The Trump administration yesterday introduced the key principles of what it is referring to as “the most significant tax reform since 1986” and “the biggest tax cuts in history.” Central to the president’s plan are deep reductions in the corporate income tax rates and modest reductions in the individual income tax rates that are in line with his campaign promises.
As outlined yesterday, the president proposes to slash the top corporate tax rate to 15 percent from 35 percent and impose a new, one-time tax on the repatriation of previously untaxed overseas profits at a to-be-determined rate, which might be as low as 10 percent or even 3.5 percent, as proposed by certain congressional leaders. Furthermore, the proposal advocates for the U.S. to convert from the current system of taxation on worldwide profits to a territorial-tax system in which foreign profits are not taxed.
The 15 percent corporate rate would also apply to profits of pass-through businesses, such as S Corporations and LLCs, whose profits currently flow through to individual taxpayers and are taxed at a current rate as high as 39.6 percent. Like many of the points in the administration’s proposal, this one is unclear as to whether the 15 percent rate would apply to all of the taxable income of pass-through businesses or just the undistributed profits of such companies.
On the personal side of tax reform, the president calls for simplifying the number of tax brackets to three from seven, with a top individual income tax rate of 35 per cent, down from the current 39.6 percent. The additional tax rates under the president’s plan will be 10 percent and 25 percent, although the income brackets for these levels have not yet been defined. Long-term capital gains and dividends are expected to continue to be taxed at a maximum rate of 20%.
In addition, the president’s proposal aims to repeal the burdensome Alternative Minimum Tax as well as the estate tax and the 3.8 percent Medicare tax on Net Investment Income. Furthermore, tax deductions for charitable contributions, mortgage interest and retirement savings will remain intact, but other itemized deductions, including the deduction for state and local taxes, will be eliminated. Additionally, the administration proposes a doubling of the standard deduction from approximately $12,000 to $24,000 for married couples filing jointly and from $6,000 to $12,000 for single filers.
The one-page statement released by the White House lacked details, but it noticeably did not mention a repeal of Section 1031 tax-deferred exchanges (principally used for real estate) or the favorable treatment of carried interests.. It also did not mention previous Trump concepts such as the expensing of fixed asset acquisitions or the non-deducibility of interest expense on business debts.
Speaker of the House Paul Ryan and House Ways and Means Committee Chairman Kevin Brady stated that the House is 80 percent in agreement with the president’s plan. However, questions remain regarding how much opposition the president will receive from congressional lawmakers who have their own visions of tax reform. For example, under a House plan, the corporate tax rate would be set at 20 percent and there would be a “border adjustment tax” of 20 percent on imports. Similarly, questions remain as to how the president intends to pay for his plan and offset tax cuts without ballooning the national deficit. How and when these details will be hammered out is unclear.
There is no doubt that the U.S. is ripe for tax reform. The professionals at Berkowitz Pollack Brant will keep you abreast of tax reform as it develops, so that we may assist you with your short and long-term tax and financial planning needs.
About the Author: Barry M. Brant, CPA, is director of Tax, Consulting and International Services with Berkowitz Pollack Brant, where he leads the firm’s private client group and provides guidance on complex tax matters, including multi-national holdings, cross-border treaties and wealth preservation and protection. He can be reached in the CPA firm’s Miami office at 305-379-7000
, or via email at info@bpbcpa.com.
Individuals with overdue tax bills may soon get calls from private collection agency working on the IRS’s behalf. Under the new program, which was authorized by Congress in 2015, the IRS will this week begin turning over taxpayer’s old, outstanding tax obligations to private contractors. With this in mind, taxpayers should be extra diligent to identify potential scams when receiving calls or any form of communication purporting to come from the IRS.
Here are some tips to help taxpayers stay safe and avoid becoming victims.
· The IRS will mail letters to notify affected taxpayers that their accounts are being assigned to one of four collection agencies, including CBE Group, Conserve, Performant and Pioneer. No other agencies are authorized to work on the IRS’s behalf.
· One of the authorized private collection agencies will first contact the taxpayer via U.S. postal mail service.
· The collection agency will then contact the taxpayer via telephone solely to discuss the different payment options available to resolve the tax deficiency. However, the collector will not be responsible for actually collecting any payments nor is he or she authorized to take enforcement action against the taxpayer.
· Taxpayer’s payments should only be made directly to the IRS, either electronically or via check made out to the United States Treasury.
· At no time should a collector ask for payment over the phone or on a prepaid debit, iTunes or gift card. Taxpayers who receive such a request should hang up the telephone and file a complaint with the Treasury Inspector General hotline at 800-366-4484 or visit www.tigta.gov.
