If you’re someone who plans to go into business or makes a lot of money then chances are you will become an accredited investor.
And that’s awesome because accredited investors can get some huge tax advantage and in some cases, you can end up paying very little to no taxes.
So in this post, we want to take some time to talk about what accredited investing is some new changes that took effect in 2021, share some examples and talk a little bit about some tax advantages.
So if you’re new to accredited investing, let’s start by defining what it is.
What is Accredited Investing?
So an accredited investor is a person or a legal entity (like a financial institution or a corporation) who is allowed to participate in investments not registered with the U.S. Securities and Exchange Commission or SEC.
The rule is meant to help prove investors have the sophistication and means to invest in potentially riskier investments, as well as weather any losses.
Now according to the SEC, an individual accredited investor is anyone who either:
- Earned income of more than $200,000 (or $300,000 together with a spouse) in each of the last two years and reasonably expects to earn the same for the current year, or
- Has a net worth of over $1 million, either individually or together with a spouse (excluding the value of a primary residence).
New 2021 SEC Accredited Investing Rules
But just last year, the SEC updated the criteria to include more people.
- The new rule allows individuals who are “knowledgeable employees” of a private fund to qualify as accredited investors.
- As well as financial professionals who have Series 7, Series 65, and Series 82 financial securities licenses.
If you fit or met any of those requirements then congratulations, you qualify as an accredited investor.
Being an accredited investor opens up to the possibility of making a truly passive income (which is making money without actively working) for you.
Now if you don’t quite meet those requirements, you may be wondering, “why do you have to be an accredited investor?”.
The rules regarding accredited investors are governed by SEC Rule 501 under Regulation D of the Securities Act of 1933, which was a government response to the Great Depression in the 1930s.
This is also known as the “truth in securities” law.
This act improved financial disclosure requirements so investors are informed about the investments they are buying.
It also tightened rules prohibiting fraud and misrepresentation in the sale of securities.
The accredited investor exemption seeks…
“…to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering,”
…according to the SEC.
In other words, the government wants to make investing safer for people who cannot afford to lose a lot of money.
Because, let’s be clear, accredited investing does carry risk. And you could absolutely lose all your money when you make an investment.
But at the same time, you can stand to gain a lot.
So, it’s really important that if you are an accredited investor, you take your time and make investments that aligned with your risk tolerance.
Where to Make Accredited Investments Online
Alright, now let’s take a look at some places you can make accredited investments online.
And if you’re not an accredited investor, we’ll show you somewhere you can check out too.
Alright, those are 4 websites that you can make accredited investments on.
But of course, you’re not limited to just those websites, or websites at all. There are many places to make accredited investments.
The key is that you understand the risk and feel comfortable making any of these accredited investments.
Now, you may be wondering, “how do they check if I’m an accredited investor?”.
It’s the responsibility of the company you are investing with to make sure you are an accredited investor.
Usually, your CPA can write an accredited investor letter for you to take to any company you want to invest with.
This is something we’ve done many times for our accredited investors or get it done quickly so that they don’t miss out on any investment opportunities.
Huge Tax Advantages for Accredited Investors
Now let’s talk about the tax advantage for accredited investors.
So usually, when you make an accredited investment you are viewed as a “LIMITED” partner.
This basically means you don’t participate actively in the business and you are simply making an investment in hopes of getting a return.
Because you’re a limited partner, you should receive a K1 which will show your profit or loss on your investment.
So if the investment that you made is losing money then that will show a loss on your K1, which will, in turn, reduce your active taxable income and allow you to pay less in taxes.
But why would anyone want to lose money on their investment even if they save money in taxes?
So as of 2021, the government has certain incentives in place for companies that invest in the US. That’s the reason why you hear companies like Amazon, paying very little in taxes.
For example, real estate investments can take advantage of opportunity zones and bonus depreciation on their properties, which could push their profits into a loss EVEN if they had positive cash flow.
So it’s essentially a win-win for the investors because you still get gains from cash flow and appreciation, but your K1 may show a loss, thanks to depreciation.
Now if you’re not quite an accredited investor yet, don’t worry because you can still get some of these same advantages as a more active investor.
We hope this will help you get started with your accredited investments and making passive income in 2021.
If you need more help with your wealth or investment management, simply contact us today and we’d be happy to guide you.