Investing Education 110: False Narrative of Tax Deductions

Introduction

As investors, entrepreneurs, and skilled professionals, we’re constantly bombarded with the same message: “You’ve got to avoid paying taxes at all costs. Taxes are the greatest deterioration of wealth. Invest in anything available to avoid paying those taxes.”

I call this a false narrative – and after nearly four decades in investment since 1985, I want to share why this mindset could be costing you more money than it saves.

The Appeal of Tax Deductions

Let me walk you through a real-world scenario that illustrates this perfectly. As someone deeply involved in oil and gas exploration – one of the industries offering the highest tax deductions through working interest participation – I face this decision every single year.

Scenario 1: Pay Your Taxes

Imagine you have $1 million in income and face the maximum tax rate of 37%, today’s rate. Here’s what happens:

• Tax owed: $370,000
• Amount retained: $630,000

Now, with that $630,000 in post-tax dollars, you can invest in solid, prudent investments and let that money work for you. Depending on your risk tolerance and desired returns, you might recover that $370,000 in tax payments within 6-8 years through smart investing.

Scenario 2: The Tax Deduction Route

Alternatively, you could invest that full $1 million in a tax-deductible investment like oil and gas working interest, which offers 80-100% tax deductions in the year you invest. Sounds attractive, right?

• Tax saved: $370,000 (no longer paid to government)
• Total capital deployed: $1,000,000 (in drilling or other tax-deductible investment)

Here’s What Everyone Forgets

This is the crucial point that almost every investor I talk to overlooks:

I care more about not losing the $630,000 than I do about paying the $370,000 in taxes.

Why? Because that $370,000 is gone either way – whether I lose it drilling a well or pay it to the government. But if I make a poor investment decision, I’ve now lost the $630,000 I would have retained after paying taxes – almost double the tax amount.

The Real Question You Should Ask

When someone pitches you a tax-deductible investment, don’t get caught up in the tax benefits. Instead, ask yourself:

“What are the economics of this investment, and what’s the realistic chance I’ll recover my money?”

The mistake investors make is not thinking about the economic success required to recover that $630,000 (or the full $1 million). You need an incredibly high probability of success – not a 10% or 20% chance, but a legitimate opportunity to make your money back.

My Annual Decision Process

Every year, I make the same choice:

1. Pay my taxes, keep the net amount, and invest in something you are comfortable with.
2. Find a sponsor with a proven track record offering tax-deductible investments where I have confidence I can make the entire investment back

If I choose option 2, I look for investments that can return the full million dollars in a reasonable time-frame (less than 48 months) and potentially provide an income-producing asset for years to come.

The Bottom Line

Don’t fall for the false narrative that tax avoidance should drive your investment decisions. When evaluating any tax-deductible investment opportunity – whether it’s oil and gas, carbon sequestration, equipment purchases, or other alternative assets – remember this:

Thank them for the tax information, then say: “Let’s talk about your investment. Let’s talk about the economics and the realistic probability of success.”

The tax benefit should be the cherry on top, not the primary reason for investing. Otherwise, you’d be better off just paying your taxes and keeping control of your remaining capital.

Since 1985, I’ve made this choice every single year. Sometimes I pay my taxes and invest the remainder conservatively. Other times, I invest in tax-deductible opportunities – but only when I have genuine confidence in the investment’s ability to return my capital.

Remember: The goal isn’t to avoid taxes at any cost. The goal is to keep the majority of your hard-earned money through smart, strategic decisions.