Developers that renovate or rehabilitate historic buildings in Florida may qualify for significant tax credits offered by federal, state, county and city governments. The aim of each of these programs is to honor and preserve the state’s historic structures while putting these buildings to new use to meet community needs. Eligible projects include those for residential, commercial and/or industrial use, but exclude private, owner-occupied residential properties.
Through the federal Rehabilitation Federal Income Tax Credit, the government provides a tax credit equal to 20 percent of allowable renovation costs on structures certified as “historic” by the government and listed or deemed eligible for listing in the National Register of Historic Places.
Developers that rehabilitate non-historic buildings built before 1936 may qualify for a 10 percent tax credit, when properties are intended for non-residential use and meet the following criteria:
o At least 50 percent of existing external walls must remain as such
o At least 75 percent of existing external walls must remain in place as either external or internal walls
o At least 75 percent of the internal structural framework must remain in place
The federal government also offers property owners a Preservation Easement income and estate tax deduction for charitable contributions of partial interest in the preservation of historic properties. To claim the tax credit, the properties need not be depreciable, but developers must preserve the entire exterior façade of the property and pay a $500 filing fee.
State and local municipalities in Florida offer several programs that reward developers with tax incentives for restoring and reusing historic structures. For example, in Miami-Dade, the county may exempt historic properties from ad valorem property taxes equal to 100 percent of the assessed value of qualified improvements for 10 years. To claim this credit, property owners must apply to the Miami Beach Preservation Board.
Additionally, owners of commercial properties certified as historic by the National Register of Historic Places or by local ordinance, may qualify for lower property taxes when the Miami-Dade County Property Appraiser assesses a building based on its actual use rather than its highest and best use. To be eligible, the property must remain open to the public at a minimum of 40 hours per week for 45 weeks of the year, and the developer must apply through the property appraiser’s office by March 1 of each year.
Other counties throughout the state offer similar programs as those in Miami. Developers seeking to claim historic building tax credits should seek the counsel of advisors and accountants familiar with federal and local opportunities and guidelines for standards of rehabilitation.
About the Author: Karen A. Lake, CPA, is an 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.
As the rate of telephone scams escalates and claims more victims each day, the IRS issued the following reminders to help taxpayers identify when they receive fraudulent calls from scammers posing as representatives of the IRS:
- The IRS will never call taxpayer’s about owed taxes.
- The IRS will never demand payment without first giving taxpayers the opportunity to question or appeal.
- The IRS will never require taxpayers to use a specific payment method.
- The IRS will never request credit card or debit card information over the phone.
- The IRS will never threaten to call law enforcement and have taxpayers arrested for failure to pay taxes.
Telephone scammers are persistent in their efforts to dupe taxpayers into sharing personal information. They often alter caller IDs to make it appear that they are with the IRS, and they leave urgent voice-mail messages when taxpayers do not answer their calls.
Taxpayers who receive calls from someone claiming to be with the IRS should report the call to the Treasury Inspector General for Tax Information at 1-800-366-4484 and to the Federal Trade Commission via its Complaint Assistant at www.FTC.gov. They should also contact their accountant and tax advisor, if they have questions about the call or think they might owe taxes.
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.
With hiring on the rise, individuals seeking greener pastures in the same line of work may be able to deduct certain expenses incurred as part of their job searches. Deductible costs include:
- Expenses incurred for preparing and mailing resumes
- Unreimbursed hotel and transportation costs incurred when a job search requires out-of-town travel
- Fees paid to employment agencies, staffing firms and recruiters, unless those fees are later paid by a future employer
Non-deductible costs include:
- Expenses incurred by an individual in his or her first job search
- Expenses reimbursed by potential employers or later paid by potential employers to third-party agencies
- Expenses incurred when there is a long break between the end of one’s previous job and the time he or she begins looking for a new job
Taxpayers may deduct job search expenses as miscellaneous deductions on IRS Form 1040, Schedule A, Itemized Deductions, when the amount exceeds two percent of one’s adjusted gross income.
