Posted on September 30, 2014 by
A plaintiff filing suit to recover lost profits resulting from a defendant’s wrongful action must estimate with reasonable certainty the amount of the loss caused by the defendant’s misconduct. When calculating lost profits, the damages expert establishes an amount of lost revenues and then determines the costs that should be deducted from that amount. Despite the simplicity of this equation, the actual computation is rarely so easy. Both parties must consider causation, the plaintiff’s efforts to mitigate his or her risks, the proper length of the damage period and external factors that may have further contributed to a plaintiff’s loss of revenue. Additionally, these calculations can be complicated further by how the courts differentiate between fixed and variable costs and treat those expenses when calculating damages. While most courts agree that plaintiffs should deduct variable expenses from lost revenue, opinions on the deductibility of fixed costs vary from one jurisdiction to the next.
Dynamics of Fixed and Variable Costs
Variable costs are those that fluctuate with the rise and fall of sales, such as labor and materials. Conversely, fixed costs, which may include rent and insurance, are incurred regardless of production or sales volume. There are times, depending on the business and the loss period, when the characteristics of these expenses can change. For example, the rent a manufacturing business pays for space to store its inventory is a fixed cost. However, if the business introduces a new product and quickly ramps up production, it may require additional space, either in the same building or at another location. This increase in production will subsequently lead to an increase in rental costs, and rent would now be considered a semi-fixed cost. In this example, the deductibility of rental costs for a lost profits calculation may depend upon the case law in the jurisdiction where the case is tried.
Florida Case Law
In 2008, Florida’s Third District Court of Appeals overturned a lower court ruling addressing the issue of fixed versus variable costs in lost-profit calculations. In RKR Motors, Inc. v. Associated Uniform Rental & Linen Supply, expert witnesses disagreed on which expenses should be deductible in lost profit calculations. On appeal, the court ruled that certain fixed overhead costs are integral to parties carrying out a contract and therefore should be deducted in lost profits calculations to “allow for a true measurement of the amount the non-breaching party would have earned on the contract had there been no breach.” Not requiring such an allocation of fixed costs, the court reasoned, would lead to “absurd results.” In its opinion, the court noted that the “correct method in determining lost profits is not to subtract only those expenses that would not be ‘saved’ or reduced by not performing the breached contract. . . . [but] to subtract all costs related to performing the contract.” Because Associated failed to identify any costs that were not required to perform the contract, the court in this case accepted an allocation of all variable and fixed costs to calculate lost profits.
Calculating lost profits is a complex process that relies on facts and circumstances unique to each case and each state. While some courts have ruled that apportioned overhead expenses must be deducted from an award of lost profits, other courts have taken the view that general fixed expenses, such as overhead, should not be deducted unless they are directly attributable to the lost transaction and would have been saved by not performing the contract. When identifying fixed and variable costs, counsel must analyze the clients’ historic financial data and the relationship between expenses and revenue in determining whether costs are fixed or variable and therefore deductible. Doing so often requires the assistance of experienced forensic accountants who understand the nuances and dynamics of calculating lost profits and can apply the relevant state law to each specific matter.
About the Author: Adam J. Lang, CPA/CFF, CFE, is an associate director in Berkowitz Pollack Brant’s Forensic and Business Valuations Services practice. He can be reached at the Miami CPA firm’s office at 305-379-7000 or via email at firstname.lastname@example.org.
Posted on September 25, 2014 by
In 2014, the U.S. Department of Treasury ended its use-it-or-lose-it policy on Flexible Savings Accounts (FSAs) by allowing employees with FSA to rollover up to $500 of unspent funds into the following year.
Flexible Spending Accounts (FSAs) allow workers to set aside up to $2,500 in pre-tax money annually to pay for certain out-of-pocket medical and dental health care costs, including copayments, deductibles, medications and specific equipment and supplies required for diagnosis and treatment. Funding for these plans come from employees’ voluntary salary reduction elections and, at times, employer contributions. In the past, plan participants would lose any money left over in these accounts at the end of the year, unless their employers provided a grace period. However, beginning with the 2014 tax year, workers whose employers adopted FSA rollover policies may carry over up to $500 of unused funds for use during the following tax year. For plans beginning after Dec. 31, 2012, employees may receive payment or reimbursement of unused funds to pay for qualifying medical expenses in the following plan year.
