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Monthly Archives: June 2018

New Opportunity Zone Law can Improve Depressed Neighborhoods, Yield Investors Significant Tax Benefits by Ed Cooper, CPA

Posted on June 29, 2018 by Edward Cooper

In an effort to revitalize economically distressed communities around the country, Congress included in the Tax Cuts and Jobs Act a program that gives individuals and businesses preferential federal tax treatment when they reinvest capital gains into low-income communities.  However, to reap the benefits of the newly enacted legislation and other valuable tax incentives offered by local governments, investors must understand how the program works and how they may qualify for it.

The Basics of Opportunity Zone Investments

The new legislation gave governors the ability to designate up to 25 percent of their state’s low-income census tracts to serve as Opportunity Zones (OZs) eligible for capital investment. As of June 2018, the Department of the Treasury has certified 8,762 OZs representing all 50 U.S. states, the District of Columbia and five U.S. territories, which can now begin attracting private investment capital from the estimated $6 trillion in capital gains that individuals and businesses left unrealized at the end of 2017.

Under the law, investments in the form of business profits, publicly traded stock or appreciated property are to be pooled into Opportunity Funds (O Funds) organized as corporations and partnerships, and authorized by the Treasury to invest at least 90 percent of its assets in OZ businesses. For example, a fund may be earmarked to renovate existing commercial real estate or build new developments in an OZ, or a fund may focus on supporting the expansion of existing businesses in the OZ or incentivizing new businesses to open there. O Funds are similar to mutual funds, stock portfolios or other vehicles for which individuals expect a return on the capital they invest in the fund. However, investors in OZs receive economic benefits in the form of tax incentives and the more esoteric advantage of helping to improve the local community.

The Tax Benefits Available to Opportunity Zone Investors

In return for their capital, businesses and individuals may receive the following federal tax benefits when they roll over their unrealized capital gains from business and real estate investments into Opportunity Zone Funds:

  1. Temporarily defer tax on reinvested capital gains until Dec. 31, 2026, or the date the opportunity zone fund sells the investment, whichever occurs sooner;
  2.  Permanently remove/exclude from taxable income the capital gains yielded from the sale or exchange of an investment in a qualified opportunity zone fund that investors held for a minimum of 10 years;
  3.  Receive a step-up in the basis of an original investment by 10 percent when the taxpayer holds the investment in an opportunity zone fund for at least five years, and by an additional 5 percent when the investment is held for at least seven years, excluding up to 15 percent of the original gain from taxation.

The value of this preferential tax treatment is based on the amount of time the taxpayer holds his or her investment in the O Fund. The longer the holding period, the greater the tax benefit. Therefore, an investor could conceivably roll over into an O Fund the capital gains he or she earns from a stock portfolio, a mutual fund or the sale of highly appreciable property, such as real estate, and avoid capital gain tax when he or she holds onto the O Fund for 10 years. A more modest tax benefit is available when the holding period is between five and seven years.

As simple as this may sound, it is important to remember that the Investing in Opportunities Act is a part of the federal tax code and therefore requires taxpayers to meet certain criteria to realize the potential tax benefit. For example, capital gains must apply only to sales between unrelated parties. A developer who sells property A that he or she owns cannot defer tax when he or she reinvests the capital gains into property B that the developer, a member of his or her family or a subsidiary of its business owns. In addition, the reinvestment of capital into an OZ fund must be made within 180 days from the date the taxpayer realized the taxable gain. Moreover, investors must understand the rules guiding what qualifies as an equity investment eligible for reinvestment in an OZ for federal tax purposes. For example, eligible investments in real estate are limited to a taxpayer’s ownership interest in new construction or assets that will be improved substantially within 30 months of acquisition by the O Fund.

Individuals who own, invest in or develop commercial real estate in OZs can receive the added benefit of local tax incentives when their property is located in empowerment zones, community redevelopment agency (CRA) districts or other underserved neighborhoods that rely on public and public-private dollars to support job creation, affordable housing and business development. The challenge, for individuals and businesses is to understand how the creation of O Funds and investment in OZs can fit into a larger tax strategy and allow taxpayers to leverage these vehicles to maximum tax savings.

While final guidance on the application of the new law is pending release from the U.S. Treasury, taxpayers should meet with their advisors and accountant now to begin planning for the establishment and seeding of O Funds. The earlier one begins planning, the more prepared he or she will be to pull the trigger and rollover unrealized gains to receive the benefit of the law’s preferential capital gain treatment.

