It’s a home run solution in this difficult credit-crisis, recession-economy, and high-tax environment.

Picture raising money from friends and family with very few strings and paper work attached, and mostly compensating your active investors in the early years with tax losses, rather than cash (or interest income). Plus, your active investors can provide your business with special assistance, knowledge, work, contacts and influence so you all can be more successful sooner than later.

The tax magic in active investors is accelerated business write-offs, tax credits, and most of all active investors not being subject to onerous “passive activity loss” rules, so they enjoy these tax breaks up front.

Your active investors get the same tax breaks upfront that you do! And they also can write off their own home office, travel, business, entertainment and other type’s of (personal-like) expenses.

With tax rates headed higher on the upper-income, and the green energy revolution taking shape, this convergence of ideas is a winning formula for new business success.

We offer everything you need. From new business ideas and ways to use Green Active Investors in your business; to development on the business, tax and legal-front (using our outside attorneys); to annual accounting and tax compliance (delivering these tax breaks to active investors). We offer tax opinions too if needed.

Some larger private equity deals can be a hybrid of active investors and traditional private equity (passive) investors. In the LLC investment pool, the entrepreneur owner can own Class A interests, active investors Class B interests, and passive investors Class C interests. Class A has voting control, Class B active investor tax breaks (with special allocations), and Class C more traditional private equity returns.

To learn more about Green Active Investor tax breaks, click here.

If you want to consult with Robert A. Green on these ideas, please sign up here.

If you have any questions about our other services, please e-mail us at info@greencompany.com or call us.

Read the below article by Robert A. Green submitted to Active Trader magazine for their February 2009 issue.

Diversify your time and money with a tax-advantaged “Active Investment.” A green technology active investment might return all your money invested within the first few years just with the tax breaks alone. Later project success will be the icing on the cake!

By Robert A. Green, CPA

This year may be a good time to consider another family business activity, either starting your own new business, expanding one, or joining other entrepreneurs as an “Active Investor.” Maybe even in the exciting new green (alternative) energy market.

Many traders were emotionally and financially stressed-out in 2008 with the market meltdown and perfect-storm of volatility. Some traders may want to consider diversifying away from having all their assets in the financial markets basket and even their job in one basket.

That’s a risky proposition in this dangerous job market with lay-offs happening fast and furious for sometimes little rime or reason. If you lost your job already, you may be looking for a new job and prospects may be bleak in the job market.

Now may be a good time to start your own business and you don’t have to do it alone. Recruit other Active Investors, or join other business entrepreneurs in their business as an Active Investor yourself.

As an “Active Investor” all you will risk is a little money (can be around $25,000), and some of your time and effort (as little as 100 hours per year). You might really hit a winner.

Plus, ‘the grass is always greener on the other side’ and speaking of “green”, why not consider an exciting highly-tax-advantaged investment in green (alternative) energy?

Convergence of politicians, technology industries, environmental advocates, and consumers are spelling big things for the new green jobs economy. Why not join the green energy revolution and receive a boat load of tax breaks in doing so.

The powerful Active Investor tax-benefit plan.
Active Investors invest a small amount of cash, plus some time & effort, and their own home-based expenses.

Spending 100 hours per year at a minimum (and perhaps 500 in some cases) is the “key” to unlocking these business tax benefits, and avoiding the passive activity loss deferral rules. See “Material Participation” rules below.

Converting your home-based expenses to business-use is the “tax juice”; the added tax write-offs that ensure you make all your cash investment money back no matter what the economic outcome becomes. In other words, even if the business fails, you make money after-tax-benefits.
More tax benefits in going green.
Congress should pass accelerated tax benefits with either 100% first-year depreciation (at very high investment levels), or at least very accelerated depreciation; plus up front tax credits too.

An Active Investment in a green project might lead to a full return of cash investment based on tax advantages alone in the first three years.

Active Investors and “trader tax status” have much in common tax-wise.
Active Investor business tax breaks are similar in many ways to business tax breaks based on “trader tax status”; but there are a few key differences too.

Business traders and Active Investors both need to materially participate in their business activity in order to be allowed ordinary business tax loss treatment. Business traders generally spend over four hours per day and that’s generally close to 1,000 hours per year.

Portfolio trading and investment companies are not subject to “passive activity loss” rules; rather they are subject to the “trading rule.” All other types of businesses are subject to passive activity loss rules.

Passive activity loss rules only allow passive activity losses to offset passive activity gains and not any other type of income (like earned income, portfolio income, and other income).

Under the “trading rule”, even passive investors in a hedge fund (that has trader tax status) are allowed business loss treatment on all expenses; other than investment interest expense.

