Amouranth recently bought a gas station to avoid paying some of her income tax liability. But this turns out to have been a financial blunder. While she was confident enough in her decision to go and purchase a second gas station, the streamer might just be in a bind when she files her next return.
“Here’s why I bought a gas station,” she said. “It cost me $4 million or -$110,000 depending on how you look at it. Yeah, that’s a negative sign. I was paid $110,000 and got a gas station free. And I or you can do it again and again and again.”
Amouranth ran the numbers. “Let’s start,” she said. “Listed for $4,000,000. I invest $1,000,000 and borrow the rest.” The streamer estimated the cost of depreciation at $3 million before going on to calculate her tax liability. “$3,000,000 * .37 (my marginal tax rate) = $1,110,000. So for 2021, I will owe $1,110,000 less in income tax. Remember I invested $1,000,000 to buy this gas station. Now I owe $1,110,000 less in taxes for the calendar year.”
The problem is that none of this actually holds any water. Amouranth seems to have fallen into the trap of conflating active and passive income.
Jayson Thornton points out in a video by Spencer Cornelia that “if we’re talking about a 37% marginal tax rate, that’s her personal tax rate. That’s not a business tax rate because if it was a corporation, you would be limited at the 21% tax rate.” The financial planner goes on to say that “if we're talking about her personal tax rate, that means this is a passive investment for her.” The trouble in this particular case would be that “you’re limited to only taking a deduction from a passive investment against passive income, so she probably wouldn’t be able to deduct any of this passive loss against her ordinary income.”
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This would be where depreciation comes into question. Thornton explains that “depreciation is taking the total cost of an asset that a business purchased and slowly recouping it by taking a little bit of a deduction each year over the lifetime of that asset.” The best example would be the wear and tear on a building. Businesses can claim a deduction for maintenance which offsets the amount of rent collected. Supposing that both of these were equal, the business would have no income tax liability.
Amouranth however is not a business. The streamer has both active and passive income. The former comes from her work in the entertainment industry and the latter comes from her properties. “This is not an active business venture for her,” Thornton says. “This is not something that she’s going to be managing.” The result is that she can “only deduct those passive losses against passive gains.” Cornelia points out that she is “attempting to offset personal income with business losses and these two are not combined.” He goes on to say that “she would not be able to offset her personal income with the passive losses from the depreciation of real estate.”
The takeaway is that Amouranth seems to have badly blundered when she bought those gas stations. There could be some details which have not been revealed, but the streamer is probably going to end up paying her taxes just like everybody else.