· Never share personal information, including social security number, tax ID number or credit card information, over the telephone or via email.
· The IRS encourages taxpayers who are behind in their tax obligations to come forward and make restitution before receiving communications from a private collection agency.
About the Author: Angie Adames, CPA, is an associate director with Berkowitz Pollack Brant’s Tax Services practice, where she provides tax and consulting services to real estate companies, manufacturers and closely held businesses. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
The Financial Accounting Standards Board (FASB) recently issued a new standard for financial institutions and other businesses to follow when accounting for credit losses in financial instruments measured at amortized cost, including debt instruments, trade receivables, lease receivables, reinsurance receivables, net investments in leases, financial guarantee contracts and loan commitments. Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326) will be effective after December 15, 2019, for U.S. Securities and Exchange Commission (SEC) filing public companies and after December 15, 2020, for non-SEC filing public companies. Early application will be permitted for all organizations beginning after December 15, 2018.
Under the newly introduced Current Expected Credit Loss (CECL) model, businesses will no longer rely on an “incurred loss” approach that allows them to delay recognition of credit losses until it is probable that a loss has been incurred. Rather, the CECL model will require entities to recognize as an allowance in current period earnings an estimate of the contractual credit losses they expect to incur over the contractual life of all loans and financial instruments they hold at the reporting date. Making this immediate, forward-looking estimation will further require businesses to consider historical events, current conditions and reasonable forecasts that support the amount they do not expect to collect in the future on loan portfolios and other assets they hold currently. This, in turn, will require enhanced disclosures to provide investors and other users of financial statements with better transparency regarding businesses’ underwriting standards, credit quality, and how they estimate potential losses.
Excluded from the new model are those instruments measured at fair market value and some equity instruments. Similarly, while entities may continue to use existing methods to measure available-for-sale debt securities with unrealized losses, they will no longer be able to recognize those losses as reductions in the amortized cost of the securities.
Transitioning to the new standard for recognizing credit losses will require all reporting entities to assess how they currently account for credit impairments. It will also require changes to businesses’ existing policies, systems and processes to measure credit quality, maintain loss information, forecast future economic conditions and implement new collection estimation techniques. Earlier recognition of allowances for credit losses may result in significant adjustments in credit reserves, for which businesses must begin planning under the guidance of experienced accountants and advisors sooner, rather than later.
The advisors and accountants with Berkowitz Pollack Brant work with individuals and business owners in a broad range of industries and across international borders to develop and implement strategies that meet ever-changing, often complex, financial reporting and disclosure requirements.
About the Author: Robert C. Aldir, CPA, is an associate director of Audit and Attest Services with Berkowitz Pollack Brant, where he provides accounting, auditing and litigation-support counsel to public and privately held companies located throughout the world. He can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.co
The Financial Accounting Standards Board (FASB) recently issued an Accounting Standards Update (ASU) that clarifies the definition of a business when used in transactions involving the acquisition, sale or consolidation of a business or assets. More specifically, ASU 2017-1 provides companies and reporting organizations with a narrower, less complex and less costly framework for making the appropriate determination of whether a set of assets and activities qualifies as a business.
The existing definition of a business under Generally Accepted Accounting Principles (GAAP), is “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.” According to the FASB, this definition is often applied too broadly, resulting in entities erroneously recording transactions as business acquisitions, when they are, in fact, asset acquisitions.
Under the new framework, a business must also include “an integrated set of inputs and processes that create or contribute to the creation of outputs.” Input elements may include intellectual property, employees and long-lived assets. Substantive processes refer to “systems, standards, protocols, conventions, or rules that when applied to inputs, create or has the ability to create or contribute to the creation of an output” that allows an entity to provide goods or services to customers or investment income or other revenue. In this definition, a business requires an input and substantive process but not an output.
Making the determination of whether a set of assets and activities qualifies as a business will require reporting entities to evaluate those inputs and processes through a practical “screen”. If substantially all the fair value of the gross assets acquired or disposed of is focused on a single, identifiable asset or a group of similar identifiable assets, the screen is not met. Therefore, the set is not considered a business and the transaction should be accounted for as an asset acquisition.
This new guidance has a significant impact on the acquisition of income-producing real estate, such as multi-family apartments or shopping centers. Under existing rules, entities frequently accounted for the acquisition of these income properties as a business combination, and the acquisition required them to analyze in-place leases at the acquisition date in order to place a value on this acquired future revenue stream. Subsequently, the entity would amortize the resulting in-place lease intangible over the life of the leases. In many instances, this analysis was time consuming and costly. ASU 2017-1 speaks specifically to in-place leases at the acquisition date and states that such items should be considered part of the value of the acquired asset, more specifically, the building acquired.