Investors in other types of businesses only overcome (rise above) the passive activity loss rules if they can demonstrate “material participation” (defined below) in that business activity.
Trader tax status and other types of business status share other key words in common too.

For example, the material participation requirement within the passive activity loss rules states “the taxpayer is involved in the operations of the activity on a regular, continuous, and substantial basis.” Business traders must trade on a “frequent, continuous, regular and substantial” basis too.

But this is where these paths part ways. Trader tax status is not clearly defined in the tax code, and it’s left to the tax court. Conversely, the passive activity loss rules clearly define “material participation.”

Material Participation Defined.

Per RIA, “An individual is treated as materially participating in an activity for the taxable year if he satisfies any one of seven tests set forth in Reg § 1.469-5T(a) : I only list the five tests mostly probably apply to Active Investors.
• the individual participates in the activity for more than 500 hours during the year;
• the individual's participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals for the year (including individuals who are not owners of interests in the activity);
• the individual participates in the activity for more than 100 hours during the taxable year, and his participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for the year;
• the activity is a “significant participation activity” (i.e., a trade or business activity in which the individual significantly participates in the activity for more than 100 hours during the taxable year ( Reg § 1.469-5T(c) )) for the taxable year, and the individual's aggregate participation in all significant participation activities during the year exceeds 500 hours;
• based on all the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during the year. An individual does not satisfy the facts and circumstances test if he participates in an activity for 100 hours or less during the taxable year. Reg § 1.469-5T(b)(2)(iii) .”

Many Active Investors in green energy projects may not need to devote much time and effort and they may qualify under the 2nd and 3rd bullet points above, in connection with the 100 hour standard.

Many green technology projects are not expected to be operated like M-S 9-5 or more businesses (like a restaurant). To be successful, it may just require assigning many sub-tasks to different Active Investors, like technology procurement, sale to a school, installation arrangements and more.

Both husband and wife time is counted, even if only one of the spouse’s names is recorded as the investor.

The “Trading Rule” versus “Passive Activity Losses”
Trader tax status (business treatment) gives full ordinary loss deductions (including home-office, education, start-up expenses, margin interest and much more).

Conversely, investment expenses (under Section 212) are very limited, only allowed in excess of 2 percent of Adjusted Gross Income (AGI), and not deductible at all against the Alternative Minimum Tax (AMT).

Passive activity losses are even worse than investment expenses; they are only deductible against passive activity income. Unless an investor has many passive activity investments in place (and looking good for income), passive investors suffer loss deferral over many years; until they close down a particular investment.

Notice that because of the “trading rule”, passive activity investors can’t generate passive activity income with hedge fund investments either. Otherwise, it would be too easy for passive investors to use up their passive activity losses. Congress did not want that to happen. By the way, maybe Congress should get rid of passive activity loss rules now as well, to spur growth in this recession economy.

In the mid 1980s, Congress enacted the passive activity loss rules to kill-off the tax-shelter industry; which had proliferated on real estate and film making syndicates.

Bringing back some tax benefits in connection with real estate might help a real estate market in serious price decline. By the way, there are special passive activity loss deferral rules just for rental real estate too (even more onerous).

Home-based business expenses (the tax juice):
One of the best tax advantages for Active Investors and business traders is deducting home-office expenses, travel, meals, entertainment and other fixed or personal-type expenses (converted to business-use), without restriction or limitation.

Home-based expenses can be pure tax savings. Unlike out-of-pocket expenses for trading or business services, home-based (and personal expenses) are already fixed (committed to) as part of your personal life. By simply converting them to business-purpose, you generate tax savings without spending more money on the expenses.

On their tax returns, an Active Investor can deduct their home office and other expenses as “unreimbursed partnership expenses” (UPE) on their Schedule E; in the same manner that proprietary traders report their K-1 income and UPE.

Hard to get a bank loan? Active Investors can help.
Active Investors provide many powerful advantages other than tax savings; like a handy way to finance your business, when other traditional sources of lending or investing have dried up.

Banks are not lending much to small businesses now in this credit-crisis and recession.

Private-equity firms went way overboard buying lots of public companies using bank debt and that contributed to the credit-crisis and market meltdown. Private equity firms are not investing much now.

Vendor financing and leasing is also very difficult to arrange now, as companies don’t have sufficient cash flows to help their customers more than in the past.

Therefore, raising money for your venture with Active Investor tax-advantaged equity is very handy in this environment.

With an Active Investors program, you probably don’t need to spend much money on legal fees, since you probably don’t need a private placement memorandum or other investment documents; as is traditional in private equity and hedge fund deals. Plus, try to recruit a good attorney as an Active Investor too, saving even more cash flow.

