Bourbonnais Tax Associates LLC

𝗧𝗵𝗿𝗲𝗲 𝗧𝗵𝗶𝗻𝗴𝘀 𝗧𝗵𝘂𝗿𝘀𝗱𝗮𝘆 - 𝗘𝗽𝗶𝘀𝗼𝗱𝗲 𝟮𝟮
𝗧𝗵𝗲 𝗔𝘂𝗴𝘂𝘀𝘁𝗮 𝗥𝘂𝗹𝗲: 𝗧𝗮𝘅-𝗙𝗿𝗲𝗲 𝗥𝗲𝗻𝘁 𝗜𝘀 𝗥𝗲𝗮𝗹, 𝗕𝘂𝘁 𝗡𝗼𝘁 𝘁𝗵𝗲 𝗪𝗮𝘆 𝗧𝗶𝗸𝗧𝗼𝗸 𝗦𝗮𝘆𝘀

You have probably seen the video. Some supposed multi-millionaire bought a Ferrari using a tax trick involving his house. That version is nonsense. But underneath it is a strategy that is completely real and in the tax code.

It is the Augusta Rule, this week’s Three Things Thursday.

Section 280A(g) lets you rent your personal residence up to 14 days a year and pay no income tax on the rent. It is named for the homeowners who rent out their houses during the Masters in Augusta, Georgia. Same idea in any Super Bowl or convention city, or LA for the 2028 Olympics.

Three things that separate a real deduction from a costly mess.

𝗧𝗵𝗶𝗻𝗴 𝟭. The real power is renting to your own business for a legitimate meeting, not renting a room to a stranger. But it takes the right entity. A sole proprietor or a single-member LLC cannot do this, because you cannot rent to yourself. You need a partnership, an S corp, a C corp, or an LLC taxed as one.

𝗧𝗵𝗶𝗻𝗴 𝟮. The documentation is the entire strategy. Who attended, what was discussed, minutes of the meeting. If you cannot show a real business event happened, you do not have a deduction, you have a red flag.

𝗧𝗵𝗶𝗻𝗴 𝟯. The rent has to be reasonable and you have to prove it. Get quotes for comparable meeting space and keep them. In Sinopoli v. Commissioner (2023), an S corp paid its owners about $290,900 over three years to rent their homes for meetings. The Tax Court allowed $16,500 and disallowed the other $274,000, because the owners had no independent support for their rate and could not document the meetings in one of the years. It did not reject the strategy. It rejected the sloppiness.

Pigs get fat, hogs get slaughtered.

Full write-up on the blog: https://buff.ly/r8rh5df

🚨 IRS Scam Alert for Cryptocurrency Holders 🚨

The IRS is warning taxpayers about fake letters being mailed to cryptocurrency owners. These letters claim recipients must register for a "Digital Asset Compliance Portal" and often include a QR code that leads to a fraudulent website.

The goal is simple: steal personal information, crypto wallet details, and account credentials.

Remember:
✅ The IRS does NOT operate a Digital Asset Compliance Portal.
✅ Do NOT scan QR codes from unexpected IRS letters.
✅ Never share wallet recovery phrases or private keys.
✅ Verify any IRS communication through official IRS channels.

If you receive one of these letters, ignore it and report it.

Stay alert and protect your digital assets.

Source: https://www.irs.gov/compliance/criminal-investigation/fraud-alert-fake-irs-letters-target-cryptocurrency-holders

𝗟𝗲𝗮𝘀𝗲 𝗼𝗿 𝗕𝘂𝘆? 𝗧𝗵𝗲 𝗔𝗻𝘀𝘄𝗲𝗿 𝗜𝘀𝗻'𝘁 𝗬𝗼𝘂𝗿 𝗠𝗼𝗻𝘁𝗵𝗹𝘆 𝗣𝗮𝘆𝗺𝗲𝗻𝘁.
𝑇ℎ𝑟𝑒𝑒 𝑇ℎ𝑖𝑛𝑔𝑠 𝑇ℎ𝑢𝑟𝑠𝑑𝑎𝑦 | 𝐸𝑝𝑖𝑠𝑜𝑑𝑒 21

First, a caveat: this applies to assets used 100% in business. Mixed-use involves different rules. We're not going there today.

Every year I watch business owners make the lease-or-buy decision by telling a salesperson what they want to spend per month. The salesperson engineers a deal around that number. The car dealership invented this technique. It has since spread to equipment dealers and copier reps everywhere.

