Accelerated depreciated and punchlists

Last week, for some valued clients in Forestburgh at a house we are just finishing up, we are into our 3rd phase of our punchlist, think of the upside down pyramid where you start broad and narrow it done - punchlist is a good phrase, cause you keep punching at it.  As I’ve said in the last several posts, I’m comparing my earnestness and seriousness of effort with that being offer at Reflection in St Petes, and the gulf between the two efforts just couldn’t be wider.

As is often the case, pictures tell the story.  I have my captain’s chair so I’m comfy, and I’m fully abreast of the items that need to be done, have personally organized and as important, communicated with, each person I expect to be there, and then I sit and personally manage - manage the parking, manage the shoes people are wearing in the house, manage the shit people want to do and place on the countertops, personally make judgment calls, etc…   The buck just stops with me - as it should.  And it’s because I value our clients.  

In St Pete’s, the effort was the opposite, where no one was in charge - in the end, because I’m in this business, I just accepted a lesser product than I expected because I could see they would actually just never get it done - so the stain on the carpet, the inability to get a whole room of baseboard painted, the inability to clean it well, I’ll just accept the unit and pay for it to be done - in my business, we see a lot of end of jobs where people try and ‘get their pound of flesh’ out of us just out of principal, but I’m not in any need to get a pound of flesh out of anyone in trade for my mental health, so I’ll just take care of it.  I’m always amazed at when one of our clients will call and email us for months over something they could order or resolve on their own in minutes, but it’s that ‘pound of flesh, you owe us’ mentality.

The thing about construction, once an issue passes, it can be forgotten pretty quickly, so it's best to resolve and let it pass, since for some reason, the half-life of the annoyance seems to pass quickly unless someone is intent on fixating on it.  I mean, I’m annoyed for sure - I’ve been waiting 3.5 years for this Unit and they’ve had ¼ of a millions dollars of my money the whole time, so to come in for such a hard landing is 1, completely avoidable, 2, lacking in pride of craft.  So now I look like the Dick, being aggressive in demanding what I paid for (do it all day long for my benefit and my clients) instead of a celebratory victory lap for this amazing top floor unit in a pretty snazzy building.

Look closely at the tradesmen respect - eating on the counter, on their makeshift counter covering, with even their soda bottles sitting on a coaster-napkin - fills my heart with joy to see so much pride of craft and respect for me and the clients.

Below, is a picture of my 1400 sq ft condo that just two weeks ago was clean and empty and now this - completely unprotected and unmanaged circus of a 6 items punchlist. Shit just laying everywhere without any sort of site protection.

Even the carpets, completely unprotected as sheetrock is sanded and painting is complete. Complete inanity.

Lots of you out there, especially in the construction or real estate business, are probably aware of and have benefitted from a part of the tax code named accelerated depreciation, meaning you can buy certain classes of equipment, and ‘accelerate’ the depreciation.  Depreciation, the yearly tax adjustment for the decrease in value of an asset, is done over 5-7 years for things with motors and 29-33 years for real estate.  For things with motors (bulldozers, generators, heavy equipment) and for a certain use (including regular vehicles over a certain weight like a simple pickup truck) you can accelerate the depreciation, meaning, you can deduct the full value of the equipment over the first year - meaning you can buy a pickup truck for $75k and get a straight-line reduction in gross profits by the same amounts, saving $35k in taxes (assuming top tax bracket of 37% and NYS tax of 7%).   Bigger equipment can cost hundreds of thousands of dollars and the same straight-line deduction applies, meaning you can very quickly erase large profits by purchasing and then writing off the equipment you need for your business.

It’s a great idea, and typically is used to stimulate the economy to get businesses to buy things and I’m pretty sure this ease of use accelerated depreciation as it stands now was enacted in 2008 or so during that recession, but like many government programs, incentives and subsidies, once offered hard to take back, this one remains in place.

It has some drawbacks:

1, it allows businesses to buy things they might not need in order to take advantage of the tax break. It also perhaps gives them cover to spend more on the thing they do need, with the rationale it’s a tax break - so a $75k pickup vs a $50k.  A brand new $200k excavator vs a $100k used one.  Since even if you are getting a 40% tax break, you still are paying 60% for something, out of pocket or financed, so it’s not free.  Of course, if you finance, you pay nothing and get the whole deduction then have a monthly payment - so you could literally go out and buy a few hundred thousand dollars of toys, have a $7500 payment, and save $200k in taxes that year (and now have the payments, so business better remain solid).

2. Once you take the depreciation, then the value of the vehicle or equipment when sold has no tax value, meaning whatever you sell it at, it’s fully taxable.  Buy something for $100k, depreciate the $100k, use it for 5 years, sell it for $50k, you now own taxes on the $50k, so in my case selling it would cost me nearly $25k.  If you depreciate over a scheduled timeline say 5 or 10 years, then there would still be some tax value to offset the sale price.  I’m downsizing my business instead of growing for the first time in 23 years, and as I offload assets, I’m stuck paying the piper for the depreciation I took years ago, which creates some weird incentives like storing the vehicles out back instead of selling them.

Right now I’m trying to decide whether to trade or sell my 2020 Jeep Grand Cherokee that has 120k miles on it.  I owe nothing on it, and if I would trade and sell half the sales price would go to taxes, and I’d have to go out and buy a vehicle that would depreciate in reality (new car values sink like rocks in the first 3 years) and use real cash, even if I got a 50% tax benefit this year.  As I fine tune my financial planning - which at this stage in my career it’s as much about expense management and asset bloat as it is about income - I’m delving deeper into the nuances and math of my monthly expenditures.

So, for my jeep in particular, the math is:

• Value - $18,000, tax hit would be $8/9k, cash flow in $8/9k.
• New SUV - $55k out of pocket (I don’t really borrow anymore) - above trade reduces that to $47,000 out of pocket.
• Tax saving due to depreciation - $26k 
• Net out of pocket $21k.
• $55k asset worth $35k in 3 years.

Bottom line for things with motors, especially vehicles, the value in them is over the long run - in the short run, the first 5 years, you get crushed by the loss of value a new vehicle experiences.

I’ve been gaming (wrong word, but it’s early), kicking the can, ponzi scheming my tax bill for years - deferment strategies that push liabilities to the next year or the next - but the thing is, once you stop growing, then these strategies start to become due, start to become less effective.   When you begin to lessen your investment activities, you begin to square up with the tax man, and that, eventually, is something you just can’t avoid.  I’ve been paying huge tax bills for years - I mean half a million dollars or more - so these hedges have been important on the margins, but in the end, death and taxes get us all.

Hopefully someone smarter than me doesn't read the above tax code lesson and point out all the things I don't know and really have no clue what I'm talking about. That has certainly happened in the past.

I have all this free time and focus since I put to bed and rest that problem that was latched onto me for the last 2 years. The recoup of that loss happened quicker than I ever expected, with renewed focus, attention, bandwidth and focus on positive things in my life as opposed to the worst things/people in them. This business journey is without a doubt filled with an incredible array of amazing people.