japanese is not Korean is not Vietnamese is not Filipino is not Taiwanese, is not Mainland China, is not Hong Kong, is not Vietnam. . etc. It's about communication and how each defines their word base. "Money", "Wealth", "Riches", "Debt", etc, are defined per culture.
Thus, it shows up even in portfolio review and finance advice on the forum and must always be considered for best communication to benefit everyone.
j :D

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greg24
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by greg24 » Thu Dec 07, 2017 10:46 am

Sandtrap wrote:
Wed Dec 06, 2017 9:18 pm
I've been in business for most of my life up through retirement and I have always heard it from non-business (wage earners) or otherwise, "you can afford it, you can "write it off"".

Is this the same logic as folks who have to have a mortgage so they can "write off" the interest?
The same people who insist that entering a higher tax bracket means you have less take home. They think an additional $100 in income results in $500 in taxes. :oops:

Nowizard
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by Nowizard » Thu Dec 07, 2017 10:49 am

Flawed thinking, but if he is planning to claim what turns out to be an approved bankruptcy and the debts are business related, it could influence the overall situation.

Tim

barnaclebob
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Re: Friend buys a lot of stuff because he want's to reduce his tax liability. Is this thinking flawed?

Post by barnaclebob » Thu Dec 07, 2017 11:03 am

Sadly you wont be able to help. In order for him to change his ways he'll have to accept that the last 20 years of his life have been a waste. How would you react to someone trying to convince you that the church you both attend is just a place where lies are spread? That's what you are up against.

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