Smart Borrowing and Snapping Turtles

Top of Mind

I’ve been slowly making my way through How Countries Go Broke by Ray Dalio. I’m not sure that I’d consider central banking and monetary policy to be light beach reading, but it’s certainly had me thinking a lot about debt, and specifically the idea of healthy borrowing.

As a financial planner, it's common to hear clients discuss their goal to live "debt free". As consumers, we're taught that debt is inherently risky - something to avoid and pay off as quickly as possible. We're all familiar with cautionary tales of high interest rate credit cards and many of us have scar tissue from the 2008 subprime debt crisis. Debt can feel scary.

Meanwhile, as business owners, that same debt often becomes a strategic tool for growth and optimization - financing inventory, major equipment purchases, facilities expansion, and working capital. While it's easy to recognize large consumer credit card debt as "bad debt", what does "good debt" look like for personal finances?

People should consider debt as a strategic tool for building wealth. It's silly to suggest that debt always makes sense, but we should consider the full cost of paying cash for major purchases. For example, does it make sense to liquidate investments, pay capital gains, and disrupt a long-term investment strategy to avoid additional borrowing? The full opportunity cost of reallocating cash is not always obvious, and can often cost significantly more than the interest expense of additional debt.

30-year mortgage rates, as an example of common consumer lending, are undeniably higher and more volatile than we’ve seen for some time. But, rates are hardly at their highest point historically (see chart below). It is times like this where careful analysis of financing options is critical.

Worth Knowing

Here's something that might surprise you: while most personal debt interest isn't tax deductible (think car loans, credit cards, personal loans), interest from debt used for business or investment purposes is generally deductible. The IRS makes a key distinction based on what you use the borrowed money for, not the type of loan itself. The deductibility of interest makes a significant impact on the cash vs debt analysis of an investment.

Additionally, this creates interesting rate arbitrage opportunities. Home equity loans currently run around 7-8%, while business equipment loans often hit 10-12%. Both are tax deductible when used for business purposes, but the home equity route starts with a 3-4 percentage point advantage.

The math: A $50,000 equipment purchase financed with a business loan at 11% costs about $5,500 annually in interest. The same purchase with a home equity loan at 7.5% costs $3,750 - saving $1,750 per year before considering the tax benefits that apply to both.

The point is not to endorse HELOC loans as a perfect solution, but rather to provide an example of rate arbitrage. There are many loan options available that may be worth considering as an alternative to 100% cash payments.

The key requirements: legitimate business purpose, proper documentation, and keeping the funds clearly separated for business use.

Mark Your Calendar

The tax calendar is fairly quiet for the summer, but here are a few dates to write down:

• The business accounting method change deadline is July 31st. This is fairly specific, but if you’re considering major accounting changes like cash to accrual, inventory accounting, or depreciation methods, you’ll need to file form 3115 by July 31st for the change to take effect in tax year 2025.

• There is still plenty of time, but remember that Q3 estimated tax payments are due September 15th.

Maine Wildlife Fact

While writing this newsletter, Will came running into my office to let me know that there was a big snapping turtle in our yard. After relocating it to a nearby marshy river bed, we did a little research.

Maine’s snapping turtles have remained almost unchanged for 200 million years! They’re practically living dinosaurs. Most Maine snapping turtles have shells ranging from 8-18 inches and typically weigh 10-35 pounds. The largest specimen was discovered near UMaine Orono with a 23 inch shell and weighed 60 pounds! Scientists estimated that this turtle was 100-150 years old.

If you need to move a snapping turtle, don’t pick it up by its tail as you can do serious damage to the animal. Instead, put on some work gloves and get a firm grip on the back of the shell. Imagine your hands in the 5 o’clock and 7 o’clock position on a clock. Make sure to pick it up from the back since turtles can extend their necks almost three quarters of its shell length, and, true to its name, it may try to bite you. Alternatively, Flying Point Advisor’s naturalist team is standing by to help with all of your turtle relocation needs.

These Maine wildlife facts have been brought to you by Will (almost 7) and Frank (3), Flying Point Advisors’ on-staff naturalists.