As a result of the FASB’s new, narrowed definition of a business, it is possible that an increasing number of entities will account for acquisitions as asset transactions, rather than business acquisitions.
Privately held business entities are required to apply the ASU to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Public companies must apply the ASU to annual periods beginning after have a December 15, 2017.
The professionals with Berkowitz Pollack Brant’s Audit and Attest Services practice work with businesses of all sizes and across all industry to assess and comply with a sea of evolving regulatory standards.
About the Author: Christopher Cichoski, CPA, is a senior manager with the Audit and Attest Services practice of Berkowitz Pollack Brant, where he provides business consulting services and conducts reviews, compilations and audits for clients in the real estate and construction sectors. He can be reached at the Miami CPA firm’s Ft. Lauderdale, Fla., office at (305) 379-7000 or via email at info@bpbcpa.com.
Taxpayers who receive stock-based compensation, such as nonqualified stock options (NSOs), must carefully review both their year-end wage reports on Form W-2 and their brokerage transactions on Form 1099-B to identify the possibility of reporting duplicate items of income, which may ultimately result in an overpayment of taxes.
When selling NSOs, a taxpayer must report on Form W-2 ordinary compensation equal to the difference between the acquisition price (grant price) and the sales price (exercise price). When the taxpayers sells the shares associated with the NSO, the brokerage firm holding the shares will have a regulatory requirement to report on Form 1099-B the same difference between the exercise price and the grant price that was reflected on the taxpayer’s W-2. As a result, it will appear to the taxpayer and to the IRS that the sales event created additional income that is subject to taxation.
To avoid this risk, taxpayers will need to reconcile their W-2s and 1099-B forms to identify any potential duplication of income reporting. If NSO income is reported twice, taxpayers can make necessary corrections by manually adjusting their capital gains and losses transactions on Schedule D and Form 8949, Sales and Other Dispositions of Capital Assets. Certain commercial tax-preparation software may not be automated to the level of detail necessary for this task. As a result, taxpayers with stock-based compensation should consult with a professional tax accountant.
About the Author: Lewis Kevelson, CPA, is a tax director with Berkowitz Pollack Brant, where he provides tax-compliance, planning and business structuring counsel to foreign investors, international companies, high-net-worth families and business owners. He can be reached in the CPA firm’s West Palm Beach, Fla., office at (561) 361-2048 or via email at info@bpbcpa.com.
Posted on April 12, 2017 by
In 2013, the Internal Revenue Code introduced two new Medicare taxes above the existing income tax responsibilities of high-income earners.
The first is a Net Investment Income Tax (NIIT) that is applied at a rate of 3.8 percent to the lesser of net investment income, including interest, dividends and capital gains, or the amount by which one’s modified adjusted gross income (MAGI) exceeds thresholds established for their particular tax filing status.
Conversely, the Additional Medicare Tax imposes a 0.9 percent tax on wages, self-employment income and railroad retirement compensation that exceed similar income thresholds. Because the two taxes affect different types of income, taxpayers may unwittingly be subject to both. As a result, proper planning should be engaged throughout the year.
Net Investment Income affects individuals, estates and trusts with investment portfolio income; trade or business income from passive activities or from the business of trading financial instruments; and net gains from property sales. The tax applies to individuals whose adjusted gross income exceeds $200,000 for single taxpayers and heads of household, or $250,000 for taxpayers who are married filing jointly.
The tricky part of the NIIT centers on how non-investment income can ultimately expose a taxpayer to the tax. For example, while distributions from qualified retirement plans are not subject to this tax, these withdrawals may push a taxpayer’s AGI over the income threshold and subject investment income to it. In addition, taxpayers should remember to account for the NIIT when calculating their quarterly estimated tax payments, which may increase the amount they will ultimately owe.
The 0.9 percent Medicare tax, which is in addition to the 1.45 percent Medicare tax that all workers pay, applies to wages and self-employment income that exceeds $200,000 for single taxpayers and heads of household. For married filing jointly taxpayers, the threshold of $250,000 must include wages and compensation for both spouses.
In addition to targeting a different source of taxpayer income, the Medicare Tax, unlike the NIIT, is typically paid by an employer, who withholds the tax from the wages they pay to workers. Self-employed taxpayers are required to consider the tax when estimating their quarterly tax payments.
Tax-Minimizing Planning Opportunities
Rather than succumbing to additional Medicare taxes, individual taxpayers may implement strategies to reduce their exposure to them.
For example, taxpayers may reduce their annual net investment income by making contributions to 401(k) plans, defer gains on property by using a Section 1031 exchange, or selling securities at a loss to offset market gains achieved earlier in the year or donating the gains to a non-profit entity. While no one wants to reduce their wages, taxpayers may instead reduce their exposure to the 0.9 percent Medicare tax by using IRS form W-4 to deduct additional pay from their paychecks. Furthermore, taxpayers can max out pre-tax contributions to employer-sponsored retirement plans.
