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Chapter Six

You Can Deduct Almost Anything

“I would like to electrocute everyone who uses the word “fair” in connection with income tax policies.”

– William F. Buckley, Jr.

Stop Being Average

Taxes aren’t fair to the average taxpayer. Just who is the average taxpayer? The average taxpayer has a job, a family, and a mortgage or rent. The average taxpayer has little to no financial education. The average taxpayer gets his advice from CNN and H&R Block. The average taxpayer’s only available tax benefits are the standard deduction or a few itemized deductions, such as home mortgage interest and charitable contributions. Oh, and, of course, a 401(k) or IRA in the U.S. or RRSP in Canada to postpone a portion of their tax burden until retirement.

The reality is that average taxpayers have average tax benefits. Average taxpayers come to me from time to time asking for my advice. They ask how they can reduce their taxes. Should they put more into their 401(k)? Should they buy a bigger house? While they’re at it, should they have more children?

The reality is that average taxpayers have average tax benefits.

My answer to these folks is that as long as they’re living the life of an average taxpayer, there’s nothing much I can do for them. The solution is to stop being average. Instead, become an above-average or super taxpayer. Start doing what Congress or Parliament wants you to do by contributing more to the economy. The good news is that you’re on your way to becoming a far better than average taxpayer just by reading this book. You’re gaining financial intelligence with each page you read. When you apply the concepts you learn here, you’ll really take off.

My answer to these folks is that as long as they’re living the life of an average taxpayer, there’s nothing much I can do for them. The solution is to stop being average.

Like most professionals, I started advising people on what to do regarding their taxes long before I followed my own advice. Even before finishing graduate school, I gave people tax advice. I told business owners how to reduce their taxes even though I didn’t own a business. I told real estate investors how to increase their deductions long before I owned any real estate of my own. Was the advice good? Sure. I was a smart kid who’d applied himself at school and learned the law. Was the advice great? No.

How could I possibly give great advice to other people when I’d never applied what I’d learned in school to my own situation? It wasn’t until I started my own business and later began investing in real estate that I really began giving great advice to business owners and investors. Once I applied my knowledge in my own life, I finally understood my clients’ businesses and gave them top-notch advice. The more I personally applied my knowledge, the better I became at giving advice to others.

The same will be true for you. Once you start applying the concepts of this book in your own life, you’ll start to see how it all works. Once you begin reaping the rewards of lower taxes and more cash flow, you’ll better understand what you’ve learned while at the same time reaping all the benefits of your knowledge. That’s called wisdom.

So what’s the first step to becoming a super taxpayer? Understanding rule #6.

RULE #6:

You can deduct almost anything given the right circumstance.

It’s true. Almost any expense can be deductible from your income given the right situation. How can that be possible? It’s how the law works. Remember when I said that the tax laws favor entrepreneurs and investors? That’s because entrepreneurs and investors generally put money into the economy to produce rather than consume. The key to making an expense deductible is to make it a business or investment expense. As long as the purpose of the expense is to produce more income, it can be deductible.

If the purpose of the expense is to produce more income, it can be deductible.

And yes, this principle applies worldwide. All income taxes in developed countries are based on net income, which is simply income after deductions. And deductions come from expenses. Business expenses are the best kind of deductions. Real estate expenses are the next best. Depending on your country, chances are that expenses relating to energy are good as well. Even expenses related to investing in the stock market may be partially deductible, though these are the least deductible because they aren’t active investments.

Your first step to increasing your deductible expenses is to become an entrepreneur or investor. Until you take this step, you’ll always be an average taxpayer and the tax laws will be stacked against you. The good news is that you don’t have to quit your job. You just have to start acting like an entrepreneur or an investor. That means the first thing you need to do is to increase your financial intelligence by investing in financial education. Starting a business or investing in a deal without financial education is the riskiest action you can take with respect to your money.

Become an Entrepreneur

Here’s my advice whenever starting out: Start small. Take a course in real estate or some other type of investing. Take a course in entrepreneurship. Start a home-based business—preferably dealing with something you know about.

That’s how I got started. Many years ago, after I’d left public accounting and became the in-house tax advisor for a Fortune 1000 company, I decided to go back into public accounting. I missed the clients, and I missed the challenge. But in that transition I made a bad decision and took the wrong job with the wrong company. Seven months later, I was fired. For the first time in my life, I’d failed at a job, and a job had failed me. It turned out to be one of the best days of my life.

