Is That Deductible? The Final Chapter in a 20-Year Business Relationship

It started with a phone call from my bank:

“Your business bank account is overdrawn by $2,” the representative said kindly.

“Thank you for letting me know,” I replied, “I’ll come up and fix it right away.”

It was a small moment but one that marked the end of a long and winding journey—a 20-year partnership filled with lessons in business, real estate, and human connection. The partnership had been with my 96-year-old retired accountant and business partner, Bill. Little did I know when I joined him two decades ago that our venture would involve not only financial twists and turns but also profound life lessons and enduring admiration for his wisdom and grit.

Wrapping Up the Business

This small bank hiccup wasn’t entirely unexpected. Bill had been managing all our banking and taxes since the beginning. Even at his advanced age, he amazed me with his sharpness and ability to oversee the finances. Last fall, we had sold the final parcel of land from our 20-year-old development project, which left the business with only one final task: filing taxes for 2024 and closing the books.

When I called Bill to confirm it was okay to close the account, he answered his phone immediately. He had just been discharged from the hospital after a bout of pneumonia, but his voice was strong. He confirmed, “You can close the account,” and triumphantly added, “I mailed you our final tax filing statement yesterday.”

“How did you manage that with your failing eyesight?” I asked, both amazed and concerned. “With a magnifying glass,” he replied confidently.

Reflecting on the 20-Year Journey

Twenty years ago, I was a mid-career doctor when Bill, a retired accountant with a strong track record in real estate, invited me to join a project to create a Planned Urban Development (PUD) in our community. The goal was to provide much-needed affordable housing—a mission-driven investment that aligned with my values.

The expected return on my angel investment (ROI) was modest—around 10%—but it felt like a low-risk opportunity to make a meaningful impact. Plus I was going to be considered a “silent partner” who had minimal responsibility for the project.

However, life had other plans.

The 2007-2009 Mortgage Crisis

When the banking and mortgage crisis hit in 2007-2009, our development project struggled to stay afloat. To make matters worse, our realtor and developer began making unscrupulous decisions that tarnished our reputation and strained relationships with city officials involved in the public-private partnership.

Bill and I were forced to buy out the realtor’s minority stake, leaving us as equal partners. Bill moved to Arizona, enjoying his retirement, while I, as the only local partner, had to manage the fallout. What began as a promising community project became a long, uphill battle to rebuild trust with city leaders and sell the land, lot by lot, to salvage what we could.

The Emotional and Financial Cost

Over the years, I've interacted with numerous realtors, contractors, and potential buyers in my efforts to sell lots. While my kids managed to earn some money by mowing the empty lots as required by city regulations, I couldn't help but feel a growing concern as property maintenance expenses steadily depleted our bank account. It's important to be mindful of these ongoing costs when dealing with unsold properties.

The final lots were sold last fall, marking the end of a long chapter. When I added up the numbers, I realized the total loss was approximately $100,000. While painful, I felt immense relief that the ordeal was finally over.

But here’s the silver lining: It’s deductible.

Is That Deductible? Breaking It Down

If you’re a physician running a micro-corporation or exploring investments like real estate, understanding how business losses can be deducted is crucial. In my case, the $100,000 loss from this venture can be used to offset gains or other income within my corporate enterprise. Let me explain how this works:

1. Deducting Passive Activity Losses

This development project qualified as a passive real estate activity, meaning I wasn’t involved in day-to-day operations. Losses from passive activities can often be used to offset income from other passive investments. For example, rental income from my short-term rental properties could be reduced by the $100,000 loss.

2. Capital Loss Deduction

When you sell a business asset like land, any loss from the sale can often be categorized as a capital loss. These losses can offset capital gains from other investments, such as stocks, bonds, or other real estate ventures. If your capital losses exceed your gains, you can deduct up to $3,000 against ordinary income annually, carrying the remaining loss forward to future tax years.

3. Tax Advantages for Corporate Entities

Because this loss occurred within a corporate structure, I can deduct the entire amount against other business income. This is one of the benefits of structuring your investments within a micro-corporation—it provides flexibility and significant tax advantages.

Lessons Learned

While this venture didn’t deliver the ROI I had hoped for, it taught me invaluable lessons:

1. Due Diligence Matters: Always assess the risks and potential pitfalls, even in mission-driven investments.

2. Resilience Pays Off: Selling those lots, one by one, over 20 years required persistence and grit.

3. The Importance of Trusted Partnerships: Bill’s integrity and wisdom carried us through this difficult journey.

Most importantly, I gained a lifelong friend and mentor in Bill. His unwavering dedication to our project, even in his 90s, inspired me deeply. I’ll miss our monthly calls to discuss the business, but I’ll always treasure the lessons he taught me.

Closing the Chapter

As I paid the $2 overdraft at the bank and closed the account, I felt a bittersweet sense of closure. The business may not have been a financial success, but it was a success in so many other ways. It helped provide affordable housing, taught me invaluable business lessons, and gave me a lifelong friendship with a remarkable man.

And the good news is, it’s deductible!

Call to Action

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