Minimizing tax liabilities requires individuals to plan and implement changes throughout the year. Doing so under the guidance of professional accountants can go a long way toward maintaining tax efficiency and building wealth.
About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she focuses her practice on tax strategies for business owners and high-net-worth individuals and families. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
California law requires corporations “doing business” within the state to file a tax return and pay a minimum annual franchise tax of $800. However, a recent decision by the California Superior Court opens the door for certain pass-through entities to challenge the state’s assertion of economic nexus and, in some instances, be entitled to refunds for prior year tax payments.
The matter of Swart Enterprises, Inc. v. California Franchise Tax Board centered around the interpretation of Section 23101 of California’s Revenue and Tax Code, which defines the term “doing business” within the state as “actively engaging in any transactions for the purpose of financial or pecuniary gain or profit.” In 2010, the California Tax Board applied this definition and franchise tax treatment broadly to Swart, a family-owned corporation based in Iowa that lacks a physical presence and any sales activity in California but does own a 0.2 percent membership interest in a California-based limited liability company (LLC) investment fund.
According to the Franchise Tax Board, Swart’s interest in the California LLC was enough to establish a minimum connection required for it to collect taxes from the business. Yet, Swart was “not involved with the LLC’s operations or management and was prohibited under the operating agreement from participating in the management and control of the LLC.” Swart argued that because it held a passive, limited interest in the multi-member manager-managed LLC and had no rights of control over the management or operations of the LLC it was not, in fact, doing business in California under the definition of CRTC Sec. 23101. The court agreed and awarded to Swart a tax refund in the amount of $1,106.72, which included the amount Swart paid in franchise tax and additional fees and penalties it incurred.
In its ruling, the court made a distinction between taxpayers who are general partners or managing partners of LLCs and those who hold passive, non-managing interest and lack the right to manage or control the entities’ decision making processes. The court noted that just because an LLC elects partnership treatment for federal tax purposes does not mean that the LLC members should be treated as general partners actively engaged in the business. Yet, depending on the specific facts and circumstances of a California LLCs structure, its non-managing members may still have a requirement to file state tax returns and report their distributive share of source income from the LLC.
As a result of the court’s decision, corporations and LLCs that have previously filed and paid California corporate franchise taxes on a passive, minority investments in LLCs based in the state should consider filing a protective claim for a tax refund. Moreover, passive investors “doing business” through an LLC in any state should consider how the Swart decision may carry over to those states’ nexus assertions.
About the Author: Karen A. Lake, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals, businesses and non-profit entities navigate complex federal, state and local taxes, credits and incentives. A state and local tax expert, she can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email at info@bpbcpa.com.
The U.S. tax code allows individuals to claim a deduction on their federal income tax returns when they donate money or products to a charitable, non-profit organizations. The deductible contribution reduces the amount of a taxpayer’s income that is subject to tax. However, all donations are not treated equally. Following are some tips for taxpayers to remember to in order to maximize the tax benefits of their charitable contributions.
Ensure the Charity is Qualified. Taxpayers should confirm that the entities to which they make contributions are in fact qualified exempt organizations that are eligible to receive tax-deductible donations. This may be accomplished on the IRS’s website or on the website of Charity Navigator.
Know the Treatment for Different Types of Donations. The amount taxpayers may deduct for gifts of property, rather than cash, are limited to the item’s fair market value. Therefore a donation of used clothing, furniture or other household goods is deductible only up to the amount the taxpayer would receive if he or she sold the property on the open market during that tax year. Special rules apply for donations of large-ticket items, such as cars and boats.
Similarly, the amount taxpayers may deduct from their taxable income will be limited when they receive something in return for their donation, such as meals or merchandise. Under these circumstances, taxpayers may only deduct the amount of their contributions that exceed the fair market value of the benefits they received.
Get Documented Proof. To deduct a charitable contribution of cash or goods valued at $250 or more, taxpayers must receive from the exempt organization a written statement detailing the amount of the contribution and/or a description of the donated property.
Know Your Reporting Requirements. Taxpayers intending to deduct charitable contributions must itemize deductions on Schedule A of file Form 1040, U.S. Individual Income Tax Return. For non-cash contributions totaling more than $500 for the year, taxpayers must File Form 8283. Property valued at more than $5,000 requires taxpayers to include with their income tax filing a qualified appraisal of the property.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail info@bpbcpa.com.