 

About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business- and tax-consulting services to real estate entities, multi-national companies, investment funds and high-net-worth individuals. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

Does your Business Qualify for a Work Opportunity Tax Credit? by Michael Hirsch, JD, LLM

Posted on June 26, 2018 by Michael Hirsch,

According to the U.S. Department of Labor, the number of available job openings in April 2018 exceeded the number of unemployed individuals for the first time since 2000. In this robust labor market, businesses should not forget the Work Opportunity Tax Credit (WOTC) that is available to them when they hire veterans and other specific classifications of workers for whom significant barriers to employment may exist.

A business may qualify for the WOTC when they hire workers who fall into any of the following categories:

  • Unemployed veterans
  • Ex-felons
  • Recipients of qualified long-term unemployment benefits
  • Recipients of Supplemental Security Income (SSI)
  • Recipient of long-term family assistance
  • Recipients of Qualified IV-A Temporary Assistance for Needy Families (TANF)
  • Recipients of food stamps (SNAP)
  • Summer youth employees living in Empowerment Zones
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals

The actual amount of the credit is limited to the amount of the business income tax liability or social security tax owed. Calculating the credit is based on the worker’s classification and a percentage of the “qualified wages” the business paid to them during their first two years of employment. For example, a business may take into account up to $12,000 of the wages it pays in the first year to a qualified veteran who is entitled to compensation for a service-connected disability and who was released or discharged from the military less than one year prior to the hiring date. When the workers is a certified summer employee, the first-year wages for purposes of calculating the WOTC is limited to $3,000.

To qualify for the Work Opportunity Tax Credit, an employer must first request certification from the state workforce agency within 28 days after an eligible employee begins work. It is possible for tax-exempt organizations to qualify for WOTC when they hire veterans.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

Supreme Court Ruling Overturns Precedent on Internet Sales Tax by Karen A. Lake, CPA

Posted on June 25, 2018 by Karen Lake

On June 22, 2018, the U.S. Supreme Court issued its long-awaited decision in South Dakota v. Wayfair, eliminating physical presence as a requirement for creating economic nexus and opening the door for more states to force online and out-of-state businesses to collect and remit sales tax on sales they make to in-state residents.

The ruling overturns the court’s 1992 decision in Quill v. North Dakota, which established a physical presence test to establish economic nexus and limited a state’s power to impose sales-tax-collection obligations to only those businesses and online retailers that owned property or employed workers in that state. Since that time, e-commerce and online shopping have exploded and blurred the boundaries between state lines and the definition of physical presence. Many of the larger e-commerce companies, such as Amazon, have been collecting sales tax from remote sales all along due to their physical presence throughout most of the country. However, smaller e-retailers, including Wayfair, Overstock, New Egg and some of Amazon’s third-party sellers, have avoided sales tax requirements legally due to their lack of a physical presence in most states. This will change under the Wayfair decision, which does away with physical nexus and relies instead on economic nexus based on a sales threshold to establish a business’s meaningful and substantial presence in a state.

Going forward, states will have the power to impose sales-tax registration, reporting and collection obligations on businesses and service providers that conduct more than $100,000 in sales or more than 200 transactions in their jurisdiction in a given year. This reinforces the current economic-sales-tax-nexus standard that is already in place or pending in 20 states, including Alabama, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, North Dakota, Ohio, Pennsylvania,  Rhode Island, South Dakota, Tennessee, Vermont and Washington. Those states that have not yet enacted economic nexus laws will now have the authority to establish nexus based on low-sales thresholds, similar to that of the Wayfair decision, and compel more companies outside of their borders to begin filing sales tax returns in their states in the future. Similarly, few online and remote sellers, streaming services and web-based software providers will be able to ignore the wide range of nexus-creating laws, including affiliate nexus, click-through nexus, and marketplace nexus, that they may have previously been able to rely on to sidestep state-level sales-tax reporting responsibilities.

The biggest winners in the Wayfair decision are the states, which will be able to reach outside of their borders to impose sales tax obligations on a vast number of businesses and service providers that have sufficient sales to create economic nexus. The Government Accountability Office estimates that this will allow states to recapture approximately $30 billion in previously lost annual tax revenue that they may use to invest in infrastructure or even pass on as tax savings to its residents.

For the vast majority of brick-and-mortar and online retailers and service providers, the Wayfair decision brings a new administrative burden of complying with thousands of different tax codes that vary from state to state. It may require businesses to issue notices to customers describing their new sales tax requirements and/or invest in new software to calculate and remit tax to each jurisdiction. As a result, it is almost certain that companies will pass these compliance costs onto customers in the form of higher prices. Online sellers and streaming will no longer be able to market their ability to skirt sales-tax obligations as a competitive pricing advantage. While this may level the playing field for brick-and-mortar businesses that were previously unable to compete with online businesses on pricing, it does not make sales tax nexus any less complicated.

