berkowitz pollack brant advisors and accountants

Monthly Archives: January 2018

Businesses Must Use New Withholding Rates beginning in February by Cherry Laufenberg, CPA

Posted on January 31, 2018 by Cherry Laufenberg

The IRS on Jan. 11, 2018, released new guidelines to help businesses and payroll-service providers adjust employees’ withholding calculations to reflect the new income tax rates and provisions of the Tax Cuts and Jobs Act. Businesses must apply the new withholding tables to workers’ paychecks by Feb. 15, 2018.

The new tables rely on the information that workers have already provided to their employers in existing Forms W-4, including the number of withholding allowance they claims. As a result, employees will not be required to complete new W-4s in 2018. However, it is recommended that workers check their withholding status on paychecks they receive after February 15 to ensure that the appropriate amount of income taxes are taken out of their pay each pay period.

While the payroll withholding adjustments under the new tax law will result in an increase in workers’ take-home pay, it does not mean that workers will owe less in taxes at the end of 2018. It is advisable that businesses and individual taxpayers meet with experienced accountants to guide them through the provisions of the new tax law.

The advisors and accountants with Berkowitz Pollack Brant work closely with businesses of all sizes and across virtually all industries to implement strategies intended to minimize tax liabilities, maintain regulatory compliance, improve efficiencies and achieve long-term growth goals.

 

About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities.  She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

Tax Reform Seminar Materials

Posted on January 25, 2018 by Joseph Saka

On January 18, 2018, several of our tax and consulting leaders presented an overview of the Tax Cuts and Job Act and offered thoughts on strategies for high-net-worth individuals, families, entrepreneurs and businesses. More than 300 clients and friends attended the programs and many have requested copies of the slides used by our presenters.

For convenience, we broke them into segments.

Tax Reform – Domestic High-Net-Worth Jan. 18, 2018

Tax Reform – Real Estate Companies Jan 18, 2018

Tax Reform- Pass-Thru Entities Jan 18, 2018

Tax Reform – Corporate and Business Deductions Jan 18, 2018

Tax Reform – International Outbound – Jan 18, 2018

Tax Reform – International Inbound Jan 18 2018

 

 

(C) Berkowitz Pollack Brant.

Information in the presentations is subject to change based on further interpretation of the law and guidance issued by the Internal Revenue Service.

 

 

 

 

Tax Reform and its Impact on Funding Children’s Education by Joanie B. Stein, CPA

Posted on January 23, 2018 by Joanie Stein

The Tax Cuts and Jobs Act (TCJA) signed into law in December 2017 expands the benefits of 529 college savings plans to cover private school tuition for children in grades K through 12. Effective Jan.1, 2018, the law allows families the opportunity to fund 529 accounts and take tax-free withdrawals of up to $10,000 per year to pay for a child’s non-college-level private or religious school education.  This is a significant development, especially when considering the rising costs of a private school education. In fact, according to the Private School Review, the annual cost to send a child to a private school exceeds the cost of one year’s tuition at an in-state public university.

 

529 college savings plans have long offered families at all income levels a tax-advantaged planning tool for affording the rising costs of a college education. Parents, grandparents or other individuals may contribute to 529s for the benefit of a young child and allow those dollars to grow tax-deferred for the next 18 years or so. When the child reaches college age, he or she may withdraw funds tax-free to pay for qualifying education expenses, including university tuition, books, computers and room and board.

 

Individual donors receive the flexibility to fund 529 plans in the manner that is most affordable to them, whether that be small monthly installments or larger annual gifts, free of gift taxes without the imposition of federal taxes on the investment gains. Additionally, donors can avoid federal gift tax on their 529 plan contributions when they give $15,000 or less per year, per beneficiary, or up to $30,000 per year, per beneficiary when donors are a married couple that files joint tax returns.

 

Under the new legislation, parents or grandparents with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for each of their children or grandchildren in one year with five years of tax-free dollars. For a single taxpayer, the maximum annual lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may contribute up to $150,000 to a 529 plan for each of their children or grandchildren. These contributions are free of gift taxes and can grow over the years free of capital gains taxes. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which is doubled from the current level under the tax reform law to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns. Theoretically, 529 plan beneficiaries may begin withdrawing up to a maximum of $10,000 per year when they turn kindergarten age to pay for schooling at a private institution or religious school and continue to take distributions at these restricted amounts for the next 13 years until they complete high school. At that time, they will be unrestricted in the amount of funds they withdraw each year for qualifying college-level education expenses, including tuitions, fees, room and board.

 

However, it is important to note that the use of 529 plan savings to pay for a child’s elementary or secondary school education at a private school or religious school is temporary; this benefit is set to expire on Dec. 31, 2025. That gives taxpayers potentially eight years to take advantage of the expanded use of 529 savings. It is critical that individuals meet with qualified advisors and accountants during the first half of 2018 in order to maintain their financial goals and maximize their tax savings in the current year and beyond.

 

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency.  She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com

Disregarded Entities with Foreign Ownership Face Immediate Challenges and Opportunities Filing 2017 Tax Returns by Arthur J. Dichter, JD, LLM

Posted on January 22, 2018 by Arthur Dichter

The media is rightfully paying significant attention to the U.S.’s new tax laws effective for the 2018 tax year. However, foreign persons with direct or indirect ownership in certain U.S. entities and structures should not forget that they have an important and immediate new filing requirement effective for the 2017 tax-filing season, which begins in January 2018.

For taxable years beginning in 2017, foreign-owned domestic disregarded entities, including single-member limited liability companies (SMLLCs), must 1) maintain a set of permanent financial records, 2) obtain from the Internal Revenue Service (IRS) an employer identification number (EIN), and 3) file both a U.S. corporate income tax return and IRS informational reporting Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code).

Failure to file the return or maintain proper records could result in a penalty of $10,000 for each violation of the law.

Generally, the Internal Revenue Code (IRC) treats SMLLCs as disregarded for all tax purposes. This means that an SMLLC would not have any U.S. income tax or information-reporting requirements separate from its foreign owner. However, under the new rules, such disregarded entities owned by a foreign person are treated as a domestic corporation that must meet all of the reporting and recordkeeping requirements applicable to domestic corporations with foreign owners. This includes filing an income tax return even if the foreign owner is already filing a U.S. tax return to report the SMLLC’s activity. The tax return will provide only general identifying information, but the Form 5472 that must be attached includes disclosure of the SMLLC’s direct and indirect foreign owners and any transactions that occurred between the SMLLC and a related party (including but not limited to the owner).  For this purpose, a foreign owner includes a nonresident alien individual, foreign corporation, partnership, trust or estate.

It is likely too late for applicable taxpayers to avoid the domestic disregarded entity filing and recordkeeping requirements in 2017. However, taxpayers do have an immediate opportunity during the first few months of 2018 to plan ahead and change their structures.

For example, an SMLLC may consider electing to be treated as a corporation for U.S. income tax purposes and take advantage of the U.S.’s new corporate income tax rate, which was has been reduced significantly from a high of 35 percent to 21 percent beginning in 2018. While this option may be acceptable and easy for some foreign owners of SMLLCs to do, it is not an ideal solution, since it will not eliminate the tax return filing requirement or, in some instances, the requirement to file Form 5472. In addition, if the SMLLC owns U.S. real property, there may be Foreign Investment in Real Property Tax Act (FIRPTA) issues.

Alternatively, if the SMLLC is owned by a foreign corporation and holds personal use property, the LLC may be liquidated and avoid a U.S. corporate tax return filing requirement going forward until the property is sold. However, this option may also yield future tax implications, including foreign tax consequences, depending on the SMLLCs activities and whether the foreign corporation owns other assets.