While the sharing economy has brought new and unique conveniences to consumers, it also provides supplemental income and potentially challenging tax issues for those individuals who provide on-demand services, including drivers for ride-sharing services, such as Uber or Lyft; hosts who rent out their homes on Airbnb; or freelancers who provide a range of needed services to other businesses and individuals.
Following are just a few of the key tax reporting and filing options these entrepreneurial individuals should remember:
Income is Taxable. Under most circumstances, participants in the sharing economy are considered independent contractors who must report and pay taxes on all income they earn, including cash payments. Income earned from sharing economy activity is generally taxable, regardless of whether or not an individual works part-time or if he or she received a W-2 statement of wages and tax, a Form 1099-MISC of miscellaneous income or a form 1099-K, report of payment card and third-party network transactions. Therefore, individuals must be diligent recording all payments they receive and maintaining accurate documentation.
You May Deduct Certain Business-Related Expenses. Freelancers may deduct from their taxable income only those business expenses that the IRS considers to be “ordinary and necessary” for the services they provide. For example, a driver who uses his or her car for business may claim the standard mileage rate deduction, which is 54 cents per mile in 2016 or 53.3 cents per mile in 2017.
You May be Required to Make Estimated Tax Payments. Because the U.S. tax system requires individuals to pay-as-they-go, on-demand workers often have an obligation to make estimated tax payments throughout the year, rather than waiting for their tax bill the following year. These estimated tax payments are due annually on April 15, June 15, September 15 and January 15.
You May Avoid Estimated Payments by Increasing Withholding from Another Job. Sharing economy workers who have another job may request that those employers withhold additional tax from their paychecks to account by completing an updated Form W-4.
Know Special Reporting Rules for Rental Property Rules. The IRS generally requires individuals who rent out their home or other dwelling units during the year to report all of their rental income, unless the unit is rented for less than 15 days during the tax year. Rental property hosts may deduct certain expenses to reduce the amount of rental income that is subject to tax. However, there are limitations on these expenses and a requirement that taxpayers divide their application between their personal and business tax returns. Deductible expenses may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation.
In addition, certain states, such as Florida, require hosts to collect and report sales tax on rental charges of “transient property.” Similarly, these property rentals may be subject to an additional tax on the local, county level in the form of a tourist development tax, convention development tax, tourist impact tax, or municipal resort tax.
About the Author: Dustin Grizzle is a senior manager in Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning and compliance services to businesses and high-net-worth individuals. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
Individual taxpayers who gamble for pleasure are subject to federal income taxes on their winnings. This includes not only the monetary spoils earned from playing lotteries or betting at casinos but also the fair market value of non-cash prizes, such as cars and trips. Similarly, individuals who are not so lucky may have an opportunity to deduct gambling losses from taxable income up to the amount of their gambling income.
Reporting gambling income and losses requires taxpayers to keep track of their lucky streaks and maintain appropriate records, including logs of winning and losses and copies of receipts and tickets. When winnings exceed certain amounts, the payer is required to provide the gambler with a copy of Form W-2G, which it also issues to the IRS.
For example, it is customary for a payer to issue a Form W-2G to taxpayers with winnings of $600 or more for which the payouts are at least 300 times the amount of their wagers. New for 2017 are higher thresholds for winnings related to slot machines, Bingo and Keno.
- Winnings of $1,200 or more from one bingo game, without a reduction for the amount wagered.
- Winnings of $1,200 or more from one play of a slot machine, without a reduction for the amount wagered
- Winnings of $1,500 or more from one game of Keno, which is reduced by the amount wagered on the same game
Gambling winnings as reportable as “other income” on IRS Form 1040 of an individual’s personal tax return. Losses, however, are reported on Schedule A, Itemized Deductions.
About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or at info@bpbcpa.com.
The Financial Accounting Standards Board (FASB) recently issued an Accounting Standards Update (ASU) that clarifies the definition of a business when used in transactions involving the acquisition, sale or consolidation of a business or assets. More specifically, ASU 2017-1 provides companies and reporting organizations with a narrower, less complex and less costly framework for making the appropriate determination of whether a set of assets and activities qualifies as a business.
The existing definition of a business under Generally Accepted Accounting Principles (GAAP), is “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.” According to the FASB, this definition is often applied too broadly, resulting in entities erroneously recording transactions as business acquisitions, when they are, in fact, asset acquisitions.
Under the new framework, a business must also include “an integrated set of inputs and processes that create or contribute to the creation of outputs.” Input elements may include intellectual property, employees and long-lived assets. Substantive processes refer to “systems, standards, protocols, conventions, or rules that when applied to inputs, create or has the ability to create or contribute to the creation of an output” that allows an entity to provide goods or services to customers or investment income or other revenue. In this definition, a business requires an input and substantive process but not an output.
