How to defer US taxes
Source: Hacker News
TL;DR
Defer U.S. taxes by reinvesting taxable income into the economy as business expenses, depreciating assets, and using leveraged investments. Pay yourself with refinanced cash when investments appreciate or credit rates drop.
Depreciation and Tax Deferral
Depreciation spreads the cost of a business asset over time, reducing taxable income each year.
Simple Depreciation Schedule
| Year | Revenue | Depreciation | Taxable Income |
|---|---|---|---|
| 1 | $11 | $10 | $1 |
| 2 | $11 | $10 | $1 |
| … | … | … | … |
| 10 | $11 | $10 | $1 |
| Total | $110 | $100 | $10 |
Alternative Schedule (Front‑loaded)
| Year | Revenue | Depreciation | Taxable Income |
|---|---|---|---|
| 1 | $11 | $0 | $11 |
| 2 | $11 | $11 | $0 |
| … | … | … | … |
| 10 | $11 | $11 | $0 |
| Total | $110 | $100 | $11 |
Front‑loaded Depreciation Impact
| Year | Revenue | Depreciation | Taxable Income |
|---|---|---|---|
| 1 | $11 | $100 | -$89 |
| 2 | $11 | $0 | $11 |
| … | … | … | … |
| 10 | $11 | $0 | $11 |
| Total | $110 | $100 | $99 |
Good accountants will adjust depreciation schedules to match unexpected profits or losses, effectively deducting yesterday’s expenses from today’s revenue.
Cost Segregation
Instead of depreciating a building over 27.5 or 39 years, a cost‑segregation study can reclassify components (e.g., carpeting, fixtures, landscaping, certain electrical work) into 5‑, 7‑, or 15‑year assets. This can generate $200 K–$300 K in depreciation deductions in the first year for a $2 M property.
Loans, Refinancing, and Tax Deferral
Most investment capital is borrowed (SBA loans, commercial real‑estate loans, etc.). The government supplies cheap capital to banks, which then lend at higher rates. To defer taxes, many investors refinance: they pay off an existing loan with a new one and pocket the cash difference. Since loan proceeds are not taxable income, this cash can be used without increasing tax liability.
Disclaimer: Loans are not free, and refinancing can be complex.
Death and Tax Obligations
When a taxpayer dies, their tax obligations end. Heirs receive assets at market value, establishing a new cost basis for future depreciation.
According to Modern Monetary Theory, taxes primarily serve to pull dollars out of circulation; the government never actually needed the money in the first place.
Your economic impact—through spending, saving, borrowing, lending, donating, or bequeathing—continues to affect society long after you’re gone.