In another post https://thefinancialstoic.com/?p=223 I discussed the difference between assets and liabilities. Obviously, it’s exceedingly important to acquire assets due to the fact that the right assets generate income which as you all know is critical in building wealth. Just as important, avoiding the acquisition of liabilities is critical as liabilities structurally deplete wealth. Perhaps most importantly, however, is learning how to turn liabilities into assets.
Unfortunately, liabilities tend to be the ‘fun things’ in life. Things such as sportscars, boats, motorcycles, bikes, jewelry, clothes, watches, furniture, etc. that don’t generate income and inherently are depreciable items.
They are obviously not part of a wealth building strategy and are in fact, items that should ultimately be avoided. That said, however, they provide some of the largest temptations in life and for many of us, myself included, offer some of the most desirable pleasures in life.
Can you really turn ‘fun’ liabilities into income producing assets?
What if there was a way to turn liabilities into assets? On the surface this is pretty hard to believe could even be possible. In fact, I thought it was hard to believe myself until I saw it play out with one of our friends of the family. In order to explain how this is even possible, I need to tell you all a little story about our friend…
One day my wife was talking about our friend Sheri who had recently bought two brand new snowmobiles. My wife told me that Sheri had told her that she bought them and was able to write them off as deductions for her business.
Now our friend Sheri was a doctor and could have easily just paid for them from her disposable income but the fact that she was going to deduct them as a ‘business expense’ got me pretty curious to say the least.
I asked my wife what ‘exactly’ did Sheri have for a business where she could consider these business expenses? My wife told me that Sheri was an outdoor guide and spent weekends here and there taking paying clients into the backwoods to recreate and participate in outdoor sporting activities such as hunting and fishing.
Interestingly enough my wife was also a certified guide, just like Sheri was, and in the past had worked for a recreational resort that offered the same exact excursions and guided trips that Sheri offered.
Huh, I thought. I could see how a couple of snowmobiles might be a plausible business expense if she took clients on paid snowmobile trips. My interest was really beginning to pique!
Turn a passion or a hobby that you already do into a business asset
However, what really could be the upper extent of this opportunity to turn liabilities like snowmobiles (which cost you money) into assets which generate income by using them in a business? Well, here’s where the story gets VERY interesting!
My wife tells me, “The snowmobiles aren’t the only things Sheri recently bought for her guiding business that she told me she was expensing as business deductions”. “Do tell”, I prodded my wife. “Yeah, Sheri just bought a float plane for the business which she is using for her own guide business but also leasing to the State’s warden service.
Getting someone else to pay for the asset
She told me that not only is she going to be able to depreciate the plane as part of her business but the warden service’s lease payments actually pay for 100% of the loan on the plane”. Huh. Not only is she using the plane as a business deduction but someone else is actually PAYING her to have the plane in her ownership!
“Oh it even gets better”, my wife exclaimed. At this point I’m thinking to myself that our friend Sheri has been able to purchase a couple of brand new snowmobiles where clients end up paying them off through the guiding fees that they pay her and she now has a float plane that another party is paying to use that completely covers the cost of the asset. HOW could this get even better?
“Sheri also told me that her and her husband recently bought a camp up north that they’ve made part of the business, along with a new four wheel drive truck”.
Daily personal expenses can become business deductions
Okay, this is starting to sound a bit unbelievable. Could it even BE possible for someone to have a business and effectively outfit it with the ‘toys’ that most of us would kill to have in our own personal life? Well, the answer is Yes. (find out more information on allowable business deductions here https://thefinancialstoic.com/?p=292 )
Let’s step back from this a second. Let’s assume for one minute that my wife and I wanted to experience the same pleasures that Sheri was experiencing but we were going to do this as ‘Joe and Jane Citizen’. Something very interesting happens.
Other individuals ‘paying’ for the service allows these items to become assets
We have to pay for these items completely as a private citizen and the expenses come out of our personal income and net worth, just like it would for everybody else. Therefore, not only do we not get to ‘expense’ these items as business expenses but we also sure don’t get to ‘depreciate’ them as an asset either!
As a result of us buying these items as Joe Q Citizen, we invariably bring on monthly debt (financing charges to buy the item) against a depreciable item which is truly a liability. On the other hand, because our friend established a business entity that had direct use of these same items from which she generated business income, the treatment of these items was elevated to a ‘business asset’ and she got to take advantage of the current tax laws to expense and depreciate them.
In essence, she was getting a tax advantage to enjoy these same pleasure items that others do at their complete expense. Wow…what a country! So HOW could all of this be happening?
The truth is that I adamantly believe that the United States government has set up our current system so as to incentivize this type of activity. In fact, it’s very clear to see.
The rules incentivize people to create businesses
Think about it! The government wants for us to create more wealth so that it can generate more revenue from us in order to cover theirs and other governmental program expenses.
More specifically, the ‘rules of the game’ have been written to incentivize individuals to create businesses that invest in the economy and by doing so, create wealth for other individuals (employees) and the communities that they do business in (personal, property and sales tax).
As a result, there is a system already set up to assist us in turning liabilities into assets. It’s called business creation.
So is this example just a ‘one off’ thing that you only hear about because it’s that somewhat unbelievable example? No.
In fact, I have seen dozens of these types of businesses that have been involved in exciting areas of the economy or that dealt with unique assets when I worked in government acting as a liaison on behalf of business.
Conclusion
Over the years, I have worked with quite of few businesses, like outfitters and destination resorts, that had some pretty amazing assets that were part of their businesses such as ATV’s, power boats, airplanes, etc.
I also have interacted with individuals who had real estate in incredible locations (lakes, mountains and the ocean) that were part of the business assets that they controlled.
Without much question, the real interesting examples are the ones where we as private citizens would otherwise want to purchase these same items (snowmobiles, ATVs, airplanes, etc.) for our personal enjoyment yet someone else has a business that gets to deploy these same items and utilize them as a revenue generating asset. That IS the proverbial brass ring!
Not only IS there an opportunity to be able to turn liabilities into assets, the government wants us to! Don’t let ‘em down!