Making the determination of whether a set of assets and activities qualifies as a business will require reporting entities to evaluate those inputs and processes through a practical “screen”. If substantially all the fair value of the gross assets acquired or disposed of is focused on a single, identifiable asset or a group of similar identifiable assets, the screen is not met. Therefore, the set is not considered a business and the transaction should be accounted for as an asset acquisition.
This new guidance has a significant impact on the acquisition of income-producing real estate, such as multi-family apartments or shopping centers. Under existing rules, entities frequently accounted for the acquisition of these income properties as a business combination, and the acquisition required them to analyze in-place leases at the acquisition date in order to place a value on this acquired future revenue stream. Subsequently, the entity would amortize the resulting in-place lease intangible over the life of the leases. In many instances, this analysis was time consuming and costly. ASU 2017-1 speaks specifically to in-place leases at the acquisition date and states that such items should be considered part of the value of the acquired asset, more specifically, the building acquired.
As a result of the FASB’s new, narrowed definition of a business, it is possible that an increasing number of entities will account for acquisitions as asset transactions, rather than business acquisitions.
Privately held business entities are required to apply the ASU to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Public companies must apply the ASU to annual periods beginning after have a December 15, 2017.
The professionals with Berkowitz Pollack Brant’s Audit and Attest Services practice work with businesses of all sizes and across all industry to assess and comply with a sea of evolving regulatory standards.
About the Author: Christopher Cichoski, CPA, is a senior manager with the Audit and Attest Services practice of Berkowitz Pollack Brant, where he provides business consulting services and conducts reviews, compilations and audits for clients in the real estate and construction sectors. He can be reached at the Miami CPA firm’s Ft. Lauderdale, Fla., office at (305) 379-7000 or via email at info@bpbcpa.com.
Taxpayers who receive stock-based compensation, such as nonqualified stock options (NSOs), must carefully review both their year-end wage reports on Form W-2 and their brokerage transactions on Form 1099-B to identify the possibility of reporting duplicate items of income, which may ultimately result in an overpayment of taxes.
When selling NSOs, a taxpayer must report on Form W-2 ordinary compensation equal to the difference between the acquisition price (grant price) and the sales price (exercise price). When the taxpayers sells the shares associated with the NSO, the brokerage firm holding the shares will have a regulatory requirement to report on Form 1099-B the same difference between the exercise price and the grant price that was reflected on the taxpayer’s W-2. As a result, it will appear to the taxpayer and to the IRS that the sales event created additional income that is subject to taxation.
To avoid this risk, taxpayers will need to reconcile their W-2s and 1099-B forms to identify any potential duplication of income reporting. If NSO income is reported twice, taxpayers can make necessary corrections by manually adjusting their capital gains and losses transactions on Schedule D and Form 8949, Sales and Other Dispositions of Capital Assets. Certain commercial tax-preparation software may not be automated to the level of detail necessary for this task. As a result, taxpayers with stock-based compensation should consult with a professional tax accountant.
About the Author: Lewis Kevelson, CPA, is a tax director with Berkowitz Pollack Brant, where he provides tax-compliance, planning and business structuring counsel to foreign investors, international companies, high-net-worth families and business owners. He can be reached in the CPA firm’s West Palm Beach, Fla., office at (561) 361-2048 or via email at info@bpbcpa.com.
Posted on April 12, 2017 by
In 2013, the Internal Revenue Code introduced two new Medicare taxes above the existing income tax responsibilities of high-income earners.
The first is a Net Investment Income Tax (NIIT) that is applied at a rate of 3.8 percent to the lesser of net investment income, including interest, dividends and capital gains, or the amount by which one’s modified adjusted gross income (MAGI) exceeds thresholds established for their particular tax filing status.
Conversely, the Additional Medicare Tax imposes a 0.9 percent tax on wages, self-employment income and railroad retirement compensation that exceed similar income thresholds. Because the two taxes affect different types of income, taxpayers may unwittingly be subject to both. As a result, proper planning should be engaged throughout the year.
Net Investment Income affects individuals, estates and trusts with investment portfolio income; trade or business income from passive activities or from the business of trading financial instruments; and net gains from property sales. The tax applies to individuals whose adjusted gross income exceeds $200,000 for single taxpayers and heads of household, or $250,000 for taxpayers who are married filing jointly.
The tricky part of the NIIT centers on how non-investment income can ultimately expose a taxpayer to the tax. For example, while distributions from qualified retirement plans are not subject to this tax, these withdrawals may push a taxpayer’s AGI over the income threshold and subject investment income to it. In addition, taxpayers should remember to account for the NIIT when calculating their quarterly estimated tax payments, which may increase the amount they will ultimately owe.
