Leveraged Asset Purchases: Maximizing Write-Offs While Managing Compliance and Audit Risk
Written By Kaden Hackney, Tax Partner at BEC CFO & CPA
Introduction
Leveraged asset purchases—using financing to acquire business equipment, vehicles, technology, or even real estate—can be a cornerstone strategy for entrepreneurs and investors. With proper structuring, these investments may be written off in the year of purchase, lowering taxable income and increasing liquidity. The result? More cash available to reinvest, accelerate growth, and build wealth.
But tax benefits are only as strong as the compliance foundation supporting them. Knowing which sections of the Internal Revenue Code apply, distinguishing between audit risk and compliance risk, and documenting active participation are all critical for protecting deductions and unlocking maximum impact.
Key Code Sections for Accelerated Deductions
The tax code offers multiple tools to front-load deductions on leveraged purchases:
IRC §168(k) – Bonus Depreciation
Provides immediate expensing of qualified property (phased down beginning in 2023). Particularly valuable for vehicles, equipment, and certain real estate improvements. No dollar cap, but service date and property type restrictions apply.IRC §179 – Expensing Election
Allows immediate deduction of up to $1.22M in 2024 (indexed annually) for qualifying property. Unlike bonus depreciation, §179 is capped by taxable income and phases out at higher investment levels.IRC §181 – Film, Television, and Live Theatrical Productions
Enables immediate expensing of up to $15M in qualified U.S. productions. Particularly powerful for entertainment and media investors.Other Sections
§197 – Amortization of intangibles like goodwill or client lists.
§174 – R&D expense elections.
Each provision has its own eligibility rules, caps, and timing requirements, making careful selection and documentation essential.
Audit Risk vs. Compliance Risk
One of the most overlooked distinctions is between audit risk and compliance risk:
Audit Risk – The statistical likelihood of being selected for IRS examination. Large deductions or leveraged purchases may raise visibility, but audit selection is largely outside your control.
Compliance Risk – The risk that your tax position fails if examined. Poor documentation, improper asset classification, or failure to meet participation rules can cause deductions to be disallowed, leading to penalties and interest.
The focus should not be on avoiding audits but on creating defensible, well-documented tax positions that survive an audit.
Real Estate Nuance: Professional Status and Rentals
Leveraged purchases are especially powerful in real estate, where accelerated deductions can unlock significant cash flow. But whether those deductions offset ordinary income depends on participation rules:
Real Estate Professional Status (REPS)
Under §469(c)(7), taxpayers may qualify to treat rental activities as non-passive if:More than 750 hours annually are spent in real estate activities, and
More time is spent in real estate than in any other trade or business.
When REPS is met, accelerated deductions (like cost segregation with bonus depreciation) on leveraged properties can directly offset wages, business profits, or other active income.
Long-Term Rentals (LTRs)
By default, long-term rentals are passive. Without REPS, deductions can only offset passive income, limiting their reach. With REPS, however, those same deductions can reduce ordinary income.Short-Term Rentals (STRs)
Properties where the average stay is 7 days or less (or up to 30 days with substantial services) are generally not considered “rental activities” under §469. This means you can potentially treat them as an active business without needing REPS, as long as you materially participate.
In practice, this means accelerated deductions on STRs can offset ordinary income with as little as 100 hours of documented participation, provided no one else participates more.
The Gold Standard: 100 Hours of Material Participation
Whether in real estate or other business investments, 100 hours per year of documented, active involvement is often the practical benchmark for establishing material participation. Courts and the IRS have consistently recognized it as a strong indicator of activity rising above passive ownership.
This requires:
Time logs showing management, planning, and decision-making.
Proof of involvement in day-to-day or high-level operations.
Evidence that no third party materially participated more.
Meeting this standard transforms leveraged investments into active businesses, unlocking the ability to apply deductions against ordinary income.
Building Wealth Through Reinvestment
Accelerated deductions are not just a way to lower taxes—they are a tool to build lasting wealth. The savings can be redeployed into:
Acquiring additional leveraged assets.
Building liquidity reserves to fund growth.
Contributing to retirement accounts or other tax-advantaged vehicles.
By treating tax savings as reinvestment capital rather than a one-time windfall, entrepreneurs create a cycle of compounding growth: purchase, deduct, reinvest, and repeat.
Conclusion
When structured and documented correctly, leveraged asset purchases can serve as a cornerstone of a tax-efficient wealth strategy. Success hinges on:
Selecting the right Code sections (168(k), 179, 181, etc.).
Distinguishing between audit risk and compliance risk.
Meeting participation thresholds, including REPS for long-term rentals or the 100-hour rule for STRs and other ventures.
Reinvesting tax savings to fuel compounding growth.
The IRS rewards those who take full advantage of the law while respecting its requirements. With strategic planning, entrepreneurs can reduce today’s tax bill while accelerating tomorrow’s wealth.