As 2017 comes to a close, it is time for individuals with Flexible Spending Accounts (FSAs) to understand their responsibilities and potentially take action to use or lose any remaining balance in their FSAs before Dec. 31, 2017.
While FSAs can provide significant tax savings, such as lowering participants’ taxable income and reducing the amount of taxes they are required to pay, these plans also come with some restrictions that can be extremely costly when individuals do not plan appropriately.
FSAs allow individuals to set aside pre-tax dollars via payroll deductions to pay for qualified medical and dependent care expenses not covered by their health insurance plans. These out-of-pocket expenses can include insurance copayments and deductibles, medical equipment, prescriptions drugs and some over-the-counter medications, as well as dental and vision exams, weight loss programs, acupuncture, travel vaccines and other health care treatments and services allowable by each particular plan.
Typically, individuals will automatically forfeit unused dollars left over in an FSA at the end of the year. However, some plans provide participants with more flexibility. For example, an employer may allow its workers to roll over a maximum of $500 in FSA savings to the following year, or it may give employees a three-month grace period to use end-of-year balances in the following year. It is important that workers understand these options and whether or not they apply to their individuals FSA plans.
If a plan follows the “use it or lose it” rules, participants should take the time now, in the remaining weeks of 2017, to make needed doctor’s appointments, schedule important procedures or stock up on contact lenses and qualifying medications.
In addition, workers should review how much they spent on health care costs in 2017, and whether or not they expect to spend at least the maximum FSA contribution limit of $2,650 for 2018. If an individual’s health care costs are minimal during a year, they may opt to contribute less to an FSA in 2018 or forego this tax-advantaged vehicle entirely.
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 email@example.com.
In order for businesses to take advantage of bonus depreciation on qualified improvement property (QIP), they must first understand how to determine the date that a building is considered to be “placed in service.”
In 2015, the PATH Act extended 50 percent bonus depreciation to non-leased QIP that is acquired and “placed in service” after December 31, 2015, and before December 31, 2017. The bonus rate will begin to phase out in 2018 when a 40 percent rate will apply to buildings placed in service during that year, and 30 percent in 2019 (or 2020 for aircraft and longer-production year property).
Many businesses seeking to apply this incentive during its short window of availability will face intense IRS scrutiny when they claim a building’s “placed in service” date is on the day it receives a certificate of occupancy, even if the building is not yet “ready and available for a specifically assigned function,” as required by the Treasury Department.
The IRS considers a building to be ready and available for use when the following benchmarks are achieved:
• It receives approval of all required licenses and permits;
• Control of the facility passes to the taxpayer;
• It completes critical tests; and
• It commences daily or regular operations.
However, in 2015, a U.S. District Court ruled in favor of a taxpayer who challenged the IRS’s definition of “placed in service” to include “open for business.”
In the matter of Stine, LLC v. United States, the court ruled that a taxpayer could begin deducting depreciation on a retail store when the property received a certificate of occupancy and was “in a condition of readiness and availability” even though it was not yet officially open to the public. While the court’s opinion opened the door for taxpayers to accelerate a placed in service date, the IRS in 2017 announced that it will not comply the court’s ruling and will instead continue to litigate the issue.
The IRS argues that property may be consider placed in service only after it is “ready and available for regular operation and income producing use.” Therefore, it is critical that property owners consult with tax advisors experienced in real estate matters in order to properly assess whether or not their buildings and qualified improvement property satisfy the IRS’s narrow definition of placed in service.
About the Author: John G. Ebenger, CPA, is a director of Real Estate Tax Services with Berkowitz Pollack Brant, where he works closely with developers, landholders, investment funds and other real estate professionals, as well as high-net-worth entrepreneurs with complex holdings. 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.
Enrollment in Florida’s Prepaid College Program kicked off on Oct. 15, 2017, continuing the state’s 30-year tradition of helping families save for their children’s future college education. Florida residents have until Feb. 28, 2018, to enroll in the program and lock in today’s lower tuition costs at one of the state’s public universities.
Prices for enrolling a newborn child in the 2017-2018 Florida Prepaid College Program begin as low as $47 per month for a 1-Year Florida University Plan and up to $187 per month for a 4-Year Florida University Plan. Plan participants have the option to make their contributions in one lump sum, on a monthly basis or over a five-year period until the total amount is paid off. All payments to the plans are guaranteed by the state, ensuring that participants never risk losing any of the money they contribute.
Who can enroll?
Families can take advantage of Florida’s prepaid program if they have a child born before Feb. 29, 2018, or a student in the 11th grade or younger. All children and their legal guardians must have been residents of Florida for the past 12 months. To enroll, simply visit www.myfloridaprepaid.com.
Will the prepaid plan cover all of my child’s future higher education costs?
The Florida Prepaid College Plan covers tuition and differential fees at a public Florida institution for the number of credit hours described in each of the selected plans. For example, a four-year plan will cover the costs required for a child to earn a bachelor’s degree with 120 credit hours. Should students have any money left over in their plans after completing the required credits for earning an undergraduate degree, they may apply that amount toward tuition at any graduate or professional schools nationwide.