'𝑊ℎ𝑎𝑡 𝑑𝑜𝑒𝑠 𝑦𝑜𝑢𝑟 𝑏𝑢𝑑𝑔𝑒𝑡 𝑎𝑙𝑙𝑜𝑤 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ?' is a sales question. It is not a financial analysis.

𝗧𝗵𝗿𝗲𝗲 𝗧𝗵𝗶𝗻𝗴𝘀 𝗧𝗵𝘂𝗿𝘀𝗱𝗮𝘆: 𝗟𝗲𝗮𝘀𝗲 𝗼𝗿 𝗕𝘂𝘆? 𝗧𝗵𝗲 𝗔𝗻𝘀𝘄𝗲𝗿 𝗜𝘀𝗻'𝘁 𝗬𝗼𝘂𝗿 𝗠𝗼𝗻𝘁𝗵𝗹𝘆 𝗣𝗮𝘆𝗺𝗲𝗻𝘁.

𝗧𝗵𝗶𝗻𝗴 𝟭: The payment is not the analysis. A lease is a stream of future payments. A purchase is a lump sum today. Comparing them requires discounting future payments back to present value at your cost of money. Until you run that math, you don't know which option is cheaper. You only know which one feels more manageable. You can engineer a monthly payment to be almost anything — extend the term, adjust the residual, bury costs in fees. The payment amount is the output of a sales process. It is not the output of an analysis.

𝗧𝗵𝗶𝗻𝗴 𝟮: The assumptions drive the outcome, and most people never see them. A client this week needed a copier. Purchase: $11,000, full bonus depreciation in year one. Lease: $340 a month for 36 months, FMV option at the end — essentially no residual. At a 6% cost of money, the pre-tax present value favors the purchase by about $176. After factoring in the client's marginal tax rate, the NPV flips to the lease — by $89. On an $11,000 decision. Less than one percent of the purchase price. And that $89 moves with every assumption. Change the cost of money or the tax rate and the number changes. The analysis isn't a verdict. It's a framework. When the delta is this small, you're not looking at a clear winner.

𝗧𝗵𝗶𝗻𝗴 𝟯: When the margin is small, the tiebreaker is tax timing. An $89 NPV advantage is not a decision driver. At that margin, the question shifts to qualitative factors — and for a business with taxable income this year, the biggest qualitative factor is when you get the deduction. Bonus depreciation pulls the full $11,000 write-off into the current year. Lease payments give you $340 a month for three years. When you have income to absorb a deduction now and uncertainty about next year, that tiebreaker is not close. The copier went to purchase. Not because the NPV said so decisively, but because when it's a coin flip, you take the write-off now.

The lease-or-buy decision is worth fifteen minutes of actual analysis before you sign anything significant.

Bill Bourbonnais, EA, CTC, CTP, CTS | Bourbonnais Tax Associates LLC

A Tax Court case from 2019 involves a motivational speaker, a corporation called Good Thinking, a tax scheme with an official-sounding acronym, and a footnote that changes the shape of the story. It's one of the more instructive cases I've come across.

𝗧𝗵𝗿𝗲𝗲 𝗧𝗵𝗶𝗻𝗴𝘀 𝗧𝗵𝘂𝗿𝘀𝗱𝗮𝘆: 𝗚𝗼𝗼𝗱 𝗧𝗵𝗶𝗻𝗸𝗶𝗻𝗴 𝗪𝗮𝘀 𝗮 𝗕𝗮𝗱 𝗣𝗹𝗮𝗻.

Patrick Combs was a motivational speaker. His corporation, Good Thinking, received his speaking fees and used them to pay his personal expenses directly: airfare, child care, groceries, fast food, video rental stores. He drew a small salary. His tax planner's position was that Good Thinking was sustaining him through its operations. The IRS's position was that those payments were constructive dividends. The Tax Court agreed with the IRS.

𝗧𝗵𝗶𝗻𝗴 𝟭: The scheme had a name. Combs's tax planner, Robert Holcomb, had been promoting a strategy since at least 1999 called the Private Tax Excepted Self Supporting Ministry. PTESSM. The concept was to shift business income to entities that would then pay the taxpayer's personal expenses. The Internal Revenue Code does not contain that phrase. The groceries were still groceries. Official-sounding names are worth questioning, not trusting.

𝗧𝗵𝗶𝗻𝗴 𝟮: The numbers. In 2010 alone, the Tax Court sustained a deficiency of $189,453 and a §6662(a) accuracy-related penalty of $37,891. Across three years, the total deficiencies were $223,755, the accuracy-related penalties were $44,752, and a failure-to-file addition brought the grand total to approximately $276,053. Good Thinking had been paying for groceries and fast food.