Before making any decisions, it is vital that taxpayers engage the expertise of accountants and advisors to conduct a thorough review of their unique circumstances and a careful analysis comparing all of the options available to them.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

 

About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Rules Regarding the Collection of Internet Sales Tax Face a Potential Reversal by Karen A. Lake, CPA

Posted on January 22, 2018 by Karen Lake

The U.S. Supreme Court has agreed to hear a case challenging a 26-year-old law regarding how businesses collect and pay sales tax for online transactions.

E-commerce has surged since the court’s 1992 decision in Quill Corp. v. North Dakota, which prohibited states from collecting sales tax on online purchases in which a business does not have a physical presence. During this same period, state and local governments have been struggling to fill significant budget gaps. In fact, according to the Government Accountability Office, states are losing more than $13 billion each year in tax revenue because they are not permitted to collect sales tax from out-of-state, online sellers. For those states that do not impose individual income taxes on its residents, such as Florida, Texas and South Dakota, the potential revenue they could generate from online sales tax is significant.

The case currently before the Supreme Court centers on a 2016 South Dakota law that would have allowed the state to collect sales tax from online retailers conducting sales with consumers located within its boundaries. In South Dakota v. Wayfair, the state claims that under the Quill decision, its “inability to effectively collect sales tax from Internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike.”

The Supreme Court is expected to hear the case beginning in the spring of 2018. A ruling in favor of South Dakota could overturn Quill and open the doors for states to collect sales tax on all remote sales. Such a decision would require Congressional action and new legislation.

In the meantime, it behooves online retailers to spend some time analyzing the states in which they are making sales and paying sales tax. If Quill is indeed overturned, these businesses could be in for a big change in their sales tax compliance.

 

About the Author: Karen A. Lake, CPA, is SALT (state and local tax) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

What Does Tax Reform Mean for Individual Taxpayers? by Tony Gutierrez, CPA

Posted on January 20, 2018 by Anthony Gutierrez

According to the Tax Policy Center, the Tax Cuts and Jobs Act (TCJA) will result in reduced tax liabilities for 95 percent of all taxpayers across all income levels in 2018. High-income earners may have the most to gain temporarily with a larger average tax cut as a percentage of their after-tax income, at least for the next eight years. In its current state, the law calls for many of the provisions affecting individuals to sunset at the end of 2025. However, it is important for individuals to recognize that the entirety of the legislation is subject to modification as the winds of political power change during a period of time in which there will be two presidential election cycles.

With these factors in mind, families must tread carefully. Under the guidance of experienced advisors, families will find opportunities to maximize the law’s temporary benefits while keeping an eye on the future and preparing their wealth and estate plans for a broad range of possibilities.

Tax Rates

Under the TCJA, almost all taxpayers will receive a reduction in their marginal income tax rate, which maxes out in 2018 at 37 percent on taxable income over $500,000 for individual filers and $600,000 for married couples filing jointly. In 2017, the top rate was 39.6 percent on taxable income exceeding $418,400 for single filers and $470,700 for married couples filing jointly.

Income Tax Deductions

On paper, it appears that the new tax code is unfavorable in terms of deductions and credits it allows taxpayers to claim to reduce their taxable income. For example, between 2018 through 2025, taxpayers may no longer claim deductions for interest on home equity loans or miscellaneous itemized expenses for fees paid to lawyers, accountants and investment advisors. The law also eliminates deductions for alimony paid to a former spouse when a separation agreement or final divorce decree is entered into after Dec. 31, 2018, and it limits the deductibility of personal casualty losses to only property located in a presidentially declared disaster area.

Additional deduction limitations that have been receiving a lot of media attention include the $10,000 cap on state and local tax payments and the limit on mortgage interest deductions for new mortgages beginning in 2018.

On the positive front, the new law nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing joint returns. In addition, taxpayers who elect to itemize deductions will no longer be restricted to a 3 percent of adjusted gross income (AGI) limitation.  In fact, the new law also increases to 60 percent of AGI the amount of deductible cash contributions taxpayers may give to charity. This provides high-net-worth families with the ability to leave behind a lasting legacy and give substantial sums to charitable organizations.

Estate and Gift Tax

Congressional republicans who called for eliminating the estate tax lost their battle during the very brief negotiations over tax reform. However, under the final legislation, only a small percentage of ultra-high-net-worth Americans will have to worry about the estate tax for the next eight years. Beginning in 2018, the estate and gift tax exemptions double and allow individuals to avoid taxes on assets of $11.2 million or less for individuals or $22.4 million or less for married couples filing joint tax returns. Estates valued above these thresholds will be subject to a 40 percent tax. The exemption is indexed with inflation but will revert to its pre-TCJA levels in 2026.

Even with the significant increase in the estate and gift tax exemption, it is critical that families plan carefully under the guidance of advisors who are well-versed in the tax code and the tools and strategies available to preserve wealth for multiple generations.

Other Provisions Affecting Families with Children

The TCJA introduces a new use for 529 college savings plans, for which families who fund these vehicles may take annual tax-free distributions of up to $10,000 through 2025 to pay for their children’s K through 12 private or religious school tuition. When individuals contribute $15,000 or less per year, per beneficiary, to a 529 plan, they can avoid federal gift tax on those amounts. For married couples, the exclusion is as high as $30,000 per year, per beneficiary. However, donors with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for as many children as they wish by contributing five years of tax-free dollars in one single year. For single taxpayers, the maximum lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may set aside $150,000 free of gift taxes and allow those dollars to grow free of capital gains taxes in a 529 plan for each of their children and/or grandchildren. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which the TCJA doubled from the previous level to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns.

Because the TCJA represents the most significant change to the tax code in more than 30 years, individuals will need to take the time to understand the law and change the way they typically plan for tax efficiency and wealth preservation. Advance planning is key under the direction of professional advisors who are keeping a watchful eye on the IRS and the technical guidance the agency will issue to apply the new law and who have the knowledge to develop appropriate strategies to meet taxpayers’ unique circumstances, needs and goals.

About the Author: Tony Gutierrez, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on tax and estate planning for high-net-worth individuals, family offices, and closely held businesses conducting business in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at 305-379-7000 or via email at info@bpbcpa.com.

Tax Reform Brings Immediate Impact to U.S. Taxpayers Doing Business Overseas by Andre’ Benayoun, JD

Posted on January 19, 2018 by Andrè Benayoun, JD

While many provisions of the Tax Cuts and Jobs Act (TCJA) will not be reportable by U.S. taxpayers until they file their 2018 tax returns in 2019, individuals and businesses with overseas operations must prepare now and, in some instances, apply provisions of the new law to their 2017 tax returns. Following are two important and timely provisions of the law that require immediate attention and planning.

Deemed Repatriation Tax

The TCJA introduces an immediate, one-time “deemed repatriation tax” on income that U.S. businesses earned and were previously allowed to hold overseas as untaxed profits since 1987.  More specifically, the law requires businesses to presume they brought foreign earnings back to the U.S. in 2017 and pay taxes on that amount. The tax on these deemed repatriated earnings tax is 15.5 percent on liquid assets (or 17.5 percent on those liquid assets held by individuals) and 8 percent on investments in illiquid assets, such as plants and equipment (9.05 percent when the tangible assets are held by U.S. individuals).

Because the deemed repatriation tax is effective immediately, it requires taxpayers to quickly assess their tax liability on as much as 30 years-worth of foreign earnings through 2017, and convert those foreign earnings from local accounting and tax standards to U.S. tax standards and, ultimately, also into U.S. dollars.