While costs for housing are not included in any of the state’s undergraduate tuition plans, families may choose to also enroll in a Florida Prepaid Dormitory Plan and pay today’s costs for up to two years of on-campus housing in the future.
Additional expenses that are not included in the prepaid tuition plans are those that a college student will incur for meals, books and other incidentals. To cover these future costs, families may consider supplementing their prepaid plans with contributions to self-directed 529 college savings plans. Earnings in a 529 plan escape federal taxes and may be withdrawn tax-free when used to pay for “qualifying education expenses”, which can include tuition, fees, books, on-campus housing and computer technology required for the student to earn his or her degree.
What if my child attends an out-of-state university?
The flexibility of the Florida Prepaid College Plan allows students to apply their plan contributions toward the costs of tuition at any public or private school nationwide. In most cases, however, those contributions will not cover the full costs of today’s tuition at an institution outside of Florida’s public college and university system.
What if my child enrolls in college earlier or later than expected?
Children have up to 10 years after their intended college enrollment date to use their prepaid plan savings toward future tuition costs. Should a child begin college before the enrollment date projected on their plan documents, he or she must notify the Prepaid College Board 180-days prior to the revised enrollment date and pay any additional amounts to the plan.
What if my child receives scholarship money?
If students with prepaid plans attend a public university in Florida and qualify to receive scholarship money, they may receive back from the plan a portion of their initial contributions. For example, Florida high school graduates who meet specific academic and community service achievements may be eligible to receive scholarship funds from Florida’s Bright Futures Program.
Student loans are currently the second-highest source of debt in America causing significant financial burdens to students and their families. To avoid becoming another statistic in this growing problem, families should and can plan ahead for a child’s future educational goals and needs through a variety of savings vehicles, including the Florida’s Prepaid College Program and 529 Savings Plans.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at email@example.com.
As the 2017 hurricane season comes to an end, reminders of this year’s devastating storms continue to plague cities and people across Florida, Texas and Puerto Rico. However, it is important that individuals and business owners located in federal-declared disaster zones stay mindful of a number of tax relief provisions that are available to them regardless of whether or not they incurred any significant losses.
Both individual taxpayers and businesses received an extension until January 31, 2018, to meet some of their 2016 and 2017 tax filing and payments responsibilities. This includes paying 2017 third-quarter and fourth-quarter estimated tax payments and filing extended income tax returns for 2016.
Individuals and businesses located outside the covered disaster areas may also be eligible for the filing extension and qualify for penalty relief if their records or tax preparers were located in the storm-affected areas.
Full Deductibility of Casualty Losses
It is critical that taxpayers keep receipts for hurricane-related expenses they incurred, including repairs, maintenance, landscaping and even food replacement costs, in order to receive a full deduction for all hurricane-related losses exceeding $500 that are not covered by insurance. Traditionally, this deduction has been limited to the amount of the casualty loss in excess of 10 percent of a taxpayer’s Adjusted Gross Income (AGI). However, under the provisions of the hurricane relief package, full deductibility can be taken as an additional itemized deduction or as a deduction in addition to the standard deduction for taxpayers who do not itemize. Furthermore, taxpayers have the option to claim casualty losses either on their 2017 tax returns or on an original or amended 2016 return, depending on which year provides the taxpayer with the greatest benefit.
Employee Retention Tax Credit for Qualifying Employers
Businesses that were unable to continue normal operations due to the storms but continued to pay employees’ wages may be eligible to receive an income tax credit of up to $2,400 for each employee. In order to compute the Employee Retention Tax Credit of 40 percent of the first $6,000 of qualified wages businesses paid to eligible employees during specific dates that vary with each storm, they will need to maintain meticulous payroll records.
Easing of Restrictions on Withdrawals and Hardship Loans from Retirement Plan
Eligible taxpayers may take loans or hardship distributions from their retirement accounts before January 31, 2018, free of early-withdrawal penalties. This applies to victims who live within a covered disaster area and to individuals who live outside those areas when they use retirement funds to help a son, daughter, parent, grandparent or another dependent who lived or worked in the disaster area.
Such retirement plan distributions will be includible in an individual’s gross income and subject to income taxes, which the plan participant may spread out over a three-year period. If the account owner is younger than 59 ½, he or she will also be subject to an additional 10 percent tax on the withdrawn amount unless he or she recontributes the distributed amount over the next three years.
Hardship loans, which are limited to $50,000 or half of a vested balance, will not be subject to tax as long as employees pay back loan amounts pursuant to a repayment schedule agreed-upon with plan sponsors.
Extension of Time to Complete Section 1031 Tax-Free Property Exchanges
Real estate developers, owners and investors who were in the midst of a Section 1031 property exchange on the dates that the hurricanes hit may receive additional time to identify and close on like-kind replacement property and still qualify for tax deferral treatment.
For example, taxpayers affected by Hurricane Irma who sold property and entered into a 1031 exchange before September 11, 2017, will have until the later of January 31, 2018, or 165 days from the date their relinquished property was sold to identify possible replacement properties. In addition, Irma victims will have until the later of January 31, 2018, or 300 days from the date their relinquished property was sold to close on the purchase of replacement property. Affected taxpayers should notify their qualified intermediaries so that their Section 1031 deadlines are properly extended.
