Section 179 write off for investment in LLC renting heavy equipment to offset W2

[SmallBusinessSurvivor]

There's this company which is marketing itself as investment vehicle which can be used offset W2 income through depreciation generated by investing in a heavy equipment rentals. More details here: https://ezequipmentzone.com/

Basically

1. Setup a LLC to handle everything below

2. Invest 10% of the money upfront and take a 90% loan from the bank at say 7% (e.g. 30k investment and 270k loan) which is invested in heavy construction equipment

3. Get a write off 300k in first year through section 179 depreciation which passes through to you as the owner

4. Use the depreciation losses to offset any W2 income, then pay taxes on the rental income less the loan interest every year thereafter and make 12-14% returns on your investment

5. They will handle the equipment leases for you etc

The company says they will help you at each step along the way.

So my question is, is this kosher? Would passive activity rules come into play here? What am I missing? They claim it's totally legit.

[Mike9241]

sounds like a passive activity but(?) . a trade or business is not a passive activity if the taxpayer materially participates in the activity 

see reg 1.469-5T. must meet one of the seven tests

https://www.law.cornell.edu/cfr/text/26/1.469-5T 

certain activities are not considered participation

1) work of a type not customarily performed by the owners done in an attempt to avoid the passive activity rules

2) investor participation, unless the individual is directly involved in day-to-day management or operations

I suggest you have them provide an explanation of why the PAL rules would not apply and then have it evaluated by a pro. 

the other things 1) will there be a profit over the terms of the leases - if not, hobby loss rules would apply which could result in the income being taxable but no deductions or 2) the activity would be reported on schedule C and profit is subject to self-employment taxes 

The rental of personal property is subject to self-employment tax if it is classified as a business activity. This classification is determined by the continuity and regularity of the rental activity.

[SmallBusinessSurvivor]

Great 

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@Mike9241 wrote:

the other things 1) will there be a profit over the terms of the leases - if not, hobby loss rules would apply which could result in the income being taxable but no deductions or 2) the activity would be reported on schedule C and profit is subject to self-employment taxes 

The rental of personal property is subject to self-employment tax if it is classified as a business activity. This classification is determined by the continuity and regularity of the rental activity.

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Great point - it appears yes, according to their pitch, the rental of the equipment will generate income, 90% of which will be used to pay the loan, 10% becomes income that you will report and pay taxes on.

At the end of 6 years the equipment is bought back at about 50% of the original price, I guess this becomes residual value income (?) and subject to depreciation recapture and one has to pay taxes at the time at regular income tax rates (or capital gains rate?). I wish there was a nice way to model the cashflows on a worksheet or something to get the whole picture.

Anything else I should ask? Anything else I may be missing?

[Mike9241]

paying principal on a loan is not a tax deduction.  i'm not offering investment advice because that's beyond the scope of this forum. But I see no mention of what they're getting out of it.  if the rent is $100 and $90 goes to pay principal and interest you have $100 of taxable income reduced only by the interest paid. you really need a professional to review the entire agreement. In other words, you may not be left with enough cash form the deal to pay the income taxes in subsequent years. 

[AmeliesUncle]

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@SmallBusinessSurvivor wrote:

1. Setup a LLC to handle everything below

2. Invest 10% of the money upfront and take a 90% loan from the bank at say 7% (e.g. 30k investment and 270k loan) which is invested in heavy construction equipment

4. Use the depreciation losses to offset any W2 income, then pay taxes on the rental income less the loan interest every year thereafter and make 12-14% returns on your investment

They claim it's totally legit.

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Besides that it could be a passive activity, which would NOT allow you to use the first-year losses, there are some other things that could be concerning.

If they tell you to set up an LLC without saying why, that is a 'red flag'.

If they are telling you to take a loan (rather than merely mentioning that could be an option), that might be a red flag.  Even more so if they push you to get a loan through them.

You If they are 'promising' 12%-14%, that would be a major red flag.  It could be fine if they say you "could" earn that though.

[SmallBusinessSurvivor]

Thank you very much for your insight, definitely helps to ask the right questions.

Been trying to research this and I'm not convinced this is legit. Just putting this out here in case someone sees my link and thinks it's a real opportunity. I cannot vouch for them and from what I see:

The website has no phone or physical address. It says it was founded in 2016 but according to the SoS registry it was registered on April 5th 2018 in MO from Dwight Mcminn from Patton MO.

The only promotion I can find for it a LinkedIn post from Travis McMinn who appears to be associated with the owner Dwight McMinn.

I literally cannot find a single person who has used this company (other than one guy on heavyequipment .com forum who joined about 3 minutes before posting this one comment about him making 15% return in the last year). The only literal reference I found to it (and another similar website called equipmentshare .com) is a lawsuit against them from Ahern Rentals in 2020. In 2023 they filed a report with the SEC from Brent McMinn (another family member I assume) that they have $0 in sales so far and are looking to sell securities.
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Again, it may be a legit company, I just can't find any actual people who have used them.

THAT SAID, I'm happy to return to my original topic of if this is truly a legit opportunity, how can one best make use of the tax deductions.

[Mike9241]

@SmallBusinessSurvivor can't say it's a scam but there are many websites where you can easily lose your investment just by sending them money. then they disappear.  Have you checked with the Better Business Bureau though that's no guarantee they're legit.