The 0.9 percent Medicare tax, which is in addition to the 1.45 percent Medicare tax that all workers pay, applies to wages and self-employment income that exceeds $200,000 for single taxpayers and heads of household. For married filing jointly taxpayers, the threshold of $250,000 must include wages and compensation for both spouses.
In addition to targeting a different source of taxpayer income, the Medicare Tax, unlike the NIIT, is typically paid by an employer, who withholds the tax from the wages they pay to workers. Self-employed taxpayers are required to consider the tax when estimating their quarterly tax payments.
Tax-Minimizing Planning Opportunities
Rather than succumbing to additional Medicare taxes, individual taxpayers may implement strategies to reduce their exposure to them.
For example, taxpayers may reduce their annual net investment income by making contributions to 401(k) plans, defer gains on property by using a Section 1031 exchange, or selling securities at a loss to offset market gains achieved earlier in the year or donating the gains to a non-profit entity. While no one wants to reduce their wages, taxpayers may instead reduce their exposure to the 0.9 percent Medicare tax by using IRS form W-4 to deduct additional pay from their paychecks. Furthermore, taxpayers can max out pre-tax contributions to employer-sponsored retirement plans.
Minimizing tax liabilities requires individuals to plan and implement changes throughout the year. Doing so under the guidance of professional accountants can go a long way toward maintaining tax efficiency and building wealth.
About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she focuses her practice on tax strategies for business owners and high-net-worth individuals and families. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
California law requires corporations “doing business” within the state to file a tax return and pay a minimum annual franchise tax of $800. However, a recent decision by the California Superior Court opens the door for certain pass-through entities to challenge the state’s assertion of economic nexus and, in some instances, be entitled to refunds for prior year tax payments.
The matter of Swart Enterprises, Inc. v. California Franchise Tax Board centered around the interpretation of Section 23101 of California’s Revenue and Tax Code, which defines the term “doing business” within the state as “actively engaging in any transactions for the purpose of financial or pecuniary gain or profit.” In 2010, the California Tax Board applied this definition and franchise tax treatment broadly to Swart, a family-owned corporation based in Iowa that lacks a physical presence and any sales activity in California but does own a 0.2 percent membership interest in a California-based limited liability company (LLC) investment fund.
According to the Franchise Tax Board, Swart’s interest in the California LLC was enough to establish a minimum connection required for it to collect taxes from the business. Yet, Swart was “not involved with the LLC’s operations or management and was prohibited under the operating agreement from participating in the management and control of the LLC.” Swart argued that because it held a passive, limited interest in the multi-member manager-managed LLC and had no rights of control over the management or operations of the LLC it was not, in fact, doing business in California under the definition of CRTC Sec. 23101. The court agreed and awarded to Swart a tax refund in the amount of $1,106.72, which included the amount Swart paid in franchise tax and additional fees and penalties it incurred.
In its ruling, the court made a distinction between taxpayers who are general partners or managing partners of LLCs and those who hold passive, non-managing interest and lack the right to manage or control the entities’ decision making processes. The court noted that just because an LLC elects partnership treatment for federal tax purposes does not mean that the LLC members should be treated as general partners actively engaged in the business. Yet, depending on the specific facts and circumstances of a California LLCs structure, its non-managing members may still have a requirement to file state tax returns and report their distributive share of source income from the LLC.
As a result of the court’s decision, corporations and LLCs that have previously filed and paid California corporate franchise taxes on a passive, minority investments in LLCs based in the state should consider filing a protective claim for a tax refund. Moreover, passive investors “doing business” through an LLC in any state should consider how the Swart decision may carry over to those states’ nexus assertions.
About the Author: Karen A. Lake, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals, businesses and non-profit entities navigate complex federal, state and local taxes, credits and incentives. A state and local tax expert, she can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email at info@bpbcpa.com.
The U.S. tax code allows individuals to claim a deduction on their federal income tax returns when they donate money or products to a charitable, non-profit organizations. The deductible contribution reduces the amount of a taxpayer’s income that is subject to tax. However, all donations are not treated equally. Following are some tips for taxpayers to remember to in order to maximize the tax benefits of their charitable contributions.
Ensure the Charity is Qualified. Taxpayers should confirm that the entities to which they make contributions are in fact qualified exempt organizations that are eligible to receive tax-deductible donations. This may be accomplished on the IRS’s website or on the website of Charity Navigator.
Know the Treatment for Different Types of Donations. The amount taxpayers may deduct for gifts of property, rather than cash, are limited to the item’s fair market value. Therefore a donation of used clothing, furniture or other household goods is deductible only up to the amount the taxpayer would receive if he or she sold the property on the open market during that tax year. Special rules apply for donations of large-ticket items, such as cars and boats.