Employees should check with their employers to determine if their companies adopted FSA rollover policies and plan accordingly during the Fall enrollment period for contributing to their plans for the 2015 tax year.
About the Author: Nancy M. Valdes, CPA, is a senior tax manager in Berkowitz Pollack Brant’s Tax Services practice. She can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email email@example.com.
In the absence of anti-inversion legislation by Congress, the U.S. Treasury has recently taken matters into its own hands and announced the steps it will take to stem the rising tide of U.S. companies attempting to avoid or reduce their U.S. tax liabilities by moving their headquarters overseas. The Treasury’s announcement aims to make tax inversions more difficult and less attractive to U.S. companies.
U.S. companies continue to pay U.S. taxes on income generated by U.S. operations after going through an inversion. The purpose of an inversion is to avoid paying U.S. taxes on income generated by foreign operations.
According to the Treasury, cross-border mergers that closed before Sept. 23, 2014, will not be subject to the new regulations. However, companies whose deals are in the works, including Burger King, which plans an inversion to Canada through a merger with Tom Hortons, will need to address the following new rules:
- Inverted companies that use “hopscotch” loans to access foreign subsidiaries’ tax-deferred earnings will be subject to U.S. tax on a corresponding amount of deferred foreign earnings.
- Inverted companies that employ “de-controlling” strategies in which they restructure foreign subsidiaries outside U.S. control in order to avoid U.S. taxes on foreign profits and deferred foreign earnings will be subject to U.S. tax on a deemed dividend that would otherwise be nontaxable.
- Inverted companies that transfer cash or property from a controlled foreign corporation (CFC) to the newly inverted parent company in order to avoid U.S. tax are subject to U.S. tax on a corresponding amount of the CFC’s deferred foreign earnings.
- U.S. owners of inverted companies that artificially inflate the size of the acquiring foreign corporation with the use of so-called “cash boxes” or that artificially deflate the size of the domestic company by paying out large “pre-inversion dividends” to reduce continuing ownership below the 80 percent threshold will be treated as still being above the 80 percent threshold. As a result, the foreign parent corporation will still be taxed as a domestic corporation.
A former chairman of the Senate Finance Committee issued a statement objecting to the Treasury Department’s new approach to inversions, indicating that anti-inversion legislation should be accomplished by Congress and the executive branch. A policy analyst commented that Treasury risks exceeding its authority and may face a legal challenge from companies with pending inversions that are made invalid by the changes.
The advisors and accountants with Berkowitz Pollack Brant stay up-to-date with regulations affecting domestic and foreign businesses and develop strategies to maximize tax efficiencies related with international mergers.
About the Author: James W. Spencer, CPA, is a director in Berkowitz Pollack Brant’s Tax Services practice. He can be reached in the Miami CPA firm’s offices at 305-379-7000 or via email at firstname.lastname@example.org.
As immigration to the United States continues to surge, South Florida, in particular, continues to be a choice destination for Latin American citizens to invest their assets, conduct business and, in many cases, make their permanent home. Those immigrants seeking U.S. residency find that the path to citizenship offers a wealth of opportunities as well as a range of new responsibilities, including paying U.S. income, estate and gift taxes. Failing to prepare in advance of one’s move to America – whether temporarily or permanently – can be quite costly. Conversely, taking the time to understand U.S. tax laws and to plan and implement tax-efficient strategies before taking up permanent residence in the U.S. can ultimately result in significant tax savings and preservation of wealth.
Understanding U.S. Resident Tax Status
In the United States, an individual’s immigration status differs from his or her tax status. In most situations, once individuals apply for green cards or meet the thresholds of the substantial presence test, they could be considered income tax residents, who, like U.S. citizens, must report and pay taxes on their worldwide income. Before that point, they may be considered nonresident aliens, who pay tax only on income derived from U.S. sources.