About the Author: Joanie B. Stein, CPA, is a senior manager in Berkowitz Pollack Brant’s Tax Services practice. For more information, call 305-379-7000 or email firstname.lastname@example.org.
The construction sector is showing signs of recovery nationwide, where total industry spending rose 7.8 percent over the same period last year, according to the U.S. Census Bureau. The trend is equally positive in Florida, where the construction sector led job growth over the past year with an 11 percent increase in Miami’s construction employment alone.
This turnaround is evident in a wide range of residential, commercial and public-private projects that extend across the tri-county area. Construction contractors are limited only by their abilities to assure property owners, builders and governments that they can complete contracts on time and on budget.
Audited financial statements shed light on a contractor’s ability to finance operations, operate profitably, stay on budget and complete a project on time. They are a valuable tool for contractors that are in the running for new projects.
Sureties Require Audits
Increasingly, private project owners are requiring construction contractors to obtain the same performance and payment surety bonds as required by federal, state and local agencies. This mitigates the risks of default, delays and cost overruns within a contractor’s control. Doing so helps project owners to narrow their selection of contractors to those with a proven ability to satisfy the terms of a construction project on time and on budget.
One of the requirements of obtaining a surety bond is an audit of financial statements and business operations. An audit also requires an evaluation of the contractor’s internal controls, the accounting practices and systems used to recognize revenue and estimate and track costs and invoices, and the contractor’s track record of claims and cost overrun collections.
Sureties use audited financial statements to evaluate the contractor’s ability to enter into a contract at the bidding price and pay suppliers and laborers as stipulated in the initial project bid. A surety will also evaluate the financial structure of the contractor to evaluate its ability to complete the contract. Without a surety bond, a construction contractor’s ability to compete in the construction industry can be limited.
Compliance with Effective Internal Controls
When hiring for construction projects, builders and property owners generally require assurances that selected contractors have a proven track record of effectively managing their contracts and businesses. Contractors that seek consistent operating performance typically implement formal policies and procedures to avoid irregularities. With these internal controls in place, contractors may properly estimate, recognize and manage contracts.
In addition, effectively designed and implemented internal controls can assist contractors in increasing operational efficiencies. These efficiencies may result in increased operating cash flows and working capital and improved collections on contract receivables. They can also help define roles and responsibilities within the organization that are intended to reduce the likelihood of fraud.
Appropriate segregation of duties between personnel in accounting and operations is a characteristic of effective internal controls. For example, an accounting department may receive cost invoices and enter them into its accounting information system. However, approvals for the payment of such invoices should be performed by the operations department (generally, at the project management level) and, depending on the complexity of the contract and the amount of costs involved, the engineering department may also need to approve payment of certain invoices. By segregating the duties of accounting recognition and approval of invoice payments, a contractor can mitigate the risk of fraud and more effectively manage its operations.
Construction projects are among the most complex financial-reporting endeavors, which can be further complicated by up-front cost estimates, front-load and delayed billing, deferment of gross receipts, retainages, variable fixed and unit prices and guaranteed maximum prices.
The way contractors account for revenue is unique to the construction industry. Because most projects are based on contracts of one year or more, contractors typically estimate future costs and ensuing profits up front and recognize profit as the project progresses toward completion. Recognizing revenue using the Percentage of Completion method allows a contractor to account for profits as they incur costs during the course of the project, rather than at the time of contract completion. This requires careful measurement of project progress through continuous evaluation of total estimated costs versus those incurred as each stage of the project is completed. The ensuing calculation provides timely information about profitability, a project’s progress and if overrun indicators need to be addressed.
An audit performed by a CPA with proper industry expertise provides a contractor with the opportunity to demonstrate compliance with acceptable methods of contract accounting, profitability on contracts and the ability to estimate costs on contracts.
A construction audit involves looking back at past performance. Change orders can provide significant profit to a contractor’s bottom line. However, if costs are not properly estimated, a project can quickly go from a profit to a loss. Proper internal controls can help contractors avoid pitfalls in the cost estimation process when negotiating change orders.