This 1031 extension may also apply to taxpayers located outside of the covered disaster areas when they meet specific criteria established by the IRS.
In the wake of this year’s active hurricane season and the subsequent uncertainty surrounding tax reform, taxpayers may be anxious and unsure of how they should proceed into the New Year. The advisors and accountants with Berkowitz Pollack Brant have more than 35 years of experience helping businesses and individuals navigate through complex laws to maintain regulatory compliance, mitigate risks and maximize wealth-building opportunities.
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 firstname.lastname@example.org.
Partnerships and LLCs must be prepared to contend with new rules for how the IRS will assess and collect tax deficiencies identified under audit for tax years beginning on Jan. 1, 2018. With just a few weeks left in 2017, partnerships have a limited amount of time to consider how the new rules will affect them, and how they may take action if they have not done so already.
On June 13, 2017, the IRS re-released proposed regulations that it originally circulated in an unofficial form on January 19, 2017, on the new partnership audit rules enacted by the Bipartisan Budget Act of 2015 (BBA). Under the new rules, the responsibility for all adjustments of partnership income, gains, losses, deductions, credits, and related penalties and interest will shift from the individual partners to the entity itself.
The BBA replaces the current partnership audit and adjustment rules that have been in place for more than 30 years under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Under that regime, each individual partners bore the burden of paying any of a partnership’s tax underpayments identified under audit. The IRS would recalculate each partner’s return for any adjustments at the entity level and send to each partner a bill for tax deficiencies.
In contrast, under the BBA, the IRS will now require the partnership entity to collect and remit taxes at the highest individual rate (currently at 39.6 percent), plus penalties and interest, in effect during the year in which the agency uncovers the underpayment (the adjustment year), rather than the audit year. As a result, it is possible that an entity’s current partners will be responsible to pay for the tax liabilities of its former individual partners, who would have received the tax savings in prior years. In addition, the new rules do not allow partnerships to deduct any payments of tax, interest and penalties relating to a prior year’s underpayment. Instead, the payment of tax understatements would be treated as a nondeductible item allocable to the current partners.
Another significant change under the BBA is a new requirement that partnerships assign one person to serve as the entity’s sole representative in all tax and legal matters with the IRS. While the selected representative does not have to be a partner in the entity, he or she must be a person or entity with a substantial presence in the U.S. Should a partnership or LLC fail to update its existing partnership agreement with the appointment of a personal representative, the IRS will make the selection on the entity’s behalf.
The Push-Out Election
The personal representative has the option to make a push-out election. Under the election, the partnership issues revised tax information returns (Schedules K-1) to affected partners and the partnership isn’t financially responsible for additional taxes, interest and penalties resulting from the audit.
The push-out election allows the partnership to push the effects of audit adjustments out to the partners that were in place during the tax year under review. This effectively shifts the resulting liability away from the current partners to the partners that were in place during the tax year to which the adjustment applies. The push-out election must be filed within 45 days of the date that the IRS mails a final partnership adjustment to the partnership. This deadline cannot be extended. The proposed regulations specify the information that must be included in a push-out election. The partnership must also provide affected partners with statements summarizing their individual shares of adjusted partnership tax items.
A partnership should update its agreements to address whether the partnership representative is required to make the push-out election or the circumstances in which a push-out election will be made.
The Opt-Out Election
A very limited exception permits certain small partnerships to elect annually to opt out entirely from the BBA rules. To qualify for this opt-out election, a small partnership must have 100 or fewer partners, and it must be composed entirely of individuals, C-corporations, S-corporations, foreign entities treated as a C-corporations, or estates of deceased partners. The opt-out election is unavailable to a partnership that has a flow-through entity as a partner (such as another partnership or LLC). It is important to note that even partnerships making the opt-out election must appoint a partnership representative.
Actions to Take
It will become more important than ever that partnerships identify any potential issues that could result in an imputed underpayment. They will need to more closely review partnership agreements to consider whether the entity can elect out of the new regime and push these obligations out to the former partners, or if it will be obligated to pay any tax liability with current partnership assets.
This will undoubtedly require entities to conduct significant due diligence and potentially revise existing partnership agreements. It may also require modifications to the structure of partnerships to better manage its risks and potential exposure to a partnership level tax liability. Should a partnership decide to pay taxes and penalties at the entity level, it will need to consider how the current partners will bear the payment. Conversely, if the partnership opts out of the new standard, it will need to have systems, policies and procedures in place for making such elections. It will also need to reach out to former partners, calculate their obligations and ensure that the make required payments. No matter what decision the partnership makes, it can expect that the new standard will impact its financial statements and disclosures, both retroactively and in the future.
Time is of the essence for partnerships to make sense of the new audit standard and understand how it will impact the risks, liabilities and opportunities it will bring to the entity and its current and former partners. The advisors and accountants with Berkowitz Pollack Brant work extensively with domestic and international entities, including real estate developers and investors, to meet complex regulations and ensure maximum tax efficiency.
About the Author: Andreea Cioara Schinas, CPA, is a director with Berkowitz Pollack Brant’s Tax Services practice, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at email@example.com.