Residency for income-tax purposes differs for estate and gift taxes. While the income-tax test is fairly defined, the determination of whether someone is a U.S. domiciliary, and, therefore subject to estate tax on their worldwide assets or gift tax on gifts of U.S. situs assets, is a facts and circumstances test. Additionally, it should be noted, that a non-U.S. domiciliary may be subject to an estate tax on his or her U.S. situs assets only.
Prior to becoming U.S. income tax resident aliens, immigrants have a unique planning opportunity to reduce their future U.S. tax liabilities before stepping foot on American soil. Overriding plans should focus on implementing specific strategies that accelerate income, defer losses and maximize tax efficiencies of estates and business entities prior to U.S. immigration.
Accelerate Income and Gains
Because foreign-source income is not subject to U.S. income tax before individuals gain resident alien status, it behooves future immigrants to realize income and gains before they seek U.S. citizenship. This acceleration of income may include collecting outstanding accounts receivables; distributing accumulated earnings and accelerating interest payments; and even selling or gifting assets before one becomes a resident alien of the U.S. For example, immigrants who own businesses in foreign countries may reduce their future taxable U.S. income by accumulating business earnings and paying themselves dividends before becoming U.S. resident aliens. While these immigrants may face tax ramifications on those payments in their home countries, they may be able to avoid bringing that income into the U.S., where they may pay higher taxes on the amount.
In addition, future U.S. income tax residents may avoid potential taxes on appreciated assets by selling them at fair-market value before moving to the U.S. If future income tax residents later repurchase those assets, they will receive a step-up in the assets’ cost basis, which will reduce full appreciation value and the taxpayer’s taxable gains when they sell the assets stateside.
Defer Losses and Deductible Expenses
The U.S. tax system allows income tax residents to reduce their taxable income by claiming losses and certain expenses against their gross worldwide income. As a result, immigrants may consider delaying losses and deductable expenses until after they gain U.S. tax residency. For example, if an immigrant’s stock portfolio decreased over the past 10 years, he or she may consider harvesting those losses and bringing them to the United States, where a sale of the stock may offset gains realized from another income-producing source.
Gift Assets and Restructure Estate Plans
Unlike the resident alien tests that rely on hard facts to determine one’s U.S. income tax responsibilities, one’s exposure to U.S. estate taxes considers a more subjective principle, namely one’s domicile or physical presence in and “intent” to remain in the states for an unlimited amount time. Determining domicile requires analysis of various factors, including the location of one’s business, home and personal belongings; whether or not the individual held a U.S. driver’s license or used U.S. issued credit cards; and the amount of time the individual spends in the U.S. and in other countries. Under the tax code definition of domicile, a foreign citizen may be considered a nonresident alien domiciled in the United States and thus subject to gift and estate taxes, also referred to as transfer taxes.
The best strategy for minimizing one’s estate taxes is to reduce the value of his or her taxable estate. This can be accomplished by gifting tangible personal property, including jewelry, art or a home sited outside the U.S. to family members prior to immigration or creating a trust, foreign corporation or other tax-efficient vehicle to hold those assets outside the purview of the U.S. tax system. However, with many of these estate tax planning instruments, estate owners must take special care to ensure they neither exclude U.S.-based heirs from benefiting from trust assets in the future nor fall under the five-year transfer rule or the throwback rule relating to undistributed net income. Yet, estate owners must of course consider the practical approach of their actions. Gifting assets away or losing control over investments is never desirable, and such activities need to be evaluated irrespective of their tax benefits. Through appropriate planning, including establishing goals and objectives and aligning them with the tax system, individuals may identify a more tax efficient manner to accomplish their stated aims. For these reasons, as with all U.S. tax planning, individuals should meet with experienced advisors and accountants to weigh the pros and cons of each potential tax savings strategy.