While the law does allow U.S. taxpayers to elect to pay this obligation over an eight-year period, the first installment is due on the same day as the taxpayer’s federal income tax filing deadline without regard to extension. For example, an individual with foreign, untaxed earnings subject to this rule would need to make the first installment payment on April 16, 2018, even if the taxpayer receives a six-month filing extension. Should the taxpayer miss the initial installment due-date, he or she may lose the option to pay the deemed repatriation tax over the next eight-year period and instead be compelled to pay the entire tax liability up-front in one lump-sum payment.

This leaves U.S. multinationals with a very limited window of time to determine not only the amount of earnings they hold offshore under U.S. tax principles but also the tax rates that should apply to that income based on the liquidity of their foreign-entity balance sheets. Making this determination and deciding whether to allocate overseas earnings to liquid or illiquid assets for purposes of calculating the tax will be a time-consuming, burdensome process. For example, according to the law, stock held in a publicly traded company is a liquid asset because taxpayers may easily sell their shares for cash. Conversely, shares in a private company are considered illiquid assets, which would be subject to the lower repatriation tax rate of 8 percent or 9.05 percent.

Accuracy is key when calculating the deemed repatriation tax, and businesses should be prepared to substantiate their calculations with supportable facts in the event the IRS challenges their estimates. A good starting point for many businesses to comply with this law would be an earnings and profits (E&P) study on their untaxed accumulated offshore earnings and profits.  An E&P study looks at the historical foreign earnings reported under local tax principles and recalculates those amounts under U.S. tax principles with the support necessary to pass IRS audit procedures.

Once an E&P study is complete, taxpayers should consider what other benefits may be available to lower their deemed repatriation tax liabilities. As an example, the law permits taxpayers to apply E&P deficits from one foreign company against the earnings of another. In addition, the law allows for taxes paid by the foreign corporation to partially reduce the deemed repatriation tax if the U.S. taxpayer is a C corporation. Generally, U.S. individual shareholders who in invest in foreign corporations are not allowed to take credit for foreign taxes paid at the foreign-entity level, but they may be able to do so by making certain elections. As such, it behooves businesses to engage professionals to appropriately and accurately calculate and support the required repatriation tax.

Looking beyond the deemed repatriation tax, the new tax law provides a participation exemption for C corporations to effectively exclude from future income those dividends they receive from certain foreign corporations. For example, distributions of earnings to a C corporation by its long-held foreign subsidiary may not be subject to a second level of tax upon repatriation of those earnings to the U.S. Yet, U.S. corporations will not be able to deduct or claim a credit on their federal U.S. income tax returns for any withholding tax that they pay abroad on those future dividends. With this in mind, U.S. individual taxpayers with an interest in a foreign corporation may consider establishing or converting an existing LLC to a C corporation to bring dividends from abroad to a U.S. corporation free of U.S. taxation.  It is also worth noting that imposing a C corporation between a U.S. individual and a foreign corporation may result in a lower rate of tax upon ultimate distribution to the U.S. individual if the foreign entity is organized in a country that does not have an income tax treaty with the U.S.

Global Intangible Low-Taxed Income (GILTI)

One provision of the new tax law that will not go into effect until 2018 is the new anti-deferral regime known as Global Intangible Low-Taxed Income (GILTI).  In an effort to prevent U.S. businesses from shifting profits offshore to low-tax countries, the TCJA imposes an annual tax on foreign income that exceeds 10 percent of a taxpayer’s return on all foreign depreciable assets, including plants, equipment and real estate. The law excludes from this calculation some items of income, most notably income that is subject to a local tax rate above 18.9 percent. The effective GILTI tax rate through 2025 is 10.5 percent for C corporations and as high as 37 percent for individuals and S corporations. Beginning in 2026, the rate is scheduled to increase to 13.125 percent for C corporations and remain at 37 percent for individuals.

Again, due to this preferential treatment afforded to C corporations, partnerships and other pass-through entities might consider converting to a C corporation in 2018 to avoid a potentially higher tax liability come 2019.

The provisions of the tax law that relate to outbound international matters are complex and will require further guidance from the IRS in the coming months. It is critical that U.S. taxpayers with overseas interest meet with qualified tax professionals to assess the entirety of their domestic and foreign operations and develop strategies to improve global tax efficiency going forward.

About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for repatriation of profits ; treaty analysis; tax-efficient debt financing; and pre-immigration tax planning. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

IRS Extends Employers’ Affordable Care Act Reporting Deadline, Provides Taxpayers with Relief when Filing 2017 Tax Returns by Adam Cohen, CPA

Posted on January 18, 2018 by Adam Cohen

Despite a repeal of the individual insurance mandate that is included in the Tax Cuts and Jobs Act that went into effect on Jan. 1, 2018, U.S. taxpayers will still need to meet their 2017 Affordable Care Act reporting requirements on the tax returns they file this April.

However, the IRS has reversed its earlier decision to reject electronically filed returns that do not indicate whether or not the taxpayer had health coverage during the year. Therefore, taxpayers may indeed file their 2017 tax returns before the April 16, 2018, filing deadline without checking the “full-year coverage” box on Form 1040.

This development is due to the IRS’s decision to extend by 30 days the 2018 due date for some entities to provide 2017 health coverage information forms to their employees. Insurers, self-insuring employers, other coverage providers and applicable large employers now have until March 2, 2018, to provide to their workers Forms 1095-B, Health Coverage, and 1095-C, Employer-Provided Health Insurance Offer and Coverage Forms, which summarize the insurance they offered or did not offer to employees in 2017.

Notwithstanding this extension of time to share information with employees, employers will still need to meet their responsibilities to electronically file informational returns with the IRS by the April 2 deadline (or February 28 for paper filers) via Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C, Employer-Provided Health Insurance Offer and Coverage.

As a reminder, employers that do not meet their 2017 ACA reporting requirements may be subject to a penalty as high as $3.193 million, depending on their gross sales and when they correct or make a final informational return filing. Similarly, individual taxpayers who failed to have minimum essential health care coverage for any month in 2017, or who did not meet one the exceptions from the law, will be subject to the ACA’s individual mandate shared responsibility penalty, which is the greater of 1) 2.5 percent of a household’s modified adjusted gross income (MAGI) above the filing threshold or 2) a payment equal to $695 per adult and $347.50 per child with a maximum amount per family of $2,085.

About the Author: Adam Cohen, CPA, is an associate director of Tax Services with 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, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.com.

 

3 Tax Tips for Gig Workers in the Sharing Economy by Richard Cabrera, JD, LLM, CPA

Posted on January 18, 2018 by Richard Cabrera

In today’s sharing economy, individuals need little more than an Internet connection to become self-made entrepreneurs. Thanks to platforms such as Uber, Airbnb, TaskRabbit and Upwork, there are countless opportunities for individuals to make money driving cars, renting out rooms or providing on-demand services, either as their primary source of income or as a side gig. However, it is important that participants in the gig economy understand how their services affect their tax liabilities. Here are some quick points to keep in mind.

Income is Taxable.

The IRS considers gig workers to be independent contractors who must report and pay taxes on the income they earn, including cash payments. Income is generally taxable regardless of the amount of time individuals engage in a specific activity or whether or not they receive an income statement, such as Forms W-2 Wage and Tax Treatment, 1099-MISC for Miscellaneous Income, or 1099-K for Payment Card and Third Party Network Transactions.

In many instances, the IRS requires online platforms that facilitate transactions between consumers and gig workers to report to the IRS workers’ income when it exceeds $20,000 and/or when workers conduct more than 200 transactions in a given year. In contrast, freelance workers who do not use sharing platforms to secure work can expect to receive Form 1099-MISC, a copy of which is also provided to the IRS, when they receive income of $600 or more in a tax year.

Pay Taxes as You Go so You Don’t Owe.