Audited financial statements are becoming an important diagnostic tool in the construction industry. They provide critical information and assist in identifying the construction companies which have proven track records. In addition, audits provide contractors an opportunity to critically assess their systems of internal control and financial reporting and address unidentified risks that they may face.
Retaining the assistance of an experienced accounting firm can help contractors demonstrate their profitability, compliance with acceptable methods of contract accounting and ability to estimate costs on contracts while presenting their financial results to key stakeholders in the industry.
The Audit and Attest Services practice at Berkowitz Pollack Brant has extensive experience providing audit, review and compilation services to construction contractors.
About the Author: Robert C. Aldir, CPA, is an associate director in the Audit and Attest Services practice of Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail email@example.com.
In May, Florida Gov. Rick Scott signed a bill cutting more than $120 million in taxes and ultimately reducing the tax burden of the state’s taxpayers. House Bill 5601 includes a combination of several tax holidays, credits and exemptions intended to save taxpayers more than $500 million in 2014.
To help attract and keep businesses in the state, HB 5601 provides tax incentives to that allow businesses to take tax credits against corporate income taxes or insurance premium taxes or as a refund on collected sales tax. It also increases tax credits available to businesses that provide capital investments in rural and low-income communities through the New Markets Development program. Additionally, the bill extends by one year the Community Contribution Tax Credit to businesses that make qualified donations to non-profit organizations that provide affordable housing and promote economic development.
HB 5601 exempts from state sales tax a range of products and services, including prepaid meal plans purchased by students currently enrolled in a state college, child restraint systems and booster seats, youth helmets and certain therapeutic veterinary diets. In addition, businesses in the construction sector will benefit from a temporary sales tax exemption on the purchase of mixer drums used to produce tangible personal property intended for future sale.
Other Tax Cuts
Finally, HB 5601 reduces the taxes for electricity, and clarifies and updates the definition of prepaid calling arrangements and their related taxes. Under the new definition, the sale or recharge of certain prepaid calling services will be treated as a sale of tangible personal property and therefore subject to retail sales and use tax, which is approximately half the amount of the communication services tax.
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.
Posted on October 14, 2014 by
The evolving nature of tax laws continues to leave taxpayers in an uncertain environment as 2014 comes to a close and a new year begins. To hedge their risks, taxpayers should get in the habit of working with their accountants and financial advisors as early as possible to develop a range of appropriate tax-efficient strategies that they may implement on a moments notice to address changes in tax laws. Doing so requires constant attention to emerging issues and regulations and the flexibility to change course as needed.
Following are some of the tax issues that made headlines in 2014 and that we plan to continue following in 2015.
Affordable Care Act (ACA)
Lawsuits and delays in the timeframe and guidance of when and how taxpayers will need to come into compliance with the Affordable Care Act continue. One thing is clear: 2014 marked the start of open enrollment in the Health Insurance Marketplace and the ACA’s individual shared responsibility provision that requires all U.S. citizens and resident aliens to have minimum essential health insurance coverage for each month of the year unless they qualify for any of the nine broad exemptions. Taxpayers will need to address their compliance with this provision on their 2014 tax returns or risk a penalty.
Also for 2014 tax returns, small businesses paying at least half of their employees’ healthcare premiums can receive an tax credit of up to 50 percent of paid premiums. In 2015, employers with 100 or more full-time workers will need to offer insurance to 70 percent of their workforce and prepare to insure 95 percent in 2016. Similarly, businesses with 50 to 99 full-time employees will have until 2016 to comply with this employer mandate to provide health insurance.
As the ACA continues to roll out, businesses of all sizes will need to develop appropriate strategies to comply with the law while managing their expenses and tax liabilities. For some, this includes reducing premiums by raising deductibles on existing employee health plans and making greater use of tax-free health savings accounts.
Net Investment Income Tax
While the 3.8 percent net investment income (NIIT) surtax on high-income earners is not new, the market gains from the past year is a good reason for investors to revisit the topic with their accountants and financial advisors. Taxpayers should consider several planning strategies to reduce or defer income and minimize exposure to the NIIT, including making charitable gifts or putting income into tax-deductible retirement plans.