Immigrating to the United States is an endeavor that individuals must undertake only with the benefit of experienced legal and tax counsel. In addition, attention should be paid to allow ample time for clients and their counselors to address a complete range of tax planning strategies and their consequences, including those related to business entities, insurance policies and retirement plans. While the usual approach for immigrants to focus on obtaining visas first and then seeking tax advice once stateside could result in severe tax ramifications. The preferable strategy is for these individuals to put tax planning ahead of immigration.
For more than 30 years, the advisors and accountants with Berkowitz Pollack Brant have helped foreign citizens navigate complex U.S. tax laws and implement strategies that address unique circumstances and aim to minimize tax liabilities and preserve wealth.
About the author: Joseph L. Saka, CPA/PFS, is director in charge of the Tax Services practice at Berkowitz Pollack Brant. He may be reached in the Miami CPA firm’s office at (305) 379-7000 or via e-mail at email@example.com.
Landing a new job or promotion can be an exciting time. However, when these life changes require a move to a new city or state, stress and expenses can escalate quickly. When taxpayers relocate to start new jobs or to work at a new location with their existing employer, they may deduct some moving-related expenses when they meet the following three requirements:
- The Distance Test. The new job must be at least 50 miles further from individuals’ existing homes than from their prior job locations.
- The Time Test. Following a move, individuals must work full-time at their new jobs for a minimum of 39 weeks for the first year. Self-employed taxpayers must also work full-time for a minimum of 78 weeks for the first two years. Relocated taxpayers who do not meet the time test by the due date of their tax return may still deduct moving expenses if they expect to meet the time test in the following tax year.
- Close Relation in Time and Location with Start of Work. Individuals may deduct moving costs when they incur those expenses within one year after the date they start work at a new location. In addition, the distance from individuals’ new homes to their new job locations must not exceed the distance from their former homes to their new job locations. Additional rules and exceptions apply to this test.
Expenses that are deductible when relocating for employment include:
- Costs of travel, including transportation and lodging
- Costs of packing and shipping household contents and personal affects, including boxes and packing materials
- Costs of hiring professional movers
- Costs of storing and insuring contents while in transit
- Costs of connecting and disconnecting utilities
Conversely, the following expenses are not deductible when relocating for work:
- Expenses reimbursed by one’s current or soon-to-be employer (in fact, reimbursed moving expenses must be reported to the IRS as income)
- Costs for meals during the move
- Costs associated with selling an existing home or purchasing a new home
- Costs associated with entering into or breaking a lease
The advisors and accountants with Berkowitz Pollack Brant’s Tax Services practice help individuals and businesses understand the intricacies of the U.S. tax code and implement strategies to minimize liabilities and improve cost efficiencies.
About the Author: Dustin Grizzle is a senior manager in Berkowitz Pollack Brant’s Tax Services practice. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.
Despite the sweat and sacrifices entrepreneurs invest to build and grow their businesses during their lifetimes, they often fail to focus on how they will pass their entrepreneurial legacies onto future generations. In fact, according to a recent study conducted by U.S. Trust, 66 percent of business owners lack a formal succession plan that maps out how they will transfer business ownership to their children, employees, or a chosen successor upon the their retirement, incapacitation or passing. Often, these businesses are sold, liquidated or dissolved without owners realizing the benefits of their lifelong efforts.
What is a Succession Plan?
Too often, business owners believe they have appropriate succession plans in place. However, these intended “plans” are often broad and ambiguous “wishes” of how business owners “hope” their successors will take over. In most cases, owners pay insufficient attention to the realities that can make or break the success of a plan.
Conversely, a sound succession plan documents and communicates to all parties a long-term strategy of how a business will continue to operate after the managing owner(s) and/or principal(s) are gone or incapable of leading the business. It includes the specific steps that will be required to ensure an effective transition and increase the likelihood that the business does not fail or flounder upon the founding owners’ departure or disability.
Complicating succession planning is a range of issues that can affect a business’s long-term success. They include the way in which the business is structured, family relationships, retaining a competitive edge for the business, underlying motivations for transfers of ownership and the greater fear of relinquishing control of one’s life work. Navigating through these rocky emotional and operational issues is a delicate dance for which no standard rules apply. Rather, it requires careful examination of the situations unique to each business and implementation of financial, legal, managerial and effective generational communication that address the distinct circumstances of those businesses.