Independent contractors must pay self-employment taxes in addition to federal income taxes. Gig workers can make estimated tax payments to the IRS throughout the year to cover these tax obligations rather than waiting to pay a significant tax bill when they file their tax returns.

Alternatively, freelancers who are considered to be employees of either an online platform or another business have the option to withhold more taxes from their paychecks by adjusting their exemptions on IRS Form W-4, Employee Withholding Allowance Certificate. It is beneficial for workers to meet with tax advisors to ensure that the correct amount is withheld from their income. When workers do not withhold enough tax, they may owe a significant tax bill at the end of the year and also be liable for estimated tax underpayment penalties. If they withhold too much tax, workers may unintentionally reduce their cash flow, give the IRS an interest-free loan, and lose out on opportunities to invest those extra dollars or benefit from compounding interest.

Take Qualifying Deductions to Lower Taxable Income.

The Tax Code allows individuals to deduct certain “ordinary and necessary” costs of doing business from their gross income. These deductible business expenses may include the costs of cell phones; wireless and Internet service plans; certain auto expenses, such as gas, oil, insurance, tune-ups and repairs; fees for parking and tools; and food and drinks. However, because freelance workers use their phones, cars and other items for both personal and business use, it is important that they carefully separate out and claim as a deduction only the business portion of these expenses. The IRS has very strict rules regarding what satisfies the business-use substantiation standards, including a requirement to maintain contemporaneous records, which can be very difficult for workers to implement when their gig is a side job. Alternatively, gig workers who use their cars for companies like Uber or Lyft can instead claim a standard mileage rate deduction or 53.3 cents per mile when they use their car for business purposes.

Similarly, taxpayers who earn income from renting out a house or an apartment must divide their use of the home between personal and business purposes in order to calculate the appropriate deductions of mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation, they may claim in a given year. It is important to note, however, that the IRS will generally not allow a taxpayer to deduct rental expenses that exceed the gross rental income limitation.

Independent contracts and freelancers represent a growing segment of the U.S. workforce who face unique tax compliance challenges. Engaging the services of professional tax accountants can help these workers meet their tax obligations and take advantage of potential tax benefits.

 

About the Author: Richard Cabrera, JD, LLM, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning, consulting, and mergers and acquisition services to businesses located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

Tax Reform for Real Estate Businesses and Investors by John G. Ebenger, CPA

Posted on January 17, 2018 by John Ebenger

The Tax Cuts and Jobs Act (TCJA) that overhauls the U.S. Tax Code represents new, often more-favorable tax treatment for real estate business owners and investors. However, the full benefit of these provisions will require careful evaluation and planning as the IRS catches up to the new law and provides technical guidance.

Income Taxes for Individuals and Businesses

For starters, the new law reduces the top marginal income tax rate for high-income earners from 39.6 percent to 37 percent and doubles the estate tax exemption, which allows individual taxpayers to exclude from estate tax up to $11.2 million in assets, or $22.4 million for married couples filing jointly. At the same time, the TCJA establishes a permanent corporate tax rate of 21 percent, down from 35 percent, while also eliminating the corporate Alternative Minimum Tax (AMT).

Pass-Through Business Structures

Businesses that are structured as pass-through entities, such as partnerships, LLCs, S corporations and sole proprietorships, may, subject to limitations, receive a deduction as high as 20 percent on U.S.-sourced “qualified business income” (QBI) that flows through to their owners’ personal tax returns. The deduction, which also applies to property rental businesses, trusts and estates and to taxpayers who receive qualified REIT dividends, qualified cooperative dividends, and/or qualified publicly traded partnership income, is available only through 2025; in 2026, the law calls for pass-through business income to be taxed using the standard individual tax rates and brackets that are in effect at that time.

In general, the 20 percent deduction is capped at the greater of the following:

1) 50 percent of wages paid to employees and reported on W-2s; or

2) 25 percent of W-2 wages plus 2.5 percent of a business’s original cost of qualifying, tangible depreciable property that generate trade or business income, including buildings, equipment, furniture and fixtures.

When determining the allowable deduction, many rental real estate operations will need to consider that while they may have limited W-2 wages, they may also have significant qualifying tangible and depreciable property to help maximize the 20 percent deduction.

Real estate businesses may need to reassess their existing operations in order to realize the potential benefits they may gain from the new pass-through deduction. This can include a review of their existing structures and the tax liabilities or savings they may potentially receive from restructuring, perhaps as C corporations. In addition, applicable businesses should assess how they pay employees and independent contractors and how the new law will treat specific items of income, such as triple net leases or ground lease real estate rentals.

First-Year Bonus Depreciation

Under the new law, qualified tangible property acquired and put into service after Sept. 27, 2017, and before Jan. 1, 2023, may be eligible for 100 percent “bonus” depreciation in the year of purchase. This first-year bonus depreciation deduction will begin to decrease after 2023 until it will no longer be available in 2027. Prior to the TCJA, businesses were permitted to expense only 50 percent of the price they paid to acquire and put into service qualifying property or to make non-structural improvements to the interiors of nonresidential buildings in 2017.  The rate was scheduled to decrease to 40 percent in 2018 and to 30 percent in 2019.

By effectively doubling the amount that businesses can write off in the first year for the purchase of all eligible assets, the new rules provide qualifying businesses with an immediate tax-saving opportunity to reduce the amount of profits that are subject to tax. Moreover, the law expands the availability of bonus depreciation in 2018 to “previously used” assets.

However, the new law specifically excludes from the definition of bonus-depreciation-eligible property qualified leasehold improvements; qualified restaurant and retail improvements; and replaced it with non-leased “qualified improvement property” (QIP), which the PATH Act identified as structural improvements to the interiors of nonresidential property that was placed in service after Sept. 27, 2017. It may appear that Congress intended to provide a 15-year recovery period for QIP and for it to be bonus-depreciation-eligible. However, until the IRS issues some form of technical correction, QIP will be depreciated over 39 years.

Section 179 Expensing

Beginning with the 2018 tax year, eligible businesses may take an immediate deduction of up to $1 million per year for the costs they incur to acquire qualifying improvement property and business assets, including computer software and qualified leasehold, retail and restaurant improvements. The amount of the deduction will be reduced, dollar for dollar, when acquisition costs exceed $2.5 million. Previously, the Section 179 deduction was limited to $500,000, and it began to phase out at $2 million.

As an added benefit, the TCJA also expands the definition of Section 179 property to include  other improvements made to nonresidential real property, including roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems) made to nonresidential real property.

Net Operating Losses

Prior to the TCJA, businesses were permitted to carry back net operating losses (NOLs) two years or carry them forward 20 years to offset table income. Effective for the 2018 tax year, however, NOLs can longer be carried backward. Carryforwards will be limited to 80 percent of a business’s taxable income, but these NOLs may be applied against taxable income indefinitely. As a result of the tax reform law, businesses will need to adjust carryovers from prior tax years to account for the 80 percent limitation.

Business Interest Deduction

Generally, the TCJA limits the interest payments that businesses may deduct to 30 percent of adjusted gross taxable income beginning in 2018. The law reduces that limit further beginning in 2022. However, the law does provide a number of exceptions to this limit that are specific to real estate businesses and investors. For example, eligible taxpayers may elect to fully deduct interest accrued in the development, construction, acquisition, operation, management, leasing or brokerage of real property. In addition, there is an exception for taxpayers that are considered “small business” with average annual gross receipts of $25 million or less for the three most recent prior tax-year periods.

Under the new law, amounts not allowed as a deduction for a taxable year may be carried forward to future years, indefinitely, subject to restrictions that apply specifically to partnerships.