Tax Extenders and Tax Reform
Very little was accomplished in 2014 with regard to tax reform and reinstating the package of more than 50 tax breaks that expired in 2013. While several proposals currently float around Washington, D.C., it expected that these issues will remain on the table for Congress to address after the November elections, at the earliest.
One regulation that did go into effect for 2014 addresses how businesses that own or lease buildings, equipment, machinery or other tangible assets allocate and account for costs incurred to acquire, maintain, repair, restore, reconfigure and dispose of tangible property. The final tangible asset regulations require that businesses update or change capitalization policies and accounting methods beginning in 2014.
For 2015, the American Institute of CPAs is working on two issues in need of reform, including reducing taxpayer’s administrative burdens in preparing amended returns when receiving corrected 1099 forms and reducing corporate tax burdens on businesses that employ temporary workers out of state. In addition, we are continuing to monitor developments involving online sales tax and local state and local use taxes.
In July 2014, international banking became more transparent with the implementation of the Foreign Account Tax Compliance Act (FATCA), which intends to combat offshore tax evasion among U.S. persons, businesses and estates. Under the law, foreign financial institutions must disclose to the IRS information about accounts over $50,000 that they hold for U.S. citizens. Correspondingly, U.S. taxpayers must use IRS Form 8938 to report information about those foreign financial accounts in which they hold an ownership interest. In addition, U.S. citizens, businesses and trusts organized in the U.S. with more than $10,000 held in foreign accounts also are required to file a report of Foreign Bank and Financial Accounts (FBAR) by June 30 of each year. Failure to do so comes with a penalty of up to $100,000 or 50 percent of the amount held in the offshore account as well as a prison term of up to 10 years.
One of the most pervasive issues affecting taxpayers in 2014 has been the rapid rise in incidences of tax-related identify theft and refund fraud. Taxpayers and their advisors must learn to recognize the clues that point to potential identify theft schemes and put into place the appropriate safeguards to reduce their risk of exposure. For its part, the IRS in 2014 began to limit the number of direct deposit refunds it pays to taxpayer’s bank account or to a prepaid debit card to three per year.
Adapting to uncertain tax environments requires the assistance of experienced professionals with the knowledge and skills to balance planning strategies with the specific and unique needs and goals of each taxpayer. The advisors and accountants with Berkowitz Pollack Brant work with foreign and domestic individuals, businesses and estate throughout the year to develop strategies that minimize tax liabilities, maximize tax efficiencies and comply with regulatory demands.
About the Author: Kenneth J. Strauss, CPA/PFS, CFP, is director of the Taxation and Personal Financial Planning practice with Berkowitz Pollack Brant. For more information, call (954) 712-7000 or email email@example.com.
“How large a discount can I get when valuing my business?” This is a question often posed by business owners. They are referring to the most commonly applied valuation discounts, referred to as the discounts for lack of control (also known as a minority interest discount) and marketability. Many people believe that these discounts are automatically applied. In actuality, these discounts must be supported by both the facts and circumstances of the particular valuation and comparison to the body of empirical data currently recognized in the valuation community for quantifying valuation discounts.
The valuation of a controlling interest versus a minority interest in a closely-held business is not likely to have the same value, depending on the circumstances. Because of the inherent differences between a controlling and a minority interest, the value of a minority interest is not equal to its pro-rata portion of the enterprise’s value. This results from the application of lack of control and marketability discounts. For example, a 10 percent interest in a business valued at $1 million is not necessarily worth $100,000. After applying discounts, it may be worth considerably less.
A discount for lack of control reduces the value in order to reflect the minority interest’s inability to control the business’s management and policies. When quantifying this discount, the valuator must consider several factors, including voting rights, the level of control and accompanying benefits of the minority interest, the contractual agreements in place between the company’s owners, and relevant jurisdictional law. Many factors can affect the degree of control an owner has over the operations of a corporation, partnership or limited liability company. If any of the elements of control are unavailable to the ownership interest being scrutinized, the value attributable to control should be reduced accordingly.