Berkowitz Pollack Brant State and Local Tax professionals work with individuals and businesses to understand tax policy and help companies with their sales tax compliance.

 

About the Author: Karen A. Lake, CPA, is state and local tax (SALT) 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.

Many Fiscal-Year Corporations will Pay a Blended Tax Rate for 2017 and 2018 by Cherry Laufenberg, CPA

Posted on June 22, 2018 by Cherry Laufenberg

While the Tax Cuts and Jobs Act (TCJA) reduces the corporate rate from a high of 35 percent to a flat 21 percent for calendar years beginning after Dec. 31, 2017, businesses whose fiscal years include Jan. 1, 2018, will pay federal income tax in 2017 and 2018 using a blended tax rate.

To determine their income tax liabilities for fiscal years that include Jan. 1, 2018, applicable corporations must first calculate their tax for the entire taxable fiscal year using the rates that were in effect prior to the TCJA. Next, they must calculate their tax using the new 21 percent rate and proportion each tax amount based on the number of days in the taxable year when the different rates were in effect.  The sum of these two amounts will be the corporation’s fiscal year federal income tax.

If a fiscal-year corporation did not use the blended rate when filing their 2017 federal tax returns, it should speak with its accountants and consider filing an amended return to reflect this change.

In addition, barring the enactment of any new laws, refund payments issued to, and credit elect and refund offset transactions for, corporations claiming refundable prior year minimum tax liability on returns processed on or after Oct. 1, 2017, and on or before Sept. 30, 2018, will be reduced by a 6.6 percent sequestration rate for fiscal year 2018.

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.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

Tax Lessons for Students Starting Summer Jobs by Joanie B. Stein, CPA

Posted on June 20, 2018 by Joanie Stein

Summer jobs and internships often represent students’ first encounters with the Internal Revenue Service (IRS) and the U.S. tax system. In fact, first-time workers are often surprised to see how much money employers take from their pay to cover their tax liabilities.

Following are some of the important lessons students will learn, outside the classroom, about the reality of earnings, taxes, and savings.

Employed Summer Workers

A worker starting a new job will typically be required to complete IRS Form W-4, Employee’s Withholding Allowance Certificate, to help his or her employer calculate how much federal income tax to withhold from his or her paycheck and pay to the government on his or her behalf. The form asks workers to provide basic information and select their filing status, which, for most students, will be single. Things can get complicated when workers are asked to provide the “total number of allowances” they wish to claim.

Generally, the fewer allowances an individual claims, the greater the amount of income taxes withheld from his or her paycheck. Most young workers who can be claimed as dependents of their parents’ tax returns will select zero allowances on Form W-4.  However, student workers may instead claim themselves as one dependent to have their employers withhold more taxes withheld from their gross pay in order to minimize the risks that will have a tax liability come year-end.

In January, student workers will receive from their summer employers IRS Form W-2, which will summarize the gross amount they earned and the taxes they already paid. Whether or not a student will need to file a federal income tax return in April of 2019 will depend on various factors, including his or her gross earnings for the year, the amount of taxes they paid and the number of allowances they claimed. In some instances, a student may voluntarily elect to file an income tax return, especially if they are due a potential refund from the IRS.

Should a student’s summer earnings fail to meet the threshold for requiring federal income tax withholding, they will still be required to have payroll taxes withheld from their paychecks to pay into the federal Social Security and Medicare programs.

Self-Employed Students

The IRS considers students who earn cash babysitting or doing odd jobs, such as mowing lawns or cleaning pools, to be self-employed workers who, absent an employer, are responsible for paying their tax liabilities directly to the IRS. To meet their income and payroll tax liabilities self-employed students may make estimated quarterly tax payments directly to the IRS during the year.

Tip Income

Tips that students receive from working as waiters or camp counselors are considered taxable income subject to federal income taxes. Therefore, it is important that students keep an accurate log of the tips they earn and be prepared to report to the IRS cash tips of $20 or more they receive in any single month.

Saving and Budgeting

Along with the benefit of a regular paycheck is an opportunity for students to begin developing good budgeting, spending and savings habits that will serve them well far into the future. While it may be tempting for students to spend all of their summer earnings, they should consider how saving even a small portion of that money can grow in the future thanks to the magic of compounding interest. Alternatively, a student may put up to $5,500 of their summer wages into a Roth Individual Retirement Account (Roth IRA) and allow that investment to grow tax-deferred until he or she reaches retirement age, at which point he or she may withdraw the accrued savings free of taxes.