Carried Interest

Congress spent the past several years debating the preferential tax treatment of management fees and other forms of compensation (in excess of salaries) paid to partners, managers and developers for a share of a business or project’s future profits. This concept of carried interest treatment survived Congressional wrangling over tax reform and will continue to be taxed at the favorable long-term, capital gains rate of 20 percent, rather than the maximum ordinary income rate, which under the TCJA is 37 percent.  However, the new law does limit the tax treatment of these gains to apply only to assets held for more than three years or sold after three years.

Section 1031 Like-Kind Exchanges

Thanks, in large part, to the lobbying efforts of the National Association of Realtors and National Association of Real Estate Investment Trusts, Section 1031 exchanges of like-kind real estate property will continue to receive tax-deferred treatment under the TCJA. The law, however, did eliminate the availability of tax-deferred exchanges of personal property, such as art work, coins and other collectibles.

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 info@bpbcpa.com.

 

Property Owners Can Expedite the Recovery of More Capital Improvement Expenses UPDATED with Tax Reform News by John G. Ebenger, CPA

Posted on January 11, 2018 by John Ebenger

The Internal Revenue Code permits owners of business- and income-producing real estate to deduct from their taxable income an allowance for the wear and tear, deterioration or obsolescence of property over time. In addition, some businesses have been able to accelerate depreciation deductions to more quickly recover the cost and other basis of certain capital investments in property improvements. However, unbeknownst to many property owners, the laws changed in 2015 and extended the potential application of first-year bonus depreciation to a broader range of nonresidential property improvements. When real estate owners and investors miss out on these deductions, they may be leaving significant tax and cost savings on the table while also losing out on opportunities to improve the long-term value of their investments.

With the passage of the Tax Cuts and Jobs Act (TCJA) on Dec. 20, 2017, the technical implementation of bonus depreciation will change as the IRS issues guidance in 2018 to confirm to the provisions contained in the new tax reform law.

Then and Now

Under the U.S. tax code, businesses are typically allowed to deduct most “ordinary and necessary” business costs from their taxable income in the year they accrue those expenses. In contrast, a business’s capital investments in tangible property, including equipment, machinery and buildings, are deductible over several years of the property’s useful life, unless it qualifies for an immediate first-year bonus depreciation.

In 2002, Congress introduced the concept of bonus depreciation to apply to new property with a recovery period of 20 years or less, including off-the-shelf computer software, water utility property, and qualified leasehold improvement property (QLHI). This final category applied only to improvements businesses made to commercial property, excluding land, that they leased and made available for use at least three years after the building itself was placed in service. For the next 13 years, businesses were left in a state of uncertainty as Congress either allowed bonus depreciation to lapse or extended it temporarily to cover as much as 100 percent of expenses for qualifying assets, depending on the tax year for which the property was placed in service.

With the 2015 passage of the Protecting Americans from Tax Hikes (PATH) Act, 50 percent bonus depreciation was revived and extended to cover non-leased, qualified improvement property (QIP) acquired and placed in service after Dec. 31, 2015, and until Dec. 31, 2017, the impact of TCJA has not been addressed.

A Broader Range of Assets Now Qualify for Bonus Depreciation

Building improvements are typically very large expenditures that can stagnate a business’s cash flow. The logic behind bonus depreciation is that the quicker businesses are able to deduct and recover the costs of investments in real property improvements, the more money they will free up to invest in other assets that can expand their operations and improve their profit potential.

The PATH Act allowed property owners to apply bonus depreciation to a broader range of improvements to nonresidential property, regardless of whether or not the underlying property is leased. Moreover, the law lifted a prior restriction that limited the application of bonus depreciation to property that was at least three-years-old.

Under guidance issued in 2017, businesses received the ability to immediately write off a portion of QIP only when they made the improvements after the date the building was first placed in service. Therefore, deductions would apply to qualifying improvements that were made as soon as one day after a building was placed in service. The only exceptions to bonus-eligible property are 1) enlargements of an actual building, 2) changes to the internal structural framework of a building, or 3) any improvements to the building’s elevator or escalator.

Therefore, consider a taxpayer that completed construction on a new, 50,000-square-foot office building in January 2017 and subsequently expended $500,000 to build out 1,000 square-feet of a new tenant’s space in November 2017. Under this definition of QIP, the building owner could in 2017 deduct from taxable income 50 percent of the costs he or she incurred to build out the new tenant’s space, simply because the building predates the improvements.

If the building is 30-years old, and the owner completed a $1 million renovation to update the property’s common areas in 2017, 50 percent of those costs ($500,000) would qualify for bonus depreciation if the renovations maintained the structural integrity of the building and did not involve improvements to elevators or escalators. Not only would the building owner reduce 2017 tax liabilities, he or she will also be able to recover one-half of the costs incurred to improve the value and future marketability of the building.

Planning Opportunities

The short-term certainty of these relaxed and less restrictive rules for bonus depreciation represents significant savings for owners of commercial real estate, businesses that invest heavily in equipment and machinery, such as manufacturers and distributors, as well as those entities that rely on frequent software updates. The only limit to the benefit of applying bonus depreciation is a business owner’s reluctance or failure to plan ahead with the guidance of experienced tax advisors.

Not only will property owners be able to use the immediate tax deductions to offset improvement costs in the current year, they will also free up cash flow to invest in other income-producing business activities. Moreover, because there is no spending or investment threshold on QIP used in a trade or business or for the production of income, some businesses may be able to create taxable losses to further reduce their tax liabilities

In some instances, businesses that failed to plan ahead or who put QIPs into service in 2016, may file amended tax returns to retroactively apply bonus depreciation to those activities they failed to report in that tax year. This assumes that businesses did not formally elect out of bonus depreciation on their 2016 income tax returns.

Businesses have an additional opportunity to qualify for both first-year bonus depreciation and Section 179 property deductions, especially when they make improvements to qualifying leasehold property, and/or retail or restaurant property. A cost segregation study is key to helping taxpayers identify all of the assets associated with the purchase, construction, repair and renovation of a property that may qualify for accelerated depreciation deductions and cost recovery.

 

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 info@bpbcpa.com.

 

IRS Issues Preliminary Guidance on One-Time Repatriation Tax under Tax Reform Law by Andre’ Benayoun, JD

Posted on January 10, 2018 by Andrè Benayoun, JD

Following the passage of the Tax Cuts and Jobs Act (TCJA), the IRS issued preliminary guidance to help multi-national businesses comply with the new law’s “deemed repatriation tax” on foreign profits that U.S. companies and their overseas subsidiaries hold offshore.

 

Effective for the last tax year beginning prior to Jan. 1, 2018, U.S. businesses will be subject to a one-time “deemed repatriation tax” of 15.5 percent on certain earnings they made since 1987 and invested in liquid assets held overseas and an 8 percent tax on foreign earnings invested in illiquid, fixed assets, such as plants and equipment. The tax due may be spread over an eight-year period and is due regardless of whether or not businesses actually bring foreign profits back to the U.S.

 

This provision replaces the previous tax regime, under Section 965 of the Internal Revenue Code, for which U.S. businesses were able to defer paying a 35 percent tax on repatriated earnings by stockpiling profits offshore. It aims to move the U.S. to a more territorial system in which U.S. companies would pay taxes in the future solely to the foreign governments where they earn profits.

 

The end result of the new law would be an immediate tax hit on corporate profits with the benefit of avoiding U.S. taxes in the future, even on earnings that businesses bring back to the States. However, it is important to note that these benefits are afforded solely to C Corporations and not to S Corporations or individuals. This may be a surprising result for some because, while the future benefits of a territorial regime only apply to C Corporations, the deemed repatriation of foreign earnings does, indeed, apply to S Corporations that do not elect to defer the income pick-up as well as to individuals, for which no election to defer the income pick-up is available.