Entrepreneurs who plan to pass their businesses onto future generations must first consider whether their children are, in fact, interested and actually capable of taking over the reigns of a family-owned entity.
Interest is a subjective factor that no two people will measure by the same standards nor will one’s interest today guarantee the same attraction in the future. Consider the entrepreneur who spends three decades building a successful manufacturing business. After 20 years, the entrepreneur’s son expresses interest in taking over the family-owned business and spends his summers learning the ropes of the operation. However, upon the son’s college graduation, he takes a job on Wall Street and builds a successful career in finance. When the time comes for the entrepreneur to retire, he finds his son no longer interested in carrying on the family business. Are other children prepared and properly trained to step in? If not, can the entrepreneur sustain the value of the business and monetize it by selling or by transferring ownership to employees or other chosen buyers?
For entrepreneurs whose children do carry through on intended succession plans, one’s motivation and capability to allow the next generation to succeed will weigh heavily on the timing of ownership transfers. Typically, founding entrepreneurs are deeply intertwined in their businesses, which have become a key to their identity and self-value. Second-generation business owners do not always share this same perspective nor do they always share the survival mentality or the burning desire that their predecessors had in creating the business and making it successful.
Similarly, the challenge of keeping the business competitive in a constantly evolving marketplace requires second-generation owners to constantly innovate and employ entrepreneurial efforts that they may not be able to exercise. In fact, the primary reason most second-generation businesses fail is their inability to adapt to change and innovate.
How can an entrepreneur walk away from their life’s work with confidence that future generations will adapt and sustain their competitive legacy? The answer involves a careful process of planning that respects multi-generational differences and addresses the potential challenges and conflicts that can arise. It also requires assurance that the transfer of responsibility takes place when the business is strong enough to sustain the transfer to the next generation while the founder is still in a position to mentor the next generation leader.
Too often succession plans fail to result in smooth transitions of operational and managerial ownership because too little emphasis is placed on what may be the most important aspect of a successful plan: development of the successor and the timely transfer of responsibilities.
Every individual learns at a different pace and through a different style. No one can predict with exacting certainty the point at which a child will acquire the skills and experience needed to take over and sustain an existing business. One hopes that the child receives adequate preparation before taking on a leadership role. However, what is adequate for some may be lacking for others.
The most successful plans provide successors with ample time and opportunities to learn and integrate slowly into a leadership position and forge trusted relationships with employees, clients and other audiences to ensure consistency and continuity. The responsibilities transferred should not be so great that they impede successors’ ability to keep the business profitable. Benchmarks may be established from the onset to measure how well or quickly successors advance to fit into their new roles. Additional training may be required.
Equally important is having the first generation set aside adequate reserves to allow the second generation to make mistakes without taking the business down. Successful entrepreneurs learn from their mistakes. Their successors should be afforded the same opportunity without fear of ruining what the entrepreneur took years to build.
Succession planning is a process that cannot be accomplished overnight. It takes time and patience to understand generational differences, work through rough patches and allow successors the time, opportunities and support to overcome challenges. The results of such planning will provide peace of mind for all involved parties.
About the Author: Richard A. Berkowitz, JD, CPA, is founder and CEO of Berkowitz Pollack Brant Advisors and Accountants. He can be reached at the CPA firm’s Miami office at 305-379-7000 or via email at email@example.com.
According to the U.S. Bureau of Labor Statistics, retirement benefit plans were available to 85 percent of employees working for private businesses with 100 or more workers in 2013. In order to protect employees’ investments and help them to make sound financial decisions, businesses sponsoring these plans, particularly defined benefits and defined contribution plans, are required to report annually on their plans’ characteristics and financial operations.
The process for complying with the reporting and audit standards set forth by the Employee Retirement Income Security Act of 1974 (ERISA) can be a complicated and exhaustive undertaking, for which many businesses often are not adequately prepared. Following are common questions and challenges posed by administrators of employee-sponsored 401(k) plans regarding their audit requirements and fiduciary responsibilities.