Plus, you save on interest costs, which can be a significant drain on cash flow during a recession economy. In general, small business loan interest rates are sky high during this credit crisis. It’s also hard to get a SBA lower rate loan too.

Think of “Active Investors” as self-raised private-equity with extreme tax-advantages.

The (tax) power of green.
President Obama and the Democratic-controlled Congress have promised converting America from dependency on foreign-oil to a US-home-grown green energy job economy.

Plus, going green will fix our environment, which has also reached the tipping point.

It’s pretty likely that the Democrats will pass significant fiscal (tax) benefits. Tax rates are also headed up (on the upper-income) and that makes tax-advantaged investing even more valuable to them. It’s the upper-income that can probably part with a good chuck of change to invest in your project too.

Example project for going green with lots of tax breaks.
On the side from trading, a trader and/or their family members can suggest a green (alternative) energy project in their local town.

Write a “letter to the editor” in the local paper as follows:

Suggest that the local school (and/or other quasi-government buildings) add solar-energy panels and/or wind power energy systems (of other green technologies) to their properties, in order to lower town energy costs (and related real estate taxes) and protect the environment too.

Next - point out the tax benefits. How the school doesn’t benefit from income tax breaks, because it’s a non-profit institution, not paying income taxes. And that it’s a real shame, considering that Congress has and will continue to pass significant new tax breaks for businesses using green technologies.

Invite other town residents and businesses to partner with you in a management company to purchase the green technologies and lease them back to the school/town for their use.

Mention that you and your co-Active Investors will do much of the work required to make the project happen in a successful manner. Briefly point out the Active Investor tax-advantages. Save the details for when interested partners contact you later on.

Go on to mention that the Active Investors will take care of much of the work. Say you want to recruit local professionals (attorneys, accountants, engineers, physicians), local trades’ people (builders, contractors, plumbers, electricians, masons, and landscapers), and business managers, public-relations & marketing people. Point out that this project is great public relations for these local business people.

With this local involvement, as owners (stake holders), there is more incentive (for profit and image) to keep the projects on budget and with excellent quality.

Recruit school children to promote and sell the green energy project to the town residents. The biggest impediment to green (alternative) energy projects is objection from the local community; the infamous NIMBY (Not in My Back Yard) objection.

Towns and schools are being charged much higher interest rates in this environment on new projects, because the bond guarantors are in distress too. Active Investor equity is the key to success in this regard.

This plan saves interest and energy costs, and it helps the environment too. It will be a great working lesson for our school children and it’s their future at stake too.

Wind farms in Iowa.
If NIMBY is too stiff – ‘you can’t fight city hall’ – consider a green energy project in a more friendly green-business state.

For example, wind farms are growing fast with great success in Iowa. In fact, one Iowa factory – who was facing closure after its jobs moved to Asia – converted to a wind power equipment manufacturer. The equipment is very heavy and best to ship and assemble on local wind farms.

Iowa wind farms have proliferated along with corn-ethanol farms. Even with energy prices headed lower, they both are still economical. And again, Active Investor tax benefits alone can make it a worthwhile investment. Energy prices are expected to rise again, after we recover from the recession.

green gold or black(oil) decay?
In his ground-breaking book, “Hot, Flat and Crowded”, author (and New York Times Opinion columnist) Thomas Friedman predicts that billions of people will join the American-type of energy consumption demand curve and that will dwarf energy supplies, including new green energy too. And we better start making green energy and fast! Without it, he goes on to say the environment is a sure loser.

President Obama has stated that green technologies, green jobs and the green economy and environment can’t wait for the return of higher oil prices. And that the green revolution must start immediately ushered in with consistent fiscal incentives and all the help Americans can provide. It’s our future at stake!

Use Active Investors in any business.
If you think green energy is just ‘pie in the sky’ or ‘blowing in the wind’, then use Active Investors in any small business that you like.

The same powerful tax advantages apply no matter what the business is. Maybe your business won’t have as many accelerated tax breaks and/or tax credits as going green, but even basic tax breaks together with the (tax juice) home-based expense tax benefits make Active Investors a winning formula for any business.

Combine Active Investors with Private Equity too.
Some larger private equity deals can be a hybrid of Active Investors and traditional private equity (passive) investors. In the LLC investment pool, the entrepreneur owner can own Class A interests, active investors Class B interests, and passive investors Class C interests. Class A has voting control, Class B active investor tax breaks (with special allocations), and Class C more traditional private equity returns.

Bottom line.
Picture a business model that raises cash equity along with key labor support, and the pressure is not on you for compensating your equity-workers; you instead leave that to Uncle Sam – your other partner-in-profit.