 

Under IRS Notice 2018-07, the agency has declared its plan to better define, in the near future, what constitutes liquid and illiquid assets held offshore for purposes of calculating the effective tax rate applicable to the deemed repatriation of foreign earnings. Furthermore, the Notice attempts to further explain and eliminate the double taxation issue that may arise when foreign corporations of a U.S. company have different tax years (e.g., one foreign corporation has a December 31 year-end and another has a November 30 year-end.)

 

About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for profit repatriation; treaty analysis; tax-efficient debt financing; and pre-immigration tax planning. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

 

IRS Asks Businesses to Wait for Payroll Guidance when Applying Tax Reform Measures in 2018 by Cherry Laufenberg, CPA

Posted on January 09, 2018 by Cherry Laufenberg

Due to the passage of the Tax Cuts and Jobs Act that President Trump signed into law in late 2017, business and payroll service providers will need to adjust employees withholding calculations for the 2018 tax year. However, as the IRS works to apply the new law, it asks businesses to continue to use the existing 2017 withholding tables during the month of January. The agency expects to issue guidance on this matter in the coming weeks to enable businesses to make payroll changes based on employees’ existing W-4 information.

Workers should expect to see an increase in their take-home pay, with less taxes withheld from their paychecks, beginning in February 2018.

The advisors and accountants with Berkowitz Pollack Brant work closely with businesses of all sizes and across virtually all industries to implement strategies intended to minimize tax liabilities, maintain regulatory compliance, improve efficiencies and achieve long-term growth goals.

About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities.  She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

 

Partnerships Must Adapt to New IRS Audit Rules, Liabilities at the Entity Level – UPDATED Under Tax Reform

Posted on January 08, 2018 by Joseph Saka

For more than three decades, IRS partnership audits have operated under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which required individual partners to pay their share of a partnership’s tax underpayments identified in an IRS audit, unless the partnership elected to be taxed at the entity level. Since TEFRA’s enactment, partnerships have proliferated in number, size, and complexity, making it difficult for the IRS to audit and collect taxes from partners in larger and more complex entities. To solve this problem, Congress enacted sweeping changes to the IRS audit rules in the Bipartisan Budget Act of 2015 (BBA). Beginning in the 2018 tax year, the BBA will require partnerships, rather than individual partners, to be liable for income taxes on all adjustments of partnership income, gains, losses, deductions, credits, and related penalties and interest.

 

While early adoption of the new rules is permitted, partnerships should be prepared for how these changes will affect the valuation, taxation, and protection of their current and future partners’ interests.

 

The New Partnership Audit Rules

Under the new partnership audit rules, the burden to pay underreported taxes identified by an IRS audit shifts from individual partners to the partnership in the year the IRS makes the adjustment (the adjustment year), rather than in the year under audit (the audit year). With this change, a partnership will be responsible for correcting an “imputed underpayment” and remitting taxes at the highest individual rate (39.6 percent in 2017), plus penalties and interest in effect during the adjustment year, rather than the audit year. This change allows the IRS to collect unpaid taxes directly from a partnership rather than its partners. Consequently, under the BBA, a partnership’s current partners may be liable to pay for tax benefits former partners erroneously received in prior years.

 

To account for this discrepancy, the new rules allow a partnership to elect tax treatment at the partner level and transfer audit year tax liabilities back to audit year partners when the partnership takes one of the following actions:

  1. Within 45 days after receiving an IRS Notice of Proposed Adjustment, the partnership can make a Section 6226 election to issue to all partners during the audit year examination revised K-1s or similar statements, reflecting each partner’s share of items adjusted by the IRS. If the partnership elects out of the default rules, each partner would be required to pay taxes for the audit year when the revised K-1 is issued. Penalties and interest on the underpayment of tax will accrue from the audit year.
  2. Within 270 days after receiving an IRS Notice of Proposed Adjustment, the partnership can issue updated K-1s to all affected partners and convince those partners to file amended tax returns incorporating the IRS adjustments. All affected partners would be required to pay the additional taxes, penalties and interest for all directly and indirectly affected years.

 

Time constraints on these elections may cause difficulties for many partnerships, especially those filing an administrative appeal. Oftentimes, the appeal process may take more time to resolve than the 45- to 270-day timeframe partnerships have to make an election. Additionally, if a partner-level election is made, the interest rate on tax underpayments will be increased by two percentage points.

 

Other Exemptions and Relief

The new audit rules apply to partnerships of all sizes for taxable years beginning after December 31, 2017. However, the law provides an opportunity for certain small partnerships to annually opt-out of the rules when they have 100 or less direct and indirect partners, all of whom are either individuals, C Corporations, foreign entities treated as U.S. C Corporations, S Corporations, or estates of deceased partners.

 

Taking advantage of this opt-out election requires qualifying partnerships to follow complex reporting and compliance requirements, which includes the obligation to provide the IRS with the names and taxpayer identification numbers of indirect partners who hold an interest in and may be liable for partnership tax liabilities. Also, when a partnership elects to opt-out, the pre-TEFRA audit rules will apply. This will typically mean that each partner will be audited separately.

 

Finally, partnerships that wish to avoid underpaid tax adjustments at the highest tax rate of 39.6 percent in 2017, can examine the effective tax rates of their individual partners. Partnerships may qualify for a lower tax rate when they can demonstrate within 270 days of receiving an IRS notice that certain partners qualified for a rate adjustment during the audit year because:

  1. Part of the identified underpayment was allocable to a partner that was a tax-exempt entity;
  2. Part of the identified underpayment was due to ordinary income allocable to a C Corporation partner or a capital gain or dividend allocable to an individual partner; or
  3. At least one partner files an amended return consistent with the final partnership adjustment and pays the tax in full.

Planning Opportunities

Compliance with the new audit rules requires partnerships to appoint a person or entity “with a substantial presence in the U.S.” to serve as partnership representative (PR) to act on behalf of the partnership for all IRS matters. In contrast to the TEFRA rules, the PR does need not be a partner. Going forward, the IRS will only communicate with and issue notices to the sole PR who represents and binds the partnership and all of its partners in IRS audits and court proceedings. If the partnership does not appoint a PR, the IRS may appoint one for the partnership.

 

Regarding timing, a partnership may be able to apply the new rules retroactively to the 2016 or 2017 tax years only when it receives an IRS notice of examination or files a claim for refund for 2016 or 2017. To make this early opt-in election, the partners must timely file a signed statement conforming to the language and manner required by the IRS.

 

In 2017, the Treasury Department released proposed regulations on the new partnership audit rules. Additionally, a Tax Technical Corrections Act was introduced in Congress to address many of the issues arising from these new rules. While the rules may be modified in the future, partnerships should comply with the new law and understand how it will impact their operations. The following items should be addressed under the guidance of experienced tax professionals:

  1. How will the partnership select a PR to have sole authority in IRS matters?
  2. What processes will be employed to ensure the PR meets its reporting obligations to the partners and the IRS?
  3. Does the partnership qualify to opt-out of the new rules or lower its imputed tax?
  4. How should the partnership agreement be amended to address the new rules?
  5. Does the partnership have any exposure to imputed tax underpayments from prior tax years?
  6. How will the partnership handle tax liabilities incurred by prior partners?
  7. If the partnership issues financial statements, will it be required to accrue income taxes under GAAP or IFRS?