Do We Have to Hire an Independent Auditor?
All employer-sponsored qualified 401(k) plans must file Form 5500, Annual Return/Report of Employee Benefit Plan, on an annual basis. However, once the plan has 100 or more eligible participants on the first day of the plan year, it is considered a “large plan,” which requires completion of Schedule H, Financial Information, of Form 5500 as well as a certification of the plan’s financial statements by an independent auditor (“audit requirement”.) This 100-participant threshold includes all eligible employees, including active employees contributing through payroll deductions; eligible employees that decline to participate in the plan; retired or terminated employees with assets in the plan; and deceased employees whose beneficiaries are entitled to benefits from assets in the plan.
There is an opportunity for businesses to avoid independent audits in subsequent years, after the plan first triggers the audit requirement, if their eligible participant count fluctuates below and then around the 100-participant threshold. Under the 80-120 Participant Rule, plan sponsors with 80 to 120 (inclusive) eligible participants at the beginning of the plan year have the option to choose the same filing status they completed in the prior year, either as a “small” or “large” plan, which may be different than their filing under the general 100-participant threshold. Plan sponsors should monitor their eligible participant count and provide their annual payroll census data to their Form 5500 preparers as early as possible, in order to determine their annual filing needs. Plan sponsors should also monitor the count of terminated participant balances, as there are options available to remove smaller balances from plan assets and therefore reduce eligible participant counts.
How Do We Prepare for an Independent Audit?
An independent audit of a plan’s financial statements will include a determination of the accuracy of financial information and disclosures, as well as the plan’s compliance with relevant labor and tax laws. Auditors will examine the operational aspects of the plan, such as plan policies, definitions of compensation, timing of plan contributions and the ways in which the plan fiduciaries follow the plan document and communicate with participants. The goal is to ensure that the plan operates as required – transparently – with appropriate oversight and in the best financial interests of plan participants. In preparing for the audit, auditors will look at payroll records, personnel records and plan-related correspondences. In addition, auditors will work closely with plan trustees and third-party service providers in conducting the plan audit.
What are Our Responsibilities as 401(k) Plan Administrators?
Administrators are responsible for managing plans in the sole best interest of participants. This includes carrying out the policies of the 401(k) plan in accordance with the plan documents and related laws and regulations; ensuring the diversification of plan investments to minimize risks of large losses; monitoring investment performance and replacing underperforming investments, ensuring the reasonableness of plan fees and defraying any unnecessary costs; and providing pertinent information to help participants make sound financial decisions.
One of the most common and costly errors plan administrators make is failing to understand their responsibilities as fiduciaries. In fact, many plan administrators often are surprised to learn that they are indeed plan fiduciaries and may be held personally liable for any breach of those responsibilities. Lack of expertise does not excuse the plan fiduciary in the case of a breach. Rather, the plan fiduciary is expected to seek the advice of professionals, as needed, to fulfill their fiduciary responsibilities. Whether a fiduciary breach is willful or accidental, the plan administrator may be responsible for paying back lost earnings that resulted from their actions or inaction.
What is Considered Adequate for Timely Deposits of Contributions?
ERISA regulations require employers to deposit participants’ contributions, “as soon as it is reasonably possible,” but no later than the 15th business day of the following month. Plan sponsors should consider their companies’ procedures and consistent history when determining what constitutes “as soon as possible” for their specific plans. Plan administrators may fall victim to their own efficiencies if they extend deposits beyond the timeframe that they historically have been able to make the deposit. A deposit made even one day past the usual timeframe can be considered late and lead to administrative headaches, such as the imposition of taxes on late contributions and repayment of lost plan earnings to restore participants and beneficiaries “to the condition they would have been in had the breech not occurred.” While there may be valid, supportable reasons for administrators to submit contributions later than usual, the Department of Labor will not accept excuses such as delays caused by employee vacations or employee turnover. To avoid late contributions, plan administrators should establish clear and consistent procedures.