I suddenly realized that not having a job freed me up to do what I’d always wanted to do—start my own business. I had a master’s degree and 13 years of experience as a tax advisor. It was time to start my own firm. With the encouragement of my wife and two young sons, I did just that, starting my firm out of my house. I worked 10 hours a day to make contacts and build my practice. It took me nine months just to get my first four clients. Since then, I’ve never looked back. I’ve never been happier in my work. And I’ve never paid less in taxes.

I’m not suggesting you get fired or quit your job. But I am suggesting that you probably have a set of marketable skills that you could use to start your own business. Start part-time. Set aside a room in your house for your business. Don’t spend money on a nice office and lots of advertising. Just start small and think big. Think about the freedom that will come when you can devote most, if not all, of your time to your business, your investments, and your family.

And it all starts with good tax planning. When you start a business, your options for deductible expenses skyrocket. And making most of your expenses deductible is easy—make sure that when you spend money your intention is to make even more money. The U.S. tax law calls this having a business purpose for your expenses.

When you start a business, your options for deductible expenses skyrocket. And making most of your expenses deductible is easy—make sure that when you spend money your intention is to make even more money.

Then, be careful with your money. Don’t spend money on stupid stuff. Spend it on things that will likely grow your business. Spend it on things that other people in your business might buy. This is called making expenditures that are ordinary in your line of business. Make your expenses count. Make them work for you. When you do that, your expenses become necessary. And when your expenses are necessary, voilà, they’re deductible.

Become an Active Investor

Now let’s suppose that you don’t want to start a business but you still want to be a super taxpayer. What do you do? You become an investor. Remember that the right side of the CASHFLOW Quadrant includes both business owners and investors. But there’s one catch; you can’t be a typical investor if you’re going to enjoy the tax benefits of investing. You have to become an active investor. That means you have to be an investor who actively invests for passive income, not earned income. Very simply, passive income is income that comes from dividends, rents, and business. It’s taxed at a much lower rate than earned income, which comes from appreciation and capital gains, or from your paycheck. In order to become a super investor, you must find good, cash-flowing investments that produce passive income. A great book to read on this topic is the book Robert Kiyosaki and I wrote together, Why the Rich Are Getting Richer. (Plata Publishing, 2017)

Becoming an active investor is actually quite simple. Just as with becoming an entrepreneur, it all starts with your financial education.

You might be thinking that becoming an active investor sounds hard. It’s not. Becoming an active investor is actually quite simple. Just as with becoming an entrepreneur, it all starts with your financial education. You don’t need a four-year degree in finance. You don’t even need a two-year degree, but you do need to take some courses in the type of investing you think you might enjoy. Don’t know what you might like? Take a variety of courses on a variety of investments. Take a course in real estate. Take a course in stock investing. And take a course in business investing. You never know what you’ll like until you learn about it. A great resource for becoming an active investor is educational programs offered by The Rich Dad Company. Learn more at www.WealthAbility.com.

Once you have an idea of what type of investing you want to do, find a mentor or coach to help you with your investing. Then simply start investing. Just as I advised with starting a business, start small. Do one small real estate deal, a couple of small stock market trades, or make a small investment in a private company. You don’t have to risk a lot of time and money. And along the way, so long as you keep track of all of your education and investment expenses, and your tax preparer reports them properly, you should be able to deduct some or all of these expenses on your tax return.

The Passive Investor

There is one other type of super taxpayer. That’s the passive investor. And no, I’m not talking about the typical investor who invests in the stock market through a mutual fund or an exchange-traded fund (ETF). I’m talking about someone who invests their money with an active investor who is working directly in a business, real estate, agriculture or energy—the tax-preferred types of investments. Passive investors also enjoy the benefit of deducting many of their expenses. With the right tax strategy, they can even deduct losses from the investment against income they earn from other sources.

The key to good passive investing is a good team.

The key to good passive investing is a good team. You need a great investment advisor and a stellar tax advisor, as well as a good lawyer and a knowledgeable banker. All of these team members need to work together to make sure your best interests are met. I’ve found the best way to get team members to work well together is to hire a wealth strategist. This can be one of the advisors on the team or a separate strategist altogether. The strategist can work to maintain the relationships between you and the other team members.