The lack of marketability discount reflects the effort an investor would have to put forth to sell an ownership interest. Investors usually consider the liquidity of an interest – that is, how long it will take to convert to cash. Investments such as publicly-traded stocks are highly liquid, since investors can, under ordinary circumstances, sell their shares and receive the proceeds in cash in just a few days. Shares in privately-held companies are much more illiquid, compared to publicly-traded securities, and typically warrant significant discounts from their indicated “marketable” price. Therefore, the market will require a discount for that lack of liquidity. Factors affecting a privately-held business interest’s marketability include – transfer restrictions, dividend-paying policy, size of the block of stock, and whether the owner possesses elements of control.
The application of valuation discounts depends on the level of value (see the chart below) indicated by the methods utilized by the valuator. If the valuation analyst values the company using a method that results in a marketable controlling interest, discounts for lack of control and lack of marketability may be appropriate. However, if the valuation methodology used produces a marketable minority value, no discount for lack of control would be warranted, but a discount for lack of marketability may be applicable.
Source: Traditional Levels of Value (www.mercercapital.com)
The valuator must apply appropriate valuation discounts to adjust the level of value indicated in the valuation method(s) to the level of value required for the particular valuation engagement. Failure to properly apply discounts may result in a substantial inaccuracy in the value conclusion.
The example below reveals the potential advantage of making certain that applicable discounts are considered. For example, if a company’s 100 percent value has been estimated at $10,000,000, and a 20 percent minority interest is being valued, the discount for lack of control and discount for lack of marketability can be calculated as illustrated in the example below.
||100% Controlling Interest Value
||20% Pro-rata Value (before discounts)
||Less: DLOC (25%)
||Minority, Marketable Value
||Less: DLOM (20%)
||Minority, Non-Marketable Value
In this hypothetical example, the total reduction of value through the discounts amounted to $800,000. This reduction was 40 percent of the pro-rata value. By reducing the pro-rata value of the minority interest using the discounts, the taxable amount is lower and may generate tax savings for gift and estate tax purposes, just by considering the inherent characteristics of a minority ownership interest.
The application of appropriate valuation discounts should be left to the professional judgment of the valuator. A qualified business appraiser is able to support discounts to withstand scrutiny by the IRS and correctly value the ownership interest, providing significant benefits to the client.
About the Author: Sharon Foote, ASA, CFE, is a manager in the Business Valuation and Litigation Support practice of Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail firstname.lastname@example.org.
The mention of usury often brings to mind predatory payday lenders and loan sharks. However, the practice of charging an excessive rate of interest often occurs in traditional financial transactions as well. Frequently, it is an unintended consequence of either or both parties failing to understand the nuances of state laws and lacking the skill to carefully calculate and analyze the characteristics of interest and fees over the life of a loan. In Florida, the calculation of interest is based on the intent and terms at the time of signing and assumes the obligation will be paid according to those terms. Therefore, it is important for lenders and borrowers to understand the terms of any agreement into which they enter.
Florida Usury Laws
Under Florida statutes, usury is defined as the charging (whether paid or not) of interest that exceeds 18 percent on loans, lines of credit, advances of money or any obligation of amounts up to $500,000, and that exceeds 25 percent for transactions involving amounts totaling more than $500,000. Loans with an interest rate between 25.01 percent and 45 percent are criminally usurious misdemeanors, while a rate above 45 percent is punishable as a third-degree felony. The challenge with avoiding a potentially usurious transaction lies in the intricacies found in the agreement, the characterization of the various fees reflected in the agreement, and, in some instances, the determination of whether the agreement is intended as the acquisition of an equity interest in the venture or the issuance of a debt obligation.
Characterization of Transaction Fees
Late fees, exit fees, commitment fees, underwriting fees, origination fees and discount points are examples of common fees that may be charged in a typical loan. However, these fees, charged by lenders, have the potential of putting lenders at risk of violating state usury laws. The courts may include these fees, especially if they are neither reasonable nor customary, in the calculation of interest to be spread over the full term of a loan, which may potentially result in the effective interest rate exceeding the legal limit. Knowing what fees may be deemed as interest is important to ensure compliance with usury laws. Both lenders and borrowers should consult legal counsel before entering into any financial obligation.