𝗧𝗵𝗶𝗻𝗴 𝟯: The reliance defense, and the footnote. Combs argued he relied on his tax planner's advice. The court sustained the penalties anyway. Then the opinion notes, in a footnote, what happened to Robert Holcomb: indicted by a federal grand jury in 2016 on charges including tax evasion and aiding in the preparation of false returns, convicted on four counts of making false statements to a financial institution, sentenced to 46 months in federal prison, and fined $600,000. Good Thinking was part of a web of entities created in accordance with his plan. The same strategy had already been used with another taxpayer years earlier.

Good strategies exist. Good advisors exist. Due diligence on the advisor matters as much as due diligence on the strategy.

Someone in a real estate investor group posted a question this week that I've been thinking about:

'𝑤𝑜𝑢𝑙𝑑 𝑦𝑜𝑢 𝑟𝑒𝑐𝑜𝑚𝑚𝑒𝑛𝑑 𝑠𝑡𝑎𝑟𝑡𝑖𝑛𝑔 𝑎𝑛 𝑆 𝑐𝑜𝑟𝑝 𝑜𝑟 𝑎 𝐶 𝑐𝑜𝑟𝑝 𝑎𝑠 𝑎 𝑛𝑒𝑤 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟?'

It's a perfectly reasonable question to ask. The problem is what it leaves out. Neither of those structures is the right answer for most real estate investors, and the fact that the question only presents two options tells you something about the advice that investor has already received.

𝗧𝗵𝗿𝗲𝗲 𝗧𝗵𝗶𝗻𝗴𝘀 𝗧𝗵𝘂𝗿𝘀𝗱𝗮𝘆 this week:

𝗧𝗵𝗶𝗻𝗴 𝟭: 𝗖 𝗖𝗼𝗿𝗽 𝗮𝗻𝗱 𝗥𝗲𝗻𝘁𝗮𝗹𝘀
Losses are trapped inside the C corporation and can't offset your personal income. There is no preferential capital gains rate at the corporate level. The exit after years of cost segregation and 1031 exchanges is brutally expensive: the corporation pays tax on the full gain at the flat corporate rate, then distributes the remainder to shareholders who pay again on dividends. Two layers of tax on money that's been depreciated to the floor. And closely-held C corporations with significant passive rental income can trigger the personal holding company tax on top of that.

𝗧𝗵𝗶𝗻𝗴 𝟮: 𝗦 𝗖𝗼𝗿𝗽 𝗮𝗻𝗱 𝗥𝗲𝗻𝘁𝗮𝗹𝘀.
The S corporation is a pass-through, which sounds better. The problems surface over time. Active management of the portfolio creates a reasonable compensation obligation, turning what would have been passive income, not subject to self-employment tax, into W-2 wages that are. The §199A qualified business income deduction isn't automatic for rental activity and requires clearing a bar that passive rentals don't always clear. Cumulative losses erode your basis over time and create complications when you eventually want to take distributions or wind down. And the real estate professional status analysis gets more complicated inside a corporate structure than it needs to be.

𝗧𝗵𝗶𝗻𝗴 𝟯: 𝗧𝗵𝗲 𝗾𝘂𝗲𝘀𝘁𝗶𝗼𝗻 𝗶𝘁𝘀𝗲𝗹𝗳 𝗶𝘀 𝘁𝗵𝗲 𝗽𝗿𝗼𝗯𝗹𝗲𝗺.
'S corp or C corp?' leaves the right answers off the table entirely. For most passive rental real estate, direct ownership or a properly structured LLC is where the activity belongs. Losses pass through correctly, the capital gains preference applies at sale, there's no double tax on exit, and no reasonable comp obligation converting passive income to payroll income. The S corp or C corp framing keeps surfacing because those are the tools the person giving advice knows how to use. That's not the same thing as them being the right tools for the job.

𝑬𝒏𝒕𝒊𝒕𝒚 𝒔𝒕𝒓𝒖𝒄𝒕𝒖𝒓𝒆 𝒊𝒔 𝒂 𝒕𝒐𝒐𝒍. 𝑩𝒆𝒇𝒐𝒓𝒆 𝒚𝒐𝒖 𝒑𝒊𝒄𝒌 𝒕𝒉𝒆 𝒕𝒐𝒐𝒍, 𝒚𝒐𝒖 𝒉𝒂𝒗𝒆 𝒕𝒐 𝒖𝒏𝒅𝒆𝒓𝒔𝒕𝒂𝒏𝒅 𝒕𝒉𝒆 𝒋𝒐𝒃.