Tax Reform Impact

In December 2017, Congress passed a sweeping tax reform act, which includes several important changes involving partnerships. Beginning in the 2018 tax year, individual partners may deduct up to 20 percent of their share of their partnership’s “qualified business income.” The intended effect of this provision is to reduce the top tax rate on an individual partner’s share of qualified business income (QBI) to 29.6 percent, from the top individual rate of 37 percent that is effective under the new tax law. While a full discussion of this tax reform provision is beyond the scope of this article, its impact on partnerships will need to be addressed in future IRS examinations where the new partnership audit rules will apply. Depending on future regulations, IRS rulings, and other developments, the result of a partnership-level audit assessment could result in income adjustments from IRS partnership examinations of 2018 and future years to be taxed at 37 percent, versus an otherwise available 29.6 percent rate under new tax reform act. Proper planning and elections may mitigate these unfavorable results. Timely tax planning will be critical to ensure optimal tax results for partnerships and partners, given these major developments.

 

 

 

754 Elections Have Immediate Impact when Selling, Buying or Liquidating Partnership Interest – UPDATED Under Tax Reform by Dustin Grizzle

Posted on January 05, 2018 by Dustin Grizzle

The sale, exchange or liquidation of partnership interest in appreciated property, such as real estate, is a common occurrence among partners and members of partnerships and LLCs taxed as partnerships. Whether due to disagreements among the partners, the death or divorce of a partner, or the addition of new partners, these transactions can result in a discrepancy between a property’s fair market value (FMV) and its basis, which can ultimately affect the tax treatment of each partner’s reported income, gains and losses. To remedy this, a partnership may make a 754 election under Internal Revenue Code sections 743(b) and 734(b) to equalize the buyer’s basis in the purchased partnership interest in property (outside basis) and the buyer’s share of the basis of the assets inside the partnership net of liabilities (inside basis).

 

While this election can be somewhat complex and time-consuming, it provides an incoming partner with a step-up or step-down in basis to reflect the FMV of the property at the time of the transfer; failing to make a 754 election can represent a missed opportunity for a partner to accelerate deductions and recover basis in a shorter period of time.

 

Understanding the Basics of Basis

When an entity or person buys an interest in a partnership with appreciated assets, its “outside basis” in the property increases to the purchase price. Subsequently, the entity or person may reduce or even eliminate taxable gains when it sells the property in the future.

 

In general, partners or members of pass-through entities will typically increase their basis in partnership interests through partnership contributions and taxable and tax-exempt income; their basis in the property will decrease due to distributions, nondeductible expenses and deductible losses. Therefore, when existing partners sell their interests in property owned by the partnership, they will typically recognize a gain or loss, while the new partner’s basis in the property will become the purchase price that he or she paid. If the property is highly appreciated, the buyer’s outside basis in the partnership interest will far exceed the inside basis in those assets. Ultimately, this can remove the new partner’s rights to immediate depreciation deductions and defer his or her benefit of additional basis until the underlying property is sold.

 

A 754 election bridges the gap between inside and outside basis by immediately stepping-up or stepping-down the basis of the remaining partnership assets. This permits the entity the option to equalize the partners and provide them with a tax asset. This tax asset allows the new partner to reduce or eliminate the tax on gains and losses already reflected in the price he or she paid for the partnership interest when the asset is sold. In addition, when the adjustment relates to depreciable or amortizable property, such as real estate, the new partner may begin taking those deductions in the year the election is made rather than waiting to recoup his or her basis when the property is transferred or sold in the future.

 

Exceptions to these rules exist for “substantial basis reductions” and “substantial built-in losses” that require a step-down in basis, even in the absence of a 754 election, when one of either of the following criteria are met:

the partnership has a built-in loss of $250,000 or more;
there is a downward basis adjustment of $250,000 or more; or
The transfer or sale involves an electing investment partnership, such as a hedge fund.
In addition, the tax reform package that President Donald Trump signed into law effective Jan. 1, 2018 updates this language to include the following:

 

The partnership has a substantial built-in-loss with respect to a transfer of partnership interest if either a) the partnership’s adjusted basis in the partnership property exceeds by more than $250,000 the fair market value of the property (Code Sec. 743(d)(1)(A) as amended by 2017 Tax Cuts and Jobs Act §13502(a)), or b) the transferee partner would be allocated a loss of more than $250,000 if the partnership assets were sold for cash equal to their fair market value immediately after the transfer.

 

 

Under all of these circumstances, anti-stuffing rules will apply in order to limit a buyer’s ability to benefit from overvalued net operating losses (NOLs) and NOLs earned in years prior to the date of the purchase.

 

How a 754 Election Works

Assume that in 2000, partners A, B and C contribute $100 each in exchange for a 1/3 interest in Donut LLC. Donut purchases a $300 asset depreciable over 10 years on the straight line method and earns $900 income before depreciation over the first 5 years. Donut distributes $600 of that amount to each partner in 2005, providing it with an inside basis of $450 ($300 asset – $150 depreciation + $900 income – $600 distribution). This amount equals the total of each partner’s individual outside basis ($150 X 3) in her or her partnership interests.

 

Now consider that in 2006, Partner C sells his entire 1/3 interest in Donut LLC to New Partner D for $250 cash. Partner C will incur a $100 long-term capital gain on his 2016 personal tax returns ($250 sales price – $150 basis). Subsequently, Partner D will take over Partner C’s capital account of $150, which exceeds by $100 his proportionate share of his basis ($250) in Donut LLC’s assets.

 

If Donut breaks even in years 2006 through 2016 and disposes of the property without a Section 754 election on Jan. 1, 2017, Partner D will not recover his outside basis or $100 (purchase price in excess of “inside basis”) until the year of liquidation.

 

Had Donut LLC made a Section 754 election in its 2006 tax returns, Partner D would have recovered his inside/outside basis difference of $100 as a $10 ordinary depreciation deduction each year until the additional basis was fully recovered. The ultimate sale of the asset in 2017 would result in the same capital gain to all partners. Without the 754 election, Partner D would have missed the benefit of timely deductions during the years 2006 through 2016.

How to Make a Section 754 Election

 

Section 754 elections are available only to partnerships and LLCs taxed as partnerships for which the entity’s income and losses pass through to each partner. A valid election requires strict adherence to procedural guidelines, including the filing of a written statement with the partnership’s tax return in the year that the distribution or sale occurred. Because the election is made at the entity level, the statement must specify the name and address of the partnership, and it must contain a declaration that the partnership elects under section 754 to apply the provisions of section 734(b) and section 743(b). Once the election is made, it will remain in effect for all future years, unless the partnership applies for and receives IRS approval to revoke it.

 

The decision to make a Section 754 election can be complicated and burdensome, but it may be well worth the effort for accelerating a partner’s tax deduction following a sale, exchange or liquidation of partnership interest. However, making this determination is best accomplished under the guidance of professional accountants.

 

The advisors and accountants with Berkowitz Pollack Brant work with domestic and international businesses to meet regulatory compliance obligations, optimize profitability and maintain tax efficiency.

 

About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, 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 info@bpbcpa.com.

Outsourcing CFO Services Yields Significant Benefits for Small and Mid-Size Businesses by Anya Stasenko, CPA

Posted on January 02, 2018 by Anya Stasenko

Operating a small business in the U.S. comes with a wealth of opportunities and an equally abundant set of complexities, including tax reporting, regulatory compliance and meticulous financial recordkeeping. For many entrepreneurs, hiring full-time professionals to oversee these functions in-house is simply unaffordable. Instead, many are turning to outsourced CFO services to receive on-demand assistance with a myriad of financial budgeting, reporting, planning and fraud-prevention services.

 

By outsourcing CFO functions to qualified and experienced certified professional accountants and auditors, business owners can more easily afford the financial and operational expertise of a CFO without incurring the expense of paying the high salary and benefits associated with hiring full-time candidates in-house. Yet, having these services available on a once-per-month, quarterly or as as-needed basis is not only cost effective, it also centralizes and expedites a small business’s decision-making processes.