In some instances, an agreement may stipulate that, in addition to the transaction fees, lenders receive an amount tied to the value of the venture to which they are lending. For obligations exceeding the $500,000 threshold referenced above, the value of this amount charged is not included in the calculation of interest. Examples are stock options, an interest in profits or residual values.
Characterization of the Agreement as an Equity Interest versus a Debt Obligation
If a lending agreement is determined to be a purchase of an equity interest in the venture, then usury laws do not apply and there are no caps on the “return” the purchaser can charge. There are factors as to the characteristics of debt versus equity, which the courts have relied upon when determining the nature of the obligation.
360 or 356 Days? Computing Interest
Very often, lending contracts are based on a 360-day year. However, under usury laws, the “per annum” in the statute is based on a 365-day year. Lenders can be surprised to learn those extra five days can turn an otherwise non-usurious loan usurious. Consider a lender who charges the maximum interest of 18 percent on a one-year, $500,000 loan based on a 360-day year. The annual interest charge is $90,000, resulting in a daily rate of $250 ($90,000 / 360 days). However, because usury laws are based on a 365-day year, the resulting interest charged is actually $91,250 (365 days x $250/day), resulting in an interest rate of 18.25 percent ($91,250 / $500,000) and, therefore, creating a usurious loan.
The usury statute does not prohibit the use of compound interest; however, the lawful rates established by the statute are based on simple interest. Therefore, it is equally important that lenders be careful when compounding interest to ensure the total amount charged does not exceed lawful interest rate limits. Consider a lender who charges 17 percent interest on a one-year $500,000 loan, compounded monthly. The interest payable is $91,946. The ensuing simple interest calculation results in a rate of 18.39 percent ($91,946 / $500,000), which is usurious.
Lenders and borrowers must keep a watchful eye on the various factors that have the potential to make lending transactions usurious. Failing to abide by state laws can result in forfeiture of all future interest as well as the return of twice the amount of interest the borrower already paid. In instances of criminal usury, the loan may become void, and the lender may be required to return any principal repayments as well as twice the interest received. To protect themselves from unintentional usury, lenders often will include savings clauses in their loan documents. However, Florida courts have ruled that such clauses are not a valid defense in and of themselves. Rather, they are but one element to be considered in usury claims.
The advisors with Berkowitz Pollack Brant’s Forensics and Business Valuations Services practice work closely with borrowers or lenders and their legal counsel to assist in identifying potential usurious terms prior to executing lending agreements as well as representing borrowers or lenders when allegations of usury arise.
About the Author: Joel Glick, CPA/CFF, CFE, is an associate director in Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice. He can be reached in the Miami CPA firm’s office at 305-379-7000 or via email at email@example.com.
Effective April 30, 2014, eligible Florida businesses may claim an exemption from sales and use tax on the purchases of certain industrial equipment and machinery used for manufacturing, processing, compounding and production of tangible personal property that is intended for future sale. The exemption, which expires on April 30, 2017, also covers the parts and accessories businesses purchase for manufacturing equipment before the businesses puts the machinery into service.
Under the new exemption, eligible businesses include those whose primary activities where the equipment is located are classified as manufacturers under Codes 31, 32 or 33 of the North American Industry Classification System (NAICS.) This includes manufacturers of foods and beverages, textiles and apparel, computers and electronics, chemicals and transportation equipment.
To claim the exemption, businesses must provide equipment and machinery sellers with signed certificates claiming their right to the statutory exemption. However, if it is later determined that the business is ineligible for the exemption, the state will seek to collect taxes from the business rather than the seller.
States offer a variety of sales and use tax exemptions to help them maintain and attract new businesses and support the creation of higher-paying jobs in their region. For example, in Florida, if a business is not considered eligible for the new manufacturing exemption, it may still qualify for an exemption under the “new and expanding business exemption” already in effect.
The advisors and accountants with Berkowitz Pollack Brant maintain a watchful eye on state and local tax issues that affect clients in a range of industries, both in Florida and throughout the country.
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.