A Reminder about Tax Filing Obligations

Student workers should remember that they may have an obligation to file a federal income tax return in April regardless of the amount of their summer earnings. For example, if an employer withholds too much tax from a student’s pay, the student may qualify for a tax refund, which he or she may receive only when filing a federal income tax return. Similarly, students will need to file annual tax returns when the amount withheld from their wages was insufficient or when they earn non-wage income from sources that include investment gains or self-employment income. A student’s failure to meet a filing requirement may result in a tax bill along with an underpayment penalty and interest on the unpaid amount.

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.

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

Exercise Caution Planning Around New State and Local Tax Deduction Limits in 2018 by Karen A. Lake, CPA

Posted on June 14, 2018 by Karen Lake

Despite the reduction in individual federal income tax rates, tax reform dealt a significant blow to residents of high-tax states, such as New York, New Jersey and California. Beginning in 2018, taxpayers across the country are limited to a $10,000 cap on the amount of state and local taxes (SALT), including property taxes, they may deduct on their federal tax returns in a given year.

Prior to the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, high-income individuals who itemized their deductions could subtract from their gross income the full amount of state and local taxes they paid. In an effort to cushion the financial blow this cap will have on their residents, several high-tax states have been busy developing workaround legislation that would also help them keep their tax coffers full.

For example, New York passed legislation in April that introduces a new, 5 percent payroll tax on employees earning more than $40,000 per year in exchange for an employee income tax credit. While employers would be able to deduct the payroll tax, it would ultimately reduce the amount of money workers take home. According to the state, the tax credit against state and local taxes should offset any reduction in pay.

In addition, the New York law would provide its residents with the ability to satisfy their state tax liabilities and receive a fully deductible federal income tax charitable deduction when they make voluntary contributions to charitable trusts established and managed by the state and local municipalities to help fund public school education, health care and other social services. Similar strategies that would allow taxpayers to characterize state and local tax payments as charitable deductions for federal income tax purposes are in the works in other states as well.

A key issue with this type of legislation on the state level is that only federal law can control how taxpayers may characterize tax payments and deduction for federal income tax purposes. In fact, the IRS has issued warnings that it intends to ban laws that states enact to circumvent federal tax law. In response, several states have cautioned that they will continue to fight against challenges to any laws that preserve SALT deductions.

During this period of uncertainty, it is recommended that taxpayers wait for further guidance from the IRS before implementing any strategies that relate to the new limit on SALT deductions.

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.

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

New Laws Make Tax Withholding Check-Ups More Important than Ever by Nancy M. Valdes, CPA

Posted on June 13, 2018 by

Preventative care is critical to averting serious (and often costly) emergencies. Just as annual medical exams can help prevent disease, and proactive vehicle maintenance can protect against major automobile repairs, regular check-ups with accountants can help individuals avoid a surprise tax bill and penalties come the April tax-filing deadline.

One benefit of a mid-year tax check-up is to confirm that you are paying the government your fair share of taxes through estimated payments and/or withholding from paychecks in compliance with the U.S.’s pay-as-you-go system of taxation. This is more important than ever in light of the new tax laws that went into effect on Jan. 1, 2018. Some provisions of the Tax Cuts and Jobs Act (TCJA) that affect workers include a reduction in the federal tax rates, a substantial increase in the standard deduction and various modifications to many of the itemized deductions that qualifying taxpayers may have claimed in the past. In addition, the TCJA lowers the corporate tax rate and introduces a complex tax regime for sole proprietors and pass-through business entities.

Following are some considerations individuals should address with their advisors and accountants during a mid-year tax check-up.

I am a Salaried Employee who Receives a W-2

Salaried workers must complete IRS Form W-4 to help their employers calculate how much taxes to withhold from their wages and pay on their behalf directly to the government. The amount withheld will depend on various factors, including the employee’s taxable earnings, marital status, number of dependents, and the credits and deductions to which he or she may be entitled. While a W-4 is required for all new employees, workers can update these forms anytime during a year to reflect changes in their lives, such as a new marriage, a divorce or the birth of a child, which, in turn, may affect their withholding amount.

If you are a salaried employee who also has unearned income from investments, rental property, a second job or other non-wage sources, you may elect to have your employer withhold additional tax from your paycheck to reduce your risk of an unexpected tax bill. However, if your employer withholds too much tax from your paycheck, you may be entitled to a tax refund. As exciting as it may seem to receive money back from the government, you should remember that a refund is essentially a return of the money you willingly loaned to the government, interest-free, the prior year.