The technology is getting more sophisticated, the scammers are getting more crafty. Don't let your guard down.

AI Deepfake Scams for Small Business: How to Spot Them Before They Cost You - 2 Dog Digital AI deepfake scams are hitting small businesses through fake CEO calls and cloned voices. Learn how deepfake fraud works and how to stop it before it costs you.

𝗧𝗵𝗿𝗲𝗲 𝗧𝗵𝗶𝗻𝗴𝘀 𝗧𝗵𝘂𝗿𝘀𝗱𝗮𝘆
Are You Depreciating Two Roofs on the Same House?

Here is a conversation I have more often than I should. An investor replaced the roof on a rental property a few years ago. Their accountant recorded the new roof, started the depreciation clock, and moved on. Nobody wrote off the old one. Today, both roofs are running on that depreciation schedule simultaneously, and they will be for the next twenty-something years.

This is not a planning strategy. It is a missed election. And it happens on nearly every real estate return I review.

The Final Tangible Property Regulations, which became effective in 2014, created three specific elections that should be evaluated on every real estate return, every year. Most returns run one of them. Some run two. Almost none run all three.

The 𝗗𝗲 𝗠𝗶𝗻𝗶𝗺𝗶𝘀 𝗦𝗮𝗳𝗲 𝗛𝗮𝗿𝗯𝗼𝗿 allows you to immediately deduct the cost of tangible property up to $2,500 per item or invoice, or $5,000 if you have an applicable financial statement. Requires an annual election and a timely filed tax return. No reduction to your adjusted basis, no recapture exposure at sale. Most investors have heard of this one.

The 𝗦𝗮𝗳𝗲 𝗛𝗮𝗿𝗯𝗼𝗿 𝗳𝗼𝗿 𝗦𝗺𝗮𝗹𝗹 𝗧𝗮𝘅𝗽𝗮𝘆𝗲𝗿𝘀 applies to buildings with an unadjusted depreciable basis of $1 million or less, and allows you to deduct repair and maintenance costs up to the lesser of $10,000 or 2% of the building's unadjusted basis per year. Same deal: annual election, no basis reduction, no recapture. Fewer investors know this one exists.

𝑷𝒂𝒓𝒕𝒊𝒂𝒍 𝑨𝒔𝒔𝒆𝒕 𝑫𝒊𝒔𝒑𝒐𝒔𝒊𝒕𝒊𝒐𝒏 (PAD) is the one almost nobody is making. When you replace a structural component, whether it is a roof, an HVAC system, a water heater, or windows, you are disposing of the old component. PAD allows you to recognize that disposal by writing off the undepreciated remaining basis of the replaced component in the year of replacement, rather than continuing to depreciate it alongside the new one for the rest of its original useful life. It is an annual election on a timely filed return. 𝑀𝑖𝑠𝑠 𝑡ℎ𝑒 𝑤𝑖𝑛𝑑𝑜𝑤 𝑎𝑛𝑑 𝑖𝑡 𝑖𝑠 𝑔𝑜𝑛𝑒 𝑓𝑜𝑟 𝑡ℎ𝑎𝑡 𝑦𝑒𝑎𝑟.

One distinction worth understanding before you pick up the phone: the De Minimis Safe Harbor and the Small Taxpayer Safe Harbor do not reduce your adjusted basis and do not create recapture exposure when you sell. PAD does both, which is why you should model the Section 1250 recapture before making the election. But PAD has no dollar ceiling. The safe harbors are capped. PAD writes off the full undepreciated remaining basis of the replaced component, whatever that number happens to be. A roof with $18,000 of remaining basis generates an $18,000 write-off in the year of replacement. No safe harbor in the set produces that result.

One more thing worth knowing: when the final regulations were issued, the IRS provided a one-time transition opportunity that allowed investors to file a Form 3115 and go back to capture prior-year partial dispositions they had missed. I filed more Forms 3115 that year than I have in any year since.

𝑻𝒉𝒂𝒕 𝒘𝒊𝒏𝒅𝒐𝒘 𝒄𝒍𝒐𝒔𝒆𝒅. Prior years that were not caught are lost. The only move now is to start making the election going forward, beginning with this year's return.

If you replaced anything structural on a rental property and your tax return did not reflect a write-off for the old component, ask your tax advisor about Partial Asset Disposition. Specifically. By name.

Three Things Thursday drops weekly at
Bourbonnais Tax Associates LLC