 

While it is not uncommon for small business owners to hire part-time bookkeepers to record financial transactions and oversee payroll, the extent of these professionals’ expertise is typically limited to the specific tasks they perform. For example, bookkeepers may lack the skills required to analyze a business’s performance, profitability and cash flow. In addition, they may be unqualified to look beyond the numbers and provide overburdened owners with the strategic counsel required to establish and meet operational and financial goals, minimize risks and take advantage of market opportunities.

Following are five additional benefits business owners will receive when they outsource CFO services:

Financial Reporting Accuracy

It is critical that businesses maintain meticulous financial records for both tax-reporting and financial-analysis purposes. When businesses outsource this task to experienced professionals, they receive a second set of eyes to confirm the accuracy of financial data as well as a valuable resource to help train workers, including bookkeepers, on best practices for managing accounting and financial processes, procedures and technology. In addition, businesses gain the benefit of having a qualified expert on call to prepare with precision and on time the requisite financial documents that they need when seeking to secure loans or investment dollars from third-parties.

Profitability and Cash Flow Analysis

Entrepreneurs wear many hats and juggle multiple job responsibilities as they grow their businesses. It is not uncommon for them to become so mired in day-to-day tasks that they do not take the time to evaluate the facts behind their financial data. As a result, they may overlook potential issues that could turn into very real problems in the future or miss out on opportunities to improve profitability and cash flow. Are some products or services more or less profitable than others? Is cash flow in and out of the business managed efficiently? Are there areas where the business can cut costs or reallocate expenses in order to improve profitability? The answers to these questions are difficult to decipher from a spreadsheet. Rather, they require a higher level of understanding and knowledge of key performance metrics and the intricacies and interplay of corporate finance, tax efficiency and risk management.

Fraud Detection and Prevention

Both small and large businesses continue to suffer significant losses from occupational fraud committed by their own employees. However, according to the Association of Certified Fraud Examiner’s (ACFE), these losses typically have a far greater impact on smaller organizations that lack sufficient internal controls to prevent and detect fraudulent activities. An outsourced CFO can provide the keen eye and sharp skills required to identify not only red flags that point to fraud but also operational weaknesses that can foster and contribute to criminal mischief. For example, businesses can reduce employees’ opportunities to commit fraud by separating the duties and responsibilities of certain business transactions to different people within the organization.

Loan Negotiations

Whether a business owner is seeking a loan or engaging in other forms of contractual negotiations, it is imperative that he or she fully understand the terms of the agreement, including their personal responsibilities to fulfill certain conditions. However, oftentimes a loan will involve standard covenants that may be difficult for a start-up or growing business with limited resources to satisfy. With the experience of an outsourced CFO, business owners can not only be assured that they understand the entirety of their contractual obligation, but they will also gain the benefit of a qualified and affordable representative to negotiate some of the terms on their behalf up front.

Short-Term Consulting and Long-Term Strategic Planning

The responsibilities of a CFO extend far beyond back-office number crunching and financial transactions. In today’s business environment, their analytic skills can be applied to all facets of an organization, from human resources and operations to sales and technology. Outsourcing these functions on an as-needed basis provides small businesses with a fresh perspective and high-level analysis of their financial, operational and tax efficiency at manageable fees. An outsourced CFO can examine a company’s balance sheet to establish workable budgets and compare them to actual results; identify problem areas; and recommend cost-cutting strategies, new technologies and new processes for improving efficiency. Their level of expertise also ensures immediate feedback to help businesses more quickly and effectively respond to changing market conditions and leverage new opportunities for future growth.

Berkowitz Pollack Brank Advisors and Accountants offers outsourced CFO services to help entrepreneurs run their domestic and international businesses more effectively and profitability. To learn more about these consulting services, please contact me directly.

About the Author: Anya Stasenko, CPA, is a senior manager with the Audit and Attest Services practice with the accounting and advisory firm of Berkowitz Pollack Brant, which has extensive experience helping foreign individuals prepare and implement tax-efficient plans for establishing residency and businesses in the U.S. Stasenko can be reached in the CPA firm’s Ft. Lauderdale, Fla. office at (954) 712-7000 or via email at info@bpbcpa.com.

Are Health Savings Accounts the Future of Healthcare? UPDATED for Tax Reform by Adam Cohen, CPA

Posted on January 02, 2018 by Adam Cohen

While the current administration failed in its attempts to fully repeal the Affordable Care Act (also known as Obamacare), it did secure under a package of tax reform the elimination of the health care law’s individual mandate beginning in 2019. Regardless of how all of this will play out, one consistent trend that continues to emerge from the administration is an increased reliance on Health Savings Accounts (HSAs).

Currently, HSAs are available only to workers with high-deductible health insurance plans, which for 2017 were defined as those with an annual deductible of $1,300 for self-only coverage and $2,600 for family coverage. These amounts are indexed annually for inflation.

According to the most recent information from the Kaiser Family Foundation, only 19 percent of workers were enrolled in HSAs in 2016. However, this is expected to change, especially as more and more employers opt for high-deductible health plans.

HSA Tax Benefits

In the most basic terms, an HSA can be compared to a bank account for which eligible workers can set aside money to use solely for paying current and future health care expenses. Contributions to the account may be made by the individual, perhaps via automatic deferral from earnings, a family member or even one’s employer. However, unlike a typical savings account, HSAs allow individuals to contribute pre-tax dollars and earn interest on their investments free of taxes. In addition, annual contributions roll over from year to year, rather than following the use-it-or-lose-it rules of a traditional health reimbursement account (HRA) or health care flexible savings account (FSA).

Another tax benefit of HSAs is that qualifying participants may deduct from their taxable income not only their own HSA contributions but also those made by their employers. For 2017, the IRS allowed qualifying employees and their employers to contribute to an HSA up to $3,400 in pre-tax dollars for themselves, or $6,750 for a family plan, plus a $1,000 catch-up contribution for individuals age 55 and older. Because workers own their individual accounts, rather than their employers, they may continue to keep and contribute to their HSAs long after they switch jobs and even into retirement since there are no age-based distribution requirements. As account owners accumulate savings, they may choose to put these funds in an investment vehicle, such as stocks and bonds, which can allow their money to grow along with their retirement savings.

When HSA participants do take distributions to pay for qualifying medical expenses, including doctor visits and prescription medications, they may exclude those amounts from their taxable income in the year of the distributions. Additionally, workers may withdraw funds from their HSAs to pay for certain health insurance premium payments, including payments for COBRA coverage and for the health insurance of individuals receiving unemployment income. As an added plus, under the current Affordable Care Act, payments for preventative services, including annual visits to primary care physicians, are exempt from the HSA deductible.

Potential Pitfalls of HSAs

 

 

 

Despite all of the tax-advantaged benefits that HSAs provide, they do come with potential risks, especially when consumers fail to follow the rules.

For example, under current law, all withdrawals from an HSA that an individual 65 and younger uses for non-qualifying medical expenses will be subject to tax as well as a 20 percent penalty. In addition, account owners cannot use HSA savings to cover the eligible medical expenses of a dependent child who is older than 24 years of age.

With the future of health care unknown, taxpayers should take the time to understand all of their options relating to what will surely be rising health care costs in the future. The professional advisors and accountants with Berkowitz Pollack Brant have deep knowledge and experience helping taxpayers understand and comply with evolving laws while maintaining tax efficiency and wealth preservation.

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, Fla., office at (954) 712-7000 or via e-mail info@bpbcpa.com.

 

Pin It on Pinterest

Menu Title