Employer-sponsored retirement plans provide a wealth of benefits to businesses and their employees. However, failing to understand the annual requirements and a plan sponsor organization’s fiduciary responsibilities over such plans can be quite costly – both for the employer and the administrator(s) of the plan. Experienced auditors are a great resource to educate businesses and work with them to comply with ever-changing regulations.
The advisors and accountants with Berkowitz Pollack Brant have extensive experience helping businesses establish defined benefits and defined contribution plans and working with plan administrators to comply with strict audit and reporting requirements.
About the Author: Lisa N. Interian, CPA, is a senior manager in Berkowitz Pollack Brant’s Audit and Attest Services practice. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
Posted on September 09, 2014 by
Despite the added cash flow that vacation properties can generate for their owners, income from such activities typically is taxable and may be subject to the additional 3.8 percent Net Investment Income Tax. Understanding the tax implications of renting residential property, including houses, apartments, condominiums and even boats, is important to ensure owners maximize the benefits of such activities without incurring additional costs.
Sources of Rental Income
Rental income on property may include rent paid by tenants, expenses paid by tenants for repairs or utilities, and costs charged to tenants for early lease termination. Also included in reportable rental income is the fair market value of services provided by tenants in lieu of rent as well as security deposits, when owners use such payment as advance rent for the last month of a lease. However, owners do not need to report security deposits retained for future damages and intended for return to tenants until the time when the owner actually keeps the money.
Exception to Rental Income Reporting
Owners of vacation property must report on their U.S. tax returns all sources of rental income and expenses on Schedule E, Supplemental Income and Loss, unless they use the property as their home and rent it out fewer than 15 days per year.
Deducting Rental Expenses
In most cases, owners of vacation homes may deduct expenses incurred for renting the property, including insurance, maintenance, taxes, interest and professional fees. Exceptions apply when owners use the homes for personal use, including use by their family members or to anyone who pays less than a fair rental price. In these instances, property owners must divide their expenses between the number of days they use the property for personal use and the number of days they rent it out to others.
Property owners may deduct some of the costs associated with vacation homes by depreciating the portion of the property’s value used for rental each year. Depreciation begins in the year in which the owner readies the property for income-producing activities and ends when the owner sells the property or converts it to personal use.
The advisors and accountants with Berkowitz Pollack Brant understand the complexities of owning and renting vacation properties and work closely with domestic and international clients to maximize tax efficiencies related to these matters.
About the Author: Kenneth J. Strauss, CPA/PFS, CFP, is a director in Berkowitz Pollack Brant’s Tax Services practice. He can be reached at the CPA firm’s Ft. Lauderdale offices by calling (954) 712-7000 or by email at email@example.com.
From September 19 through 21, Florida residents can enjoy a sales-tax holiday on the first $1,500 spent on the purchase of one new Energy Star product, including room air conditioners, ceiling fans, air purifiers, dehumidifiers, specific light bulbs as well as appliances such as refrigerators, freezers, water heaters, and washers and dryers. The tax exemption also extends to the purchase of one WaterSense product, including bathroom faucets, showerheads, toilets and sensor-based irrigation controllers. Floridians who purchase a second Energy Star or WaterSense product costing more than $500 will have to pay sales tax on those items.
This sales-tax holiday is the final of three authorized by Gov. Rick Scott in May allowing Florida residents to avoid paying 6 percent sales tax on specific purchases. Previously, residents enjoyed a sales-tax holiday on hurricane-preparation supplies in May and school supplies in August.
In addition to Florida’s three tax holidays in 2014, HB 5601 also exempts the following items from state sales tax:
- Prepaid meal plans purchased from a university or other higher learning institution
- Child-restraint systems, booster seats and children’s bicycle helmets
- A mixer drum affixed to a mixer truck used in Florida to mix, agitate and transport freshly mixed concrete in a plastic state for the manufacture, processing, compounding or production of items of tangible personal property
- Therapeutic veterinary diets used to manage illness of a diagnosed health disorder in an animal, and which are only available from a licensed veterinarian
About the Author: Karen A. Lake, CPA, is associate director of Tax Services with Berkowitz Pollack Brant. She can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email firstname.lastname@example.org.