As 2017 draws to a close, the future of tax and regulatory reform hangs in the balance. The House of Representatives just passed a budget resolution that includes allusions to major modifications to the tax rules, but details are scant. Despite this current environment of uncertainty, the end of the year remains a critical time for individuals to meet with tax advisors, review their finances, and take steps to minimize their tax liabilities and improve savings opportunities in the current year and into the future. Following are just some strategies that individuals and business owners should consider taking before the new year.
Defer Income to 2018, Accelerate Deductions and Expenses in 2017
There are a variety of ways you can reduce your tax liabilities in the current year, including delaying the recognition of income until next year. For example, you may choose to defer a year-end bonus, delay until next year the sale of capital gain property or collection of debts, or you may postpone the sale of employee stock options or withdrawals from retirement accounts above the amount of a required minimum distribution (RMD) if you are older than 70 ½.
Likewise, you may look for opportunities before the end of the year to claim tax deductions, which can reduce the amount of income that is subject to tax. Examples include contributing to retirement plans (401(k)s, SEPs, etc.), donating to charity, or paying alimony, real estate taxes or medical expenses in the current year.
For business owners, you may have an opportunity to claim deductions when you pre-pay business expenses before the end of the year. If you are self-employed, you may also deduct up to 100 percent of the costs you incur to provide health insurance to you, your spouse and your dependent children who are younger than 27.
Harvest Capital Losses
While the market has soared to new highs in 2017, investments that you sold for a profit will be subject to capital gains tax. Depending on how long you held the asset before a sale, the capital gain rate can be as high as 39.6 percent plus an additional 3.8 percent Net Investment Income Tax (NIIT). To counter this, you may sell underperforming investments before the end of the year to generate a tax loss that can reduce your taxable income in 2017 or be carried forward to potentially offset gains in 2018. Furthermore, matching the holding periods (short-term losses to offset short-term gains and long-term losses to offset long-term gains) will maximize the use of your personal tax attributes.
When harvesting capital losses, it is critical that investors first consider whether or not asset sales make sense in relation to their existing investment strategy. Disposing of an asset solely for a tax benefit may disrupt and derail your long-term financial goals.
Assess Accuracy of Tax Liabilities
To reduce the risk of an unexpected tax bill come April 15, 2018, take the last few weeks of 2017 to ensure that the appropriate amount of taxes were withheld from your paycheck and you paid your appropriate estimated taxes. You have until Dec. 31, 2017, to increase the amount your employer withholds from your paycheck and update your IRS Form W-4 to reflect life events, such as a marriage, divorce or birth of child, all of which will affect your ultimate tax liabilities.
For Florida residents affected by Hurricane Irma, the deadline for the 2017 third and fourth quarter estimated tax installments is Jan. 31, 2018. Therefore, there is still time for you to limit or eliminate a potential penalty. However, to do so, planning will be crucial.
If you work for an employer that offers a 401(k) retirement plan, you have until Dec. 31, 2017, to max out salary deferral contributions to these accounts. Your contributions, which can be as high as $18,000 in 2017 (or $24,000, if you are 50 or older), will reduce your taxable income in the current year and grow tax-deferred until you take withdrawals after the age of 59 ½. If you are a business owner, you have until April 15, 2018, to make a pre-tax contribution to your 401(k) and apply it to your 2017 tax returns, depending on the exact specifications of the plan.
If you do not have an employer-sponsored retirement savings plan, there is still time to set up an individual retirement account (IRA). The maximum amount you may contribute in 2017 to a traditional IRA or Roth IRA before April 15, 2018, is $5,500, or $6,500 if you are age 50 or older. The type of IRA you are eligible to set up will depend on your filing status and annual income.
If you are 70 ½ years of age or older and you did not work in 2017, you must take a required minimum distribution (RMD) by Dec. 31, 2017, or risk a penalty of 50 percent of the undistributed amount. If you are still working, you may postpone the RMD until the year in which you actually retire. Furthermore, if you turned 70 ½ years old in 2017, you have a one-time option to defer taking your initial RMD until April 1, 2018, which will allow you to effectively defer income from 2017 to 2018. However, you will also need to take another required distribution in 2018, which will cause a double up income in that tax year. This may be worth reviewing with your tax advisors if you expect a lower tax rate or lower levels of other income in 2018.
If you are older than 59 ½ and you need access to cash, you may be able to make a 2017 contribution to a tax-deductible retirement plan before the Dec. 31, 2017, or April 15, 2018, deadlines and subsequently withdraw the needed funds the following week. This will allow you to defer income from 2017 to 2018 when it is expected that tax rates will be lower.
Give Gifts to Charity and Family
By making gifts of money or property, either to charities, family members or friends, you will potentially reduce the amount of your income that will be subject to tax. For example, donations to qualified charitable organizations are fully deductible (up to certain income thresholds) against both income taxes and the alternative minimum tax (AMT) as long as you mail or charge the donations to your credit card before Dec. 31, 2017. If you donate appreciated property that you owned for more than a year, you may receive a deduction equal to the property’s current fair market value rather than your original basis, or amount you paid, when you acquired the property. Moreover, you will not have to report the appreciation as income. Similarly, you may donate up to $100,000 of your 2017 RMD directly to a charity by December 31 to avoid the income inclusion and plethora of potential charitable deduction limitations.
