When considering their overall investment portfolio, an investor should consider the after-tax income and total return that an offering is projected to provide. For example, an offering with significant income shelter due to depreciation deductions can provide greater after-tax income than an offering without depreciation deductions, even though the projected cash flow of the sheltered offering is lower. Also, many energy-based offerings provide significant deductions in year one due to intangible drilling costs, which deductions can be used to shelter regular income of the investor. Some of these investments are designed to provide income and back-end return in addition to the tax benefits, while others, the land conservation easement programs for example, provide no income but have the benefit of providing significant income shelter for those investors with higher marginal tax rates.
When considering these options, the individual tax situation of each investor must be taken into consideration including the income, depreciation deductions, passive losses, tax bracket, etc. To determine the net effect of these investments on an investor’s actual tax and income, the counsel of a CPA is recommended, though Cornerstone can describe how these various tax favored investments work in general.