I am an Independent Contractor who Receives a 1099

Independent contractors, also called freelancers or gig workers, bear the responsibility for reporting and paying taxes on all income they earn, including earnings received in cash, less any deduction or credits to which they may be entitled.

Under most circumstances, if you qualify as an independent contractor, you should consider pre-paying your self-employment tax, income, Social Security and Medicare tax liabilities by making four quarterly estimated tax payments directly to the IRS in April, June, September and January. Alternatively, if you also have a salaried job, you may elect to update your Form W-4 to have your employer withhold additional tax from your paycheck to account for the untaxed income you earn as an independent contractor.

I am a Self-Employed Owner of a Pass-Through Business

Income earned by pass-through businesses organized as S Corporations, partnerships, LLCs and sole proprietorships typically flows directly from the businesses to their individual owners, who pay the resulting income tax liabilities and self-employment taxes, at their individual income tax rates. However, as a business owner, you may qualify to deduct certain expenses from your gross income and ultimately reduce the amount of tax you owe.

For 2018, the TCJA introduces a new potential tax savings for owners of pass-through businesses in the form of a 20 percent deduction on certain qualified business income (QBI). Meeting the eligibility requirements for this deduction depends on a taxpayer’s line of business, the type and amount of income they earn, as well as the amount of W-2 wages the business pays to employees and the depreciable income-producing property it owns. Due to the complexity of this provision of the new tax law, it behooves owners of pass-through businesses to engage the counsel of professional accountants and tax advisors, in order to develop an appropriate strategy that meets their unique circumstances and maximizes their potential tax savings.

I Itemized Deductions on my 2017 Tax Returns

Because the TCJA nearly doubles the standard deduction for tax years beginning in 2018, it is expected that far fewer taxpayers will itemize their deductions in the future. However, should you continue to itemize, you should be aware that the new law limits, and in some cases eliminates, some of the deductions you may have taken in the past.  For example, gone are deductions for moving expenses; fees paid to legal, tax and financial advisors; and theft and casualty losses that occur outside a federal disaster area declared by the president. In addition, there is now a $10,000 limit on the amount of state and local taxes you may deduct on your federal tax returns as well as a cap on the amount of casualty losses you may deduct and the size of a mortgage loan for which you may deduct interest. With these changes in mind, it may make sense for you to meet with a tax advisor who can project whether it makes sense for you to continue itemizing deductions in the future.

Tax reform is a game-changer that can have a significant effect on individuals’ tax bills, especially when considering how they earn wages, the types of income they earn and the way in which they structure any business entities in which they have an ownership interest. If you have not already addressed the impact of tax reform on your situation, you still have time to meet with qualified accountants to put into place an appropriate strategy to maximize tax efficiency for the remainder of the year.

 

About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with U.S. and foreign-based entrepreneurs and closely held businesses to manage cash flow, protect assets and maintain tax efficiency.  She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

What Constitutes Best Evidence to Support Claims of Economic Damages? by Scott Bouchner, CMA, CVA, CFE, CIRA

Posted on June 11, 2018 by Scott Bouchner

Attorneys involved in economic damages cases understand that they have an obligation to prove lost profits with “reasonable certainty” based on their use of “best evidence.” However, the courts have not agreed on one universally accepted standard or criteria for what specifically constitutes best evidence; such decisions inevitably rely on the facts and circumstances of each individual case. Therefore, two courts faced with similar issues may reach entirely different opinions when deciding whether a plaintiff has supported its damage claim using the best evidence.

In Eastern Fireproofing Co. v. United States Gypsum Co., No. 57-938-G (US District Court Mass., 1970), the court stated:

“a plaintiff may not conjure up favorable estimations and hold back more solid but less favorable evidence otherwise available. And the admissibility of a particular class of evidence will depend to a degree upon the availability of less speculative evidence. On the other hand, there is no rule of law that only the best available evidence may be used. This would necessarily imply a determination of what class of evidence is best and it seems that such a determination cannot be made without infringing on the proper function of the jury as the finder of fact.”

With this in mind, attorneys have an opportunity to strengthen damages cases when they focus on reliable facts and sound methodology that other experts have attempted to use to meet or fail to meet the reasonable certainty standard. Following are just some of the factors that attorneys should consider when proving or disproving economic damages.

Use of Plaintiffs / Defendants Historical Financial Data

Supporting claims for economic damages in a commercial dispute typical starts with an historical review of a plaintiff and/or defendant’s financial data that preceded the alleged bad act of the other party. This assessment can include historical revenue, costs and profits/losses in the years leading up to a point in time and compare it to the same facts that occurred during and after the alleged damages period. Yet, experts should also consider whether or not there are factors other than the defendant’s alleged bad acts that could have caused a change in the injured party’s financial results. This may include changes in the economy, competition, technology, governmental regulation, the introduction of alternative products, etc.