In many countries, only certain individuals are allowed to be passive investors. In the United States, these individuals are called “accredited investors.” Accredited investors meet certain minimum wealth and earning guidelines set up by the government. In Australia these are called “sophisticated investors” or “professional investors.” There are always minimum wealth requirements and in some countries, there are additional certification rules. The thinking is that if you have enough money, you either have a high enough financial education to properly evaluate a deal or you can afford to lose some of your money. Either way, you qualify under the government guidelines for becoming a passive investor.

While the losses and expenses of a passive investor can be deductible, the rules can be a little tricky. If you’re thinking of going this route, be sure to sit down with your tax advisor and let him or her know what you are planning so that he or she can explain the rules to you and make sure you get the benefit of your expenses and losses.

Don’t Be Cheap with Your Team Members
1.	You often get what you pay for with team members.
2.	Low fees don’t translate into a good deal when it comes to advisors. A good team member is worth their weight in gold.

Document Everything

The last key to becoming a super taxpayer is documentation.

The last key to becoming a super taxpayer is excellent documentation. All good tax planning also leads to sound business and investment decisions. One of the best business or investment decisions you can make is to keep good documentation of your income and expenses. This means that you keep accurate books and records. Make sure your bookkeeping is up to date at least once each week. The more thorough and accurate your accounting, the better business and investment decisions you’ll make, and the less likelihood you will have difficulties in an audit.

TAX TIP:

Document. Document. Document. The IRS, Revenue Canada, the HMRC, ATO, and other tax collectors love documentation. Remember that if you pretend to document a deduction, you get a pretend deduction.

If you decide to start a business, even though you are starting small (as advised earlier in this chapter), think about your business as if it were one of the big dogs, such as IBM or Microsoft. Think about all of the good reporting they need to do in order to stay in business and to keep investors, bankers and management informed about what’s going on. You can do the same with your small, start-up business that you run out of your home office. When you do, chances are the IRS, CRA, or other tax officials will be in and out of your life quickly and painlessly if you’re ever audited. You’ll also have accurate financial information to help you to make wise and informed business and investment decisions. Best of all, your expenses will be deductible, and you won’t have to worry about whether the government will allow them. Why? Because you’ve followed the law exactly as it was meant to be applied.

The result will be lower taxes and less stress. So now you know what I mean when I say that almost every expense can be deductible under the right circumstances. Every time you spend money you can also reduce your taxes, whether it’s filling up your car at the gas station, going out to dinner with your spouse and business partner, or even going to New Mexico to look at real estate.

The basic difference between an average taxpayer and a super taxpayer is how serious they are about increasing their wealth. An average taxpayer turns his or her money over to someone else and hopes and prays that their investments go up in value. The super taxpayer is actively involved in creating wealth, either through actively investing in a business, real estate or the stock market or through actively seeking out active investors who will do that for them. Super taxpayers also build a great team of advisors, mentors and other relationships who actively help them build their wealth and reduce their taxes. Here’s a chart illustrating the basic difference between an average taxpayer and a super taxpayer. Pretty simple, isn’t it?

Next, we’re going to look at the king of all deductions, depreciation.

CHAPTER 6: KEY POINTS
1.	Most people are average taxpayers who only experience average tax benefits.
2.	The key to saving more in taxes is becoming a super taxpayer and enjoying the benefits of deductible expenses.
3.	The best way to enjoy deductible expenses is to start a business or to start investing for passive income. You don’t have to quit your job. Just start small.
4.	One of the best business and investing practices is to document your income and expenses, and to document them well.

Tax Strategy #6 – Document, Document, Document

Being able to immediately provide documentation upon request during an audit is always an impressive tactic. If your activities and expenses are properly documented, then the tax collector will have a hard time making a case for any changes. Plus, having your documentation in place reduces the amount of time your CPA bills you for an audit. Documentation is a successful defense strategy that enables you to always be ready for an audit and reduces the associated costs. Documentation of receipts has been made a lot easier with computers. Now, you can scan your receipts into your computer. This way, you don’t have to have a file drawer just for receipts and you don’t have to worry about them fading over time. Have you ever pulled out a credit card receipt that was a year or two old, only to find a blank piece of paper? This happens all the time. What if you were being audited and went to pull those receipts only to find they were all just blank pieces of paper. Be sure to scan the receipts into a file on your computer. The IRS loves it when they can just look at scanned receipts instead of going through faded paper receipts.

You will learn more about documentation in Chapter 22 when we talk about IRS audits. Just remember that this is one tax strategy you can do every day, and it doesn’t take much time or effort.