In addition, you may have an opportunity to reduce your taxable income and protect your assets from exposure to estate and gift taxes if you give gifts of less than $14,000 to as many people as you wish before Dec. 31, 2017. For married couples, the maximum amount that may be excluded from taxes is $28,000 in 2017. In 2018, these gift tax exclusion limits will rise to $15,000 for single filers and $30,000 for married taxpayers filing joint tax returns. It is important to remember that there is no annual limit on the amount you may gift tax-free to your spouse unless he or she is not a U.S. citizen. Similarly, you may pay as much as you like directly to an educational or medical institution to cover the costs of tuition or medical expenses for another person without gift tax implications.
The entity you select to hold your personal and business assets will have far-reaching effects on your exposure to income, estate and gift taxes; privacy; protection from creditors; and control over distributions of assets. The end of the year is a good time to meet with professional advisors to review the assets holding structures you currently have in place and make adjustments, as needed, to align with changing life circumstances.
Minimize Business Tax Liabilities
In addition to the above strategies that apply to individual taxpayers and business owners, there is still an opportunity for business entities to minimize their 2017 tax liabilities when they take the following steps before December 31.
If you established a new business in 2017, you may be able to deduct up to $5,000 in qualifying startup expenses, including the costs for advertising, travel, training, and legal and accounting fees. Additionally, if your business is a qualifying startup, it may be able to apply up to $250,000 of research and development expenses against its payroll tax liabilities.
Under Section 179 of the Internal Revenue Code, businesses that purchase new equipment may deduct from their 2017 income up to $510,000 of their acquisition costs in the current year rather than depreciating those assets over a period of time. The deductible amount will be reduced, dollar-for-dollar, by each qualifying Section 179 property exceeding $2.030 million that the business puts into place in 2017. As an added advantage, when a business purchases and puts into place in 2017 qualifying property, including improvements to interior portions of nonresidential buildings after the building is first placed in service, it may take a significant 50 percent first-year bonus depreciation deduction. If the business waits until 2018, the first-year bonus depreciation benefit will be reduced to 40 percent. In 2019, it will decrease to 30 percent.
Finally, businesses must be prepared to comply with a slew of new accounting standards that take effect in the coming years, including, but not limited to, new methods for recognizing revenue from contracts with customers, accounting for operating leases on balance sheets and disclosing more details about expected credit losses.
Meet with your Accountant
With the tax laws in a constant state of flux and the uncertainty of a complete overhaul of the tax code, individuals and business owners should take the time now to meet with their accountants and financial advisors. There is still time left in the year to take action and implement strategies that can improve your tax-efficiency and help you achieve your personal and business goals in 2017 and beyond.
The advisors and accountants with Berkowitz Pollack Brant and its affiliate Provenance Wealth Advisors work with U.S. and foreign citizens and businesses to develop tax-efficient solutions that meet regulatory compliance and evolving financial needs.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at firstname.lastname@example.org.
The new model for how businesses across all industries will need to recognize revenue from customer contracts in 2018 for public companies and in 2019 for nonpublic companies is a game changer. While privately held companies have an additional year to come into compliance, they must begin preparations now to account for the substantial changes in the timing and amount of income and expenses they will report on an annual basis in the future. Moreover, adopting the new standard will bring with it significant complexities that will impact virtually all areas of a business’s operations, including contracting, sales, lending and financing, information technology, policies and procedures, and financial reporting.
Unlike the current requirements under the U.S. Generally Accepted Accounting Principles (GAAP), the Accounting Standards Update (ASU) No. 2014-09 provides businesses in all industries and all jurisdictions with one singular and consistent five-step model for recognizing and reporting the “nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.” More specifically, the new model represents a shift from more rules-based accounting standards toward one that will require businesses to assess the unique facts and circumstances of each customer contract and exercise significant judgment when determining the amount and timing of revenue recognition. This will be especially difficult for businesses in the real estate and construction industries to navigate and may lead to devastating consequences if they do not apply judgment in a manner that is consistent with the new model.
Step One: Identify the Contract with a Customer
Under the new regulations, a contract will exist when there is an agreement between and approved by two or more parties that creates and specifically identifies both 1) the enforceable rights to goods and services and 2) the related payment terms, including transaction price, which an entity can expect to collect in exchange for delivering those goods and service. While this definition appears simple and precise, it is important for businesses to understand that there are nuances to a contract that could create a separate and distinct contract or significantly modify the terms of an existing contract.
For example, in the world of real estate, a change order can, in some instances, create a new, separate contract. Similarly, the collectability factor of a real estate contract can be a complicated judgment call, especially when an entity offers pricing concessions or seller-provided financing to the customer.
Should it be determined that a contract does not exist based on the new revenue recognition standard, an entity will need to report all payments it received as liabilities until the point in time when all parties meet their contractual obligations.