Use of Contemporaneous Third-Party Market Data

The availability of contemporaneous, third-party market data can potentially help a plaintiff’s expert establish claims for damages. Conversely, defendants’ experts have been successful using contradictory data to demonstrate flaws in the plaintiffs’ analyses. Therefore, expert witnesses should tread carefully and consider the credibility and relevance of the data they use as a foundation for their testimony and make efforts to consider how other information could potentially lead to different conclusions. Moreover, they should be prepared to explain how they weighed alternative sources of data and the reasons why one set of data was preferable or more reliable than an other.

Use of Plaintiffs Other Businesses

When a plaintiff’s business does not have a sufficient track record to establish evidence of profitable operations, its historical financial data may not be an appropriate basis for estimating future profitability. Under these circumstances, some courts have accepted the historical data of a plaintiff’s other businesses as a benchmark or yardstick to establish economic damages.

However, the plaintiff ultimately bears the responsibility to demonstrate sufficient comparability between the subject business and the other benchmark businesses and make adjustments to account for differences to the extent applicable.

Reliance on Specific Customer Sales Data

Ideally, the identification of specific lost sales caused by the defendant’s bad acts helps to substantiate a claim for lost profits and can be very persuasive to a jury. With this in mind, it is generally a useful exercise to review historical sales patterns, analyze communications with customers and attempt to demonstrate sales that a plaintiff would have made but for the defendant’s actions. From a practical standpoint, however, it is rare that the plaintiff can identify the name of the customer, along with the date, amount of the would-be sale and the reasons for the loss. When it is not possible to identify these specific lost sales, some plaintiffs have been able to overcome this lack of direct information by analyzing changes in customer behavior and sales patterns, and demonstrating their connection to the specific allegations.

Use of Contemporaneous Pre-Litigation Projections and Transactions

The court’s decision in Reese Schonfeld vs. Russ Hilliard, Les Hilliard and International News Network, Inc., 218 F.3d 164; 2000 U.S. App. LEXIS 15684 is frequently cited in economic damages cases to demonstrate that a plaintiff’s contemporaneous, arm’s-length transactions involving investments in or the sale of ownership interests in the subject company may provide more reliable evidence of damages than lost profit calculations, especially when the lack of a track record would require the development of potentially “speculative assumptions.”

Similarly, the courts have often found that financial projections prepared by one or both parties prior to any litigation to be more persuasive than those prepared solely for, or in response to, litigation.

With this in mind, attorneys should be prepared to share with their experts their clients’ accounting and operational data, budgets, financial forecasts and projections, pre-trial business and marketing plans, sales and pricing agreements, memorandums of understanding and other transactional contracts, all of which may be useful to identify and substantiate assumptions used to quantify damages.

Use of Multiple Regression Analysis / Statistical Analyses

Multiple regression analysis, sampling methodologies and other statistical analyses have become increasingly common and accepted methods used to establish reasonable certainty in damages calculations. However, the effectiveness of such statistical approaches are dependent on an expert’s understanding of how to conduct them properly, based on verifiable facts, to avoid common errors that could invalidate the results.

Plaintiffs, along with their counsel and retained experts, should work collaboratively to identify the best evidence available to establish with reasonable certainty a defensible claim for economic damages.  In determining what constitutes best evidence, it generally is advisable that the parties identify other information that may be contrary to the data they relied upon and that they be prepared to explain how they considered this additional information in the preparation of the damages claim.

 

About the Author: Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with Berkowitz Pollack Brant’s Forensic Accounting and Business Valuation Services practice, where he serves as a litigation consultant, expert witness, court-appointed expert and forensic investigator on a number of high-profile cases. He can be reached at the CPA firm’s Miami office as (305) 379-7000 or via email at info@bpbcpa.com.

 

You Can Correct Mistakes on your Tax Return by Nancy M. Valdes, CPA

Posted on June 05, 2018 by

If you realize that a tax return that you already filed for any of the prior three years contains mistakes, do not fear. The IRS offers taxpayers a simple process for making corrections and reporting information that you may have mistakenly omitted.

Here is what you need to know about filing amended tax returns.