Similarly, the amount taxpayers may deduct from their taxable income will be limited when they receive something in return for their donation, such as meals or merchandise. Under these circumstances, taxpayers may only deduct the amount of their contributions that exceed the fair market value of the benefits they received.
Get Documented Proof. To deduct a charitable contribution of cash or goods valued at $250 or more, taxpayers must receive from the exempt organization a written statement detailing the amount of the contribution and/or a description of the donated property.
Know Your Reporting Requirements. Taxpayers intending to deduct charitable contributions must itemize deductions on Schedule A of file Form 1040, U.S. Individual Income Tax Return. For non-cash contributions totaling more than $500 for the year, taxpayers must File Form 8283. Property valued at more than $5,000 requires taxpayers to include with their income tax filing a qualified appraisal of the property.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail info@bpbcpa.com.
As individuals prepare to file their 2016 income tax returns, they should remember that if they are the parents of dependent children, they may qualify for certain benefits that can reduce their taxable income. It is important to remember, however, that many of these tax credits and deductions may be limited based upon a taxpayer’s income, filing status and other unique circumstances.
Child Tax Credit. Parents with children who are under the age of 17 and who live with the parent for at least one-half of the calendar year may claim a tax credit of up to $1,000 for each qualifying dependent. The credit is limited by the amount of income tax and alternative minimum tax (AMT) parents owe and will be completely unavailable for parents whose income exceed $110,000 for married couples, $55,000 for couples filing separately and $75,000 for all other taxpayers.
Child and Dependent Care Credit. A parent who paid for someone else to care for his or her qualifying dependent child while the parent worked or looked for work in 2016, may qualify for a tax credit to cover a percentage of the expenses paid to the caregiver. A qualifying dependent may include a child who is under the age of 13 who lives with the taxpayer for more than half of the year or an individual of any age who is unable to care for him or herself. For 2016 and 2017, the dollar limit on the amount of expenses used to calculate the credit is $3,000 for the care of one dependent or up to $6,000 for two or more qualifying dependents. The allowable percentage of the credit depends on the taxpayer’s adjusted gross income.
Adoption Credit. Depending on their income, taxpayers who adopted a child in 2016 may claim a credit of up to $13,460 per child to cover the costs of qualifying adoption expenses. The amount of the nonrefundable credit will be reduced if taxpayers’ modified adjusted gross income (MAGI) falls between $201,920 and $241,920; taxpayers’ with MAGI of more than $241,920 will not be entitled to apply the credit.
Dependent Deduction. Taxpayers with children who were under the age of 19 at the end of 2016 (or 24 if the children are full-time students) may claim a dependent deduction up to $4,050 for each qualified child. The amount of the deduction may be reduced or eliminated entirely when taxpayers’ income exceeds certain limits based on their filing status.
Student Loan Interest Deduction. A taxpayer may deduct up to $2,500 in interest they paid towards education and student loans during the tax year. The amount of the deduction will decrease when taxpayers’ MAGI exceeds certain levels. The credit is not available to single filing taxpayers whose MAGI exceeds $80,000 or married filing jointly filers with MAGI above $160,000.
Self-Employed Health Insurance. Entrepreneurial taxpayers who own their businesses and paid for health insurance coverage for a child under age 27 may deduct from their taxable income the amount of annual premiums they paid.
About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or at info@bpbcpa.com.
With the 2016 federal income tax filing deadline coming up soon, individual taxpayers have a short window to estimate whether or not they will need addition time to meet their filing obligations. Those individuals who do need more time can request an automatic six-month filing extension, as long as they do so before April 18, 2017.
Contrary to popular belief, filing extensions are not reserved solely for procrastinators. Rather, there are a large number of taxpayers who routinely file for extensions, including securities traders and/or partners/investors in pass-through entities such as S-Corporations.
While a filing extension will give taxpayers until October 16, 2017, to submit their tax returns, it does not delay the deadline for which they are responsible for paying their tax liabilities. As a result, individuals will need to estimate their tax bills as accurately as possible and make a payment to the IRS by April 18 or risk a tax penalty, which can be 10 times more costly than not paying on time. Taxpayers who cannot pay in April the full amount of the taxes they owe, may request assistance from the IRS to work out a payment plan.
There are three groups of U.S. taxpayers who may receive from the IRS automatic filing extensions without having to ask for it. They include victims affected by federal disaster areas, members of the military who are on duty outside the U.S. or serving in a combat zone, and U.S. citizens and resident aliens who live and work outside of the U.S, and Puerto Rico. The length of these extensions vary based upon a taxpayer’s individual circumstances.
About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
