Joe owns a short line railroad. Joe needs to repair a bridge over the Little Stinky River. But Joe doesn’t have any money and his profitability is so low, he can’t get a bank loan. No problem. Joe is having a few stiff ones at the local bar and is sadly telling the bartender that without repairing the bridge, he’ll have to shut down his railroad. Ted Tax Lawyer is sitting at a nearby bar stool and says, “there might be a way to do this. How many miles is your railroad?” “100”, Joe answered. You need to set up an LLC and assign your track to it for a $1 for 3 years, and the bridge for 20 years. The LLC will charge the railroad a toll to cross it.” Ted asks Joe how many trips across the bridge per day and Joe says, “two, One up and one back”. “So that’s 730 trips a year? How much will it cost to fix the bridge to like new?” Joe thinks for a minute and says, “$1 Million”. “And the bridge will last for how long? Ted asks. “20 years”. “Okay so that’s 14,600 trips over the bridge for its lifetime is that correct?” Ted inquires. I guess, so, Joe answers.” Ted, pulls out his calculator, “that adds up to $69 a trip. So, you now sell shares in the LLC to investors, ” Tax Lawyer Ted replies. “But who would buy it?” Joe asks, pleadingly. “Guys who want a tax credit, now”. They can buy a share in the LLC and when the LLC spends the money on the bridge, they get up to a 50% credit which is paid back in dribs and drabs over 20 years as income. So, each share would be $7,000 since there is a cap of $3,500 per mile per year. You’ll need to take three years to repair that bridge. So, for every dollar invested they get a 50% credit on their taxes in the for each year” Tax Lawyer Ted explains. That means if a guy invests $100,000, he is creditted with having already paid $50,000 to IRS on his taxes”.

So that’s how a tax shelter works. A benefit such as this, has to be (1) Assignable; (2) spend; and (3) large enough to get someone’s attention as a credit.