  • Do not amend to correct math errors, which the IRS will correct for you automatically.
  • Do not amend if you forgot to attach tax forms, such as a Form W-2 or 1099. The IRS will mail you a request for any missing forms that it requires.
  • Amend to change filing status or to correct income, deductions or credits on original tax returns.
  • Use IRS Form 1040X, Amended U.S. Individual Income Tax Return, to correct an originally filed tax return. You may not file Form 1040X electronically; it must be mailed along with other supporting IRS forms and schedules to the IRS at the appropriate address.
  • If you are amending a return for more than one tax year, complete and mail separate Forms 1040X for each year and be sure to track them to ensure that the IRS receives them. The agency can take up to 16 weeks to process amended tax returns.
  • Pay any additional tax that you owe as soon as possible to avoid IRS penalties and interest.
  • You have three years from the date you filed an original tax return to file Form 1040X to claim a refund, or within two years from the date you paid a tax liability, if that date is later.
  • Taxpayers who will owe more tax should file Form 1040X and pay the tax as soon as possible to avoid penalties and interest. They should consider using IRS Direct Pay to pay any tax directly from a checking or savings account at no cost.
  • If you expect to receive a refund from the most recent tax returns you just filed, wait until after you receive the refund before filing an amended tax return.

About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with U.S. and foreign-based entrepreneurs and closely held businesses to manage cash flow, protect assets and maintain tax efficiency.  She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Florida Farms, Businesses May Now Apply for Hurricane Recovery Sales and Fuel Tax Refunds and Exemptions by Karen A. Lake, CPA

Posted on June 05, 2018 by Karen Lake

The Florida Department of Revenue recently published the following forms for qualifying businesses to apply for tax relief that the state legislature created in response to the 2017 hurricane season.

Form DR-26SIAG allows farming and agricultural business to apply for a refund of sales tax paid on purchases of materials used to repair or replace nonresidential farm buildings and/or agricultural fencing damaged by Hurricane Irma. Nonresidential farm buildings refer to temporary or permanent buildings or support structures used primarily for agricultural purposes and not intended to be used as a residential dwelling. This may include a barn, a greenhouse, a shade house, a farm office or a storage building. The refund applies to building materials purchased between September 10, 2017, and May 31, 2018.

Form DR-26IF provides farming and agricultural businesses with a method to apply for a partial refund on fuel tax paid for agricultural shipments made between September 10, 2017, and June 30, 2018. The refund of .02 cent fuel tax and 0.125 inspection fee for fuel placed in storage tank may apply to farms, nurseries, orchards, vineyards, gardens, apiaries or nonfarm facilities that transported agricultural products to or from a processing or storage facility that is involved in the production, preparation, cleaning or packaging of crops, livestock, related products, and other agricultural products.

Form DR-26SIGEN applies to nursing homes and assisted living facilities that purchased generators or other emergency power equipment between July 1, 2017, and December 31, 2018. The amount of the refund can be as much as $15,000 in sales tax and surtax paid for the purchase of qualifying equipment made to a single facility.

Applying for Florida tax refunds and exemptions requires businesses to gather and submit a significant amount of detailed supporting documentation. The tax accountants and advisors with Berkowitz Pollack Brant have deep experience helping clients prepare and submit these requests on the state and federal levels.

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.

How to Be Tax Compliant After Offshore Voluntary Disclosure Program Closes by Arthur Dichter, JD

Posted on June 01, 2018 by Arthur Dichter

 The IRS announced it will end the Offshore Voluntary Disclosure Program (OVDP) on Sept. 28, 2018. This move will leave taxpayers with one less option for avoiding penalties and criminal prosecution when they did not previously report all of their non-U.S. income, or when they did not comply with all of the U.S.’s various reporting requirements applicable to non-U.S. income and assets.

The good news is that taxpayers who need the OVDP still have time to participate in the program, but they will have to hurry. The better news is that the IRS will continue to provide reticent taxpayers with other amnesty programs offering penalty relief and/or protection against criminal prosecution. Most of these programs, however, do not offer relief from income tax liabilities or interest on non-reported amounts.

It is common for non-compliant taxpayers to ask, “Which program is best for me?” While there is no on-size-fits-all solution, the answer will depend on the unique facts and circumstance of each individual’s specific case.

What are my Options to Become Tax Compliant?

Offshore Voluntary Disclosure Program (OVDP)

According to the IRS, more than 56,000 taxpayers have participated in the OVDP, and the government has collected more than $11.1 billion in taxes, penalties and interest since introducing the program in 2009. With the IRS’s plan to end the program on Sept. 28, 2018, taxpayers have a limited amount of time to apply to participate, receive clearance from the agency’s Criminal Investigation division and make their OVDP submission.