With these concerns in mind, it is critical that real estate businesses engage the services of experienced legal counsel to properly draft contract agreements that meet the requirements of the new regulations and to explain how the new standards will affect when and how they recognize revenue. This will not only impact a business’s bottom line and create disparities between similar real estate companies, it will also have significant influence over a business’s loan covenants and access to capital.
Step 2: Identify the Performance Obligations
Performance obligations are contractual promises to deliver to a customer distinct goods or services or a combination of goods and service. While there are specific rules for defining performance obligations, the key challenge for most businesses will be identifying whether multiple performance obligations are distinct from each another in the context of the contract.
In the real estate industry, a single contract may include multiple performance obligations. For example, a developer building a condominium tower may contract to construct and sell individual units. It may also promise to provide customers with amenities, such as pools and tennis courts, extended warrantied for appliances and building maintenance and/or management services. In this example, the developer must first have systems in place to more easily capture and identify all distinct performance obligations and related stand-alone costs that they would need to carve out from their existing sales contracts.
In some instances, businesses may need to bundle together multiple services into one performance obligation. In other situations, goods and services may need to be unbundled into separate obligations. This would undoubtedly alter when the developer may recognize revenue from each good and service it delivers, and it would require the assistance of certified accountants to make an educated judgment and project the actual financial impact these changes would create.
Step 3: Determine the Transaction Price
Determining the transaction price, or the amount that real estate developers can expect as payment in return for transferring goods or services to a customer, requires consideration of following elements: non-cash considerations; pricing discounts, credits, price concessions, returns, or performance bonuses and penalties; the existence of significant financing components; and consideration payable to the customer. Ultimately, each of these factors will impact the final numbers.
In real estate deals, it is not uncommon for a transaction price to be less than a contracted price. This is especially true when there exists a contract concession that affects when and how much revenue a business may account for in the transaction price. Under these circumstances, a business will need to use an appropriate method to estimate at the time of contract the discounts and ultimate transaction price it is entitled to receive at the end of each reporting period. This will require businesses to develop new models for projecting revenue in the future as well as updating their current forecasts. In some instances, recognition of revenue may be accelerated or delayed when compared to current requirements under GAAP.
Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract
To allocate an appropriate transaction price to each performance obligation, a real estate business must first determine at contract inception the stand-alone selling price of each distinct product and service it promises to deliver. For example, the real estate developer building a multi-family apartment project with clubhouse, park and retail facilities, would need to allocate the total contract price to each separate performance obligation (i.e. the multi-family homes, the clubhouse, the park and the retail facilities).
These prices may not be easily recognizable due to volume discounts or bundling. In these instances, businesses will need to develop new processes and procedures for estimating stand-alone selling prices of the goods and services to be delivered.
Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation
Under the new standard, real estate businesses will no longer recognize revenue when they transfer the risks and rewards of ownership to a buyer. Rather, they will account for revenue when they fulfill a performance obligation, either at a point in time or over an extended period of time.
Under the ASU, businesses will need to evaluate whether or not they satisfied a performance obligation (and can, therefore, book revenue) based upon 1) the customer’s rights to the benefits provided by the contract, 2) whether or not the businesses created or enhanced an asset that a customer controls, and 3) whether or not the businesses created or customized an asset that only the customer can use and has an enforceable right to payment for performance completed to date.
Applying these methods of measurement for satisfying an obligation that occurs over time further requires businesses to identify the moment at which they transfer control, which may be when the customer accepts the asset and takes significant risks and rewards of ownership, when the customer takes physical possession or legal title to the asset, or when the business has a present right to payment for the asset.
Consider, for example, a property management company with contracts that contain multiple performance obligations that they perform for one contract price. Certain performance obligations, such as property maintenance and repairs, will be delivered over time. Others, such as leasing services, will be performed at one point in time. Under the new standard, the company would be required to allocate the lump sum of its “transaction price” between these separate performance obligations.
Privately held businesses in all industries, including real estate and construction, have a narrow window of opportunity to plan and prepare for the new model of revenue recognition, which will go into effect on Jan. 1, 2019, for annual reporting entities. The first step should be a meeting with legal and tax advisors and accountants to understand how the new standard will ultimately impact an organization’s existing processes, policies, systems, and profits.
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 email@example.com.
Miscellaneous deductions are tax breaks that can help individuals reduce the amount of income that is subject to taxes. They typically include unreimbursed expenses for items effectively connected with a U.S. trade or business that do not fit into specific tax categories. Examples include, but are not limited to, licensing fees; dues paid to unions, professional associations or chambers of commerce; costs for business travel, entertainment and uniforms; business liability insurance premiums; legal fees related to one’s job; and/or costs paid to prepare a tax return.
The list of potential itemized miscellaneous deductions is long, but it is not without limitations.
The Two Percent Limit
Most miscellaneous costs are deductible only when they exceed 2 percent of a taxpayer’s adjusted gross income (AGI). Therefore, a taxpayer with $100,000 in AGI must have more than $2,000 in miscellaneous expenses before they may take any deductions. If the taxpayer’s miscellaneous expenses total $2,500, he or she will be able to deduct $500 during that year.