A recent U.S. Tax Court case demonstrates the tax implications when sellers reacquire property after buyers default.
In its ruling, the court found that the sellers rightfully excluded from their reportable income $505,000 in cash payments they received from the buyer for their principle residence. However, the court explained, once the buyer stopped making payments, the sellers reclaimed the property and should have reported the income and paid long-term capital gains on the amount. According to the court, the sellers were “actually in a better position than before the sale by virtue of having ownership over both the property and $505,000.” Furthermore, the court explained, the only way the sellers might have avoided the tax was if they sold the property within one year of reclaiming it, depending on the proceeds received in the second sale.
The advisors and accountants with Berkowitz Pollack Brant’s Real Estate practice have deep experience implementing strategies to help developers, contractors and other buyers and sellers of real property meet their requirements with tax laws while maximizing their tax efficiencies.
About the Author: John G. Ebenger is a director in Berkowitz Pollack Brant’s Real Estate and Tax Services practices. He can be reached at the firm’s Boca Raton CPA office at (561) 361-1010 or via e-mail at email@example.com.
Law firms that hold funds in trust for clients and other parties in connection with legal representation have new a new level of checks and balances to contend with in upholding their fiduciary responsibilities. Specifically, effective June 1, all law firms in Florida with more than one lawyer must have in place up-to-date written plans detailing how they maintain, protect and report on each trust accounts under their management. This amendment to the Florida Bar Rule 5-1.2(c) ensures that the state’s lawyers are held accountable for their individual compliance with trust accounting procedures and take steps to avoid misappropriation of trust funds.
Because the amendment was adopted the end of March, law firms were left with little time to implement changes and meet the rigorous compliance standards by the June 1st deadline. As a result, many firms are currently at risk of severe sanctions, including probation and emergency suspension.
Under the terms of the new amendment, Florida law firms must include in their written trust plans:
- The names of all lawyers responsible for signing and reviewing trust account checks
- The names of all lawyers responsible for reconciling the firm’s trust accounts monthly and annually
- The names of all lawyers responsible for answering questions that firm members may have about trust accounts
- The names of all lawyers responsible for developing written trust account plans
While many of the these duties may fall to firm employees in finance, administration or management, all trust account activities must be supervised by a lawyer who ultimately holds responsibility for funds held under the firm’s management.
In addition, the new rules require firms to share written trust plans with all firm member so that suspicions of non-compliance or misappropriation on trust funds can be reported and corrected swiftly (“whistle-blower” requirements.) Should a firm fail to address issues of potential fraud, the individual raising doubt must report suspicions of noncompliance to the firm’s managing partner, its shareholders and the Florida Bar.
Having a well-documented trust account plan and the processes and systems in place to support compliance with those plans should be a top priority for Florida law firms. Working with the support of accountants experienced in such matters may help to identify red flags and vulnerabilities that indicate potential fraud and/or lack of compliance with all Florida Bar trust account rules. With this second set of experienced eyes, law firms may also identify overlooked deficiencies in internal controls, including segregation of duties, and the ways in which they handle cash disbursements, vendor payments and revenue recognition. These additional efforts can reinforce a law firm’s efforts and create a defense to avoid potential sanctions by the Florida Bar. Ultimately, working with professionals who are experts in identifying and correcting compliance issues will help protect a law firm’s most important asset: its image as trusted advisors and guardians of fiscal responsibility.
The advisors and accountants with Berkowitz Pollack Brant have extensive experience working with Florida law firms to evaluate existing trust account plans and systems and provide recommendations for maintaining compliance with all related Florida Bar rules.
About the Author: Richard S. Fechter, JD, CAMS, is associate director of Berkowitz Pollack Brant’s Litigation and Business Valuation Services practice. He can be reached in the firm’s Miami CPA office at (305) 379-7000 or via email at firstname.lastname@example.org.