The OVDP requires taxpayers to file eight years of amended or original income tax returns (including all required information returns) and eight years of foreign bank account reports using FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Taxpayers will be subject to income tax, interest and penalties for lack of accuracy, late filing and/or late payment. In addition, they will be required to pay a one-time OVDP penalty equal to 27.5 percent of the value of their foreign accounts and certain other foreign assets for the year during the eight-year period where the aggregate value of such assets was the highest. This penalty increases to 50 percent when a taxpayer has accounts at certain financial institutions or when they received advice from certain individuals determined to be facilitators. The IRS has published a list of 146 facilitators and financial institutions that it considers “bad” and for which the 50 percent penalty will apply.

One of the key advantages of the OVDP is that cooperative taxpayers will be unlikely to face criminal prosecution. In addition, the program provides taxpayers with peace of mind in the form of a closing agreement concluding the matter and more certainty with respect to penalties, which may be less than what they would have faced under the Tax Code.

In addition to burdening taxpayers with a requirement to file eight years of income tax returns and FBARs, the OVDP is very rigid, and IRS agents have little flexibility regarding abatement of penalties.  Moreover, taxpayers are required to track down and provide the IRS with account statements covering eight years of all of their foreign accounts, which can be a very challenging, expensive and time-consuming process.

Streamlined Filing Compliance Procedures

The streamlined procedure is available to both U.S. residents and non-resident taxpayers whose failure to report foreign financial assets and pay all tax due on their offshore income was the result of “non-willful conduct.” This means that their reticence resulted from negligence, inadvertence or mistake, or a good-faith misunderstanding of the requirements of the law.

A main advantage of streamlined procedures is that they require taxpayers to prepare fewer tax returns than required by other programs. Taxpayers must submit only three years of income tax returns (with all applicable information returns), six years of foreign bank account reports using FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), and a certification statement indicating that they meet the streamlined eligibility requirements.

In addition, while taxpayers using streamlined procedures will be subject to income tax and interest on delinquencies, the IRS will not impose penalties for a taxpayer’s late filing and/or late payment, inaccuracy, or failure to file information returns. Taxpayers who qualify for the non-resident program will not be subject to any penalties, whereas taxpayers who qualify for the resident program will pay a 5 percent penalty based on the highest aggregate balance/value of their foreign financial assets during the years included in the penalty period.

The disadvantages to streamlined procedures include a lack of protection from criminal prosecution and exposure to IRS audit of submitted returns covering the delinquency period. In addition, once a taxpayer applies this procedure, he or she no longer has the option to participate in a voluntary disclosure. Finally, because the IRS typically does not acknowledge receipt of a streamlined submission, participating taxpayers will not have the certainty provided by an OVDP closing agreement. In other words, no news is the best news.

Delinquent FBAR, Delinquent International Information Return Submission Procedures

Taxpayers may avoid FBAR penalties and file delinquent FBARs directly to the U.S. Treasury Department with an explanation for their late filing, only when they satisfy all of the following requirements:

  • they have unfiled FBARs,
  • they are not required to use the OVDP or streamlined procedure to file delinquent or amended tax returns to report and pay additional tax,
  • they are not already under IRS investigation, and
  • they have not been contacted previously by the IRS regarding delinquent FBARs.

Under certain circumstances, taxpayers may qualify to file directly with the appropriate service center delinquent information returns and amended income tax returns, if required, along with a reasonable cause statement explaining the facts related to their failure to file. The IRS may impose penalties based on whether the agency agrees with the taxpayer’s reasonable cause position.

Returns submitted through these procedures will not automatically be subject to audit. Yet, they may be selected through the existing audit selection processes that are in place for any tax or information returns.

Service Center Filings

Some taxpayers who do not meet the eligibility requirements of the streamlined procedures, but who feel they do not have enough substantial offshore income and/or assets to justify an OVDP submission, may wish to simply file original and/or amended income tax returns with information returns and a reasonable-cause statement and hope for the best. This option also works for taxpayers who feel that there were extenuating circumstances that justified their failure to file properly.  This is a very risky strategy, but it may be appropriate in certain cases. Taxpayers deciding to pursue this route should do so very carefully and only after consulting with an attorney with knowledge about offshore reporting matters and all of the available programs.

Conclusion

In the current regulatory environment, it is much more difficult for U.S. taxpayers to avoid reporting and paying taxes on foreign assets. To avoid exposure to criminal prosecution and significant penalties, it makes sense for taxpayers to come forward and disclose their offshore interests through one of the IRS’s amnesty programs. In addition to speaking with an experienced tax advisor, it is always a good idea for taxpayers to discuss their situations with an attorney.

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.

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