Expenses that are subject to the 2 percent rule include tax preparation fees and unreimbursed ordinary and necessary expenses that an individual paid for or incurred as a requirement for carrying out his or her trade or business. Additional expenses that are deductible and subject to the 2% limit include those taxpayers paid 1) to produce or collect taxable income that must be included in their gross income, 2) to manage, conserve, or maintain property held for producing such income, or 3) to determine, contest, pay, or claim a refund of any tax.
Deductible expenses that are not subject to the 2 percent limit include losses from Ponzi scheme investments, gambling losses that are less than the total of gambling winnings, and certain casualty and theft losses that are typically related to damaged or stolen property held for investment, such as stocks, bonds, artwork or other appreciating collectibles.
Claiming and Supporting Deductions
Taxpayers must maintain receipts, canceled checks, financial account statements, and other forms of documentary evidence to support their claims of miscellaneous deductions, which are reportable on IRS Form 1040, Schedule A, Itemized Deductions, or on Schedule A of Form 1040NR, U.S. Nonresident Alien Income Tax Return.
By keeping track of potentially deductible miscellaneous expenses, taxpayers may decide to accelerate certain expenses in the current year in order to exceed the two percent threshold. Alternatively, they may decide to put off until next year travel to a far-away customer, enrolling in a course to improve their professional skills or purchasing a new tool or instrument used in their trade or business. It is advisable that individuals engage the assistance of professional tax accountants to maximize their tax savings and avoid potential IRS scrutiny of deduction claims.
About the Author: Dustin Grizzle is an associate director with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax-planning and compliance services to high-net-worth individuals and businesses in the manufacturing, real estate management, and property investment industries. 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.
The wireless networks, cell phones, routers, printers and other electronics that businesses and their employees regularly use in the office setting could be the weak link to allowing hackers to take over an organization’s entire digital network. According to the IRS, remote access takeover attacks are on the rise, putting businesses and their data at risk of exposure into criminal hands.
A remote attack exploits weaknesses in a network, device or application’s security settings to allow cybercriminals to secretly infiltrate an organization and take control of its computers and other devices. For example, it is not uncommon for businesses to use the factory-issued password settings for their digital devices or to remove all protections entirely. When this occurs, and businesses fail to change the password on a device, cyber crooks can more easily identify the location of and gain access to unprotected devices and all of the data stored in them.
Another way that hackers gain control of businesses’ computers and other devices is through the use of phishing emails that contain attachments or links to malware that users inadvertently download with the click of a mouse. Typically, these scams trick victims into thinking an email or a text comes from a trusted source, such as a software provider. They may even go so far as to provide a link to a fictitious website that mirrors the software provider’s actual login page. Once the virus is downloaded, it may then disable an entire computer network and allow criminals to hold all of a network’s documents and information hostage until a business pays a significant ransom.
To protect your business from the threat of remote takeovers, consider the following tips:
- Educate employees about the threat of remote takeovers and the dangers of clicking on links or opening attachments in emails from unknown, unsolicited or suspicious senders;
- Use security software that updates automatically;
- Run periodic security “deep scans” to search for viruses and malware;
- Change factory-issued password settings on all wireless devices connected to the network, including mobile phones, computers, printers, fax machines, routers, modems and televisions;
- Use strong password with a minimum of eight digits and a mix of numbers, letters and special characters for all devices and software access;
- Regularly review all software that employees use to access the network remotely as well as those used by IT support vendors to remotely troubleshoot technical problems. If possible, disable remote access software until it is needed.
About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax consulting and compliance services, business advice, and financial planning services to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the firm’s Miami office at (305) 379-7000 or via e-mail at email@example.com.
Over the past several years, the Department of the Treasury and the IRS have taken aim at small captive-insurance companies (sometimes referred to as mini- or micro-captives). While it is legal for businesses to create these structures and self-insure themselves against specific risks, the IRS is concerned about those businesses that structure their small captives with the primary objective of generating artificial income tax deductions of up to $2.2 million (in 2017) and avoiding estate and gift taxes on intergenerational wealth transfers. To avoid falling under IRS scrutiny of potentially abusive micro-captive “transactions of interest,” businesses must tread carefully and be prepared for new IRS requirements or risk significant penalties.
What is a Captive and Why is the IRS Concerned?
A captive insurance company is a legal entity formed by a business owner to self-insure certain business risks that might be too expensive or not available from commercial insurance carriers.
The business owner purchases an insurance policy from and pays tax deductible premiums to the captive, which is considered a separate entity from the business and which must meet the definition and regulatory standards of a valid insurance company. Subsequently, the captive can make a Section 831(b) election to be treated as a small insurance company and exclude from its taxable income up to $2.2 million in premium payments it received from the insured business entity and instead be taxed solely on its net investment income.
Captives hold great value to businesses that seek to fulfill a need and plug holes in existing insurance coverage gaps. They allow operating businesses to limit their reputational risk and losses from business interruptions while also providing greater control and flexibility over the underwriting and claims processes. Despite these benefits, the IRS has found that micro-captives are also subject to widespread abuse and has even included these structures on its annual list of “Dirty Dozen Tax Scams.” For example, businesses may artificially inflate the deductible insurance premiums it pays while also providing its captive with the ability to avoid income tax its receipt of those net premiums.
A business may already be adequately insured against a specific risk or the risk they seek to insure is highly unlikely to occur. Similarly, the IRS has found that some high-net-worth families design the personal holding structure for the captive to allow multiple generations to escape estate tax.
Consider, for example, a business owner who has multiple companies that collectively pay $500,000 per year for insurance coverage needed for ordinary and necessary business needs. The business owner could keep in place essentially the same necessary insurance policies and then use a captive structure for other, somewhat questionable policies for which the captive may never be called upon to settle a claim. The taxpayer would be allowed to write off up to $2.2 million of additional premiums paid to the captive, which would accumulate profits in a structure that would not be subject to estate tax but would be able to distribute lower-taxed dividends to family members.
What are Some Recent Law Changes?
Historically, it was common to have a senior family member control an insured business and assign ownership of the captive to a family trust created for the benefit of the business owner’s spouse and children and capable of avoiding estate tax for several generations. However, Congress included in the Protecting Americans from Tax Hikes Act (PATH Act) certain changes to combat the perception that captives are an estate tax avoidance strategy. Effective January 1, 2017, captives that want to benefit from the favorable income tax deduction of up to $2.2 million must meet a “relatedness test” so that its ownership is not shifted to the spouse or lineal descendants of the owner(s) of the insured business. The Act requires that there be common ownership (within a 2 percent range) between the insured businesses and the captive. If the captive is owned 100 percent by the senior family member, then the relatedness test does not apply because the junior generation does not own any shares.
Because the PATH Act does not grandfather in existing estate-planning structures, taxpayers will have to modify their prior arrangements to preserve the favorable taxation of the small captive. Alternatively, an existing captive may meet an alternative diversification test when it broadens its pool of policyholders so that it receives at least 80 percent of its net premiums from unrelated parties. Under this alternative test, no more than 20 percent of the net written premiums can be attributable to any one policyholder. To meet the 20 percent threshold, all policyholders deemed related under the Internal Revenue Code are counted as a single policyholder.
Are Small Captives Still Viable?
There is still a place for small captive insurance companies in the business world, especially when businesses have genuine insurance and risk-management needs. However, businesses should take a conservative approach when structuring these entities and work with professional advisors to ensure there is an arm’s length relationship between the operating company and its captive insurance company. The arrangement must involve insurance risk that shifts from the operating company to captive, which must meet the stringent requirement of an insurance company. Oftentimes, this may require independent review and analysis of risk, feasibility and pricing methodology. Remember, the IRS will want to ensure that a captive is operated in accordance with regulatory requirements and that the taxpayer is guided by a team of trusted advisors with the requisite industry experience.
About the Author: Lewis Kevelson, CPA, is a director with Berkowitz Pollack Brant’s International Tax practice, where he provides tax-compliance planning and business structuring counsel to real estate companies, foreign investors, international companies, high-net-worth families and business owners. He can be reached in the firm’s West Palm Beach, Fla., office at (561) 361-2050 or via email at firstname.lastname@example.org.
Posted on November 02, 2017 by
According to the National Association of Realtors, a lack of inventory has helped to buoy buyer demand and sales prices for existing homes during the summer of 2017. As the median prices for condominiums and single-family homes continue to appreciate, homeowners who decide to put their houses on the market now can potentially reap substantial gains as well as significant tax benefits.
Under U.S. tax laws, an individual may qualify to exclude from his or her annual income up to $250,000 of the gain from the sale of a home, or $500,000 when the homeowners are married filing joint federal tax returns. Under some circumstances, homeowners will be able to exclude the entire gain from their taxable income. Any amount that is not excludable must be reported on the seller’s annual tax return as must any amount included on a seller’s Form 1099-S, Proceeds from Real Estate Transactions.
To be eligible for the deduction, a homeowner must have owned the home and lived in it as a primary residence for at least 24 months, or any nonconsecutive 730 days, during the five years that precede the date of sale. Typically, a primary residence is the one where the homeowner spends the most time, is closest to his or her work, and is listed as the homeowner’s address on drivers’ licenses and his or her tax returns. Taxpayers who own more than one residence must pay taxes on any gains from selling additional properties that are not considered their main home.
A taxpayer will be disqualified from claiming the deduction when he or she excluded the gain on the sale or exchange of another main home during the two-year period ending on the date of the most recent sale. Additionally, the deduction will not apply to property acquired through a like-kind exchange (1031 exchange) during the past 5 years or to a homeowner who is subject to expatriate tax.
Even when homeowners are not eligible to exclude the entire gain from a sale of their primary residence, they may still qualify for a partial exclusion when the sale is the result of a move for work or health reasons. For example, a taxpayer who sold a home to be closer to a new job or business in the same line of work, or who transferred to a new work location that is at least 50 miles farther away from his or her prior place of employment, may be able to deduct reasonable moving expenses. Similar partial exclusions may be available when a homeowner must sell a home due to divorce, the death of a spouse or to be closer to medical care or to provide personal care to a family member suffering from a disease, illness or injury.
It is advisable that individuals consult with professional accountants to maximize their opportunities for tax savings when buying and selling a home.
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 email@example.com.