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Monthly Archives: September 2018

IRS Extends Filing Deadlines for Victims of Hurricane Florence by Jeffrey M. Mutnik, CPA/PFS

Posted on September 27, 2018 by Jeffrey Mutnik

Certain taxpayers affected by Hurricane Florence have until Jan. 31, 2019, to meet all of their tax filing and payment obligations that had original deadlines of Sept. 7, 2018, or later.

This postponed deadline applies automatically to taxpayers located in the designated disaster areas:

  • North Carolina counties:  Allegany, Anson, Ashe, Beaufort, Bladen, Brunswick, Cabarrus, Carteret, Chatham, Columbus, Craven, Cumberland, Dare, Duplin, Granville, Greene, Harnett, Hoke, Hyde, Johnston, Jones, Lee, Lenoir, Montgomery, Moore, New Hanover, Onslow, Orange, Pamlico, Pender, Person, Pitt, Randolph, Richmond, Robeson, Sampson, Scotland, Stanly, Union, Wayne, Wilson, and Yancey.
  • South Carolina counties: Berkeley, Charleston, Chesterfield, Darlington, Dillon, Dorchester, Florence, Georgetown, Horry, Marion, Marlboro, Orangeburg, Sumter, and Williamsburg.
  • Virginia counties: Henry, King and Queen, Lancaster, Nelson, Patrick, Pittsylvania, and Russell counties and the independent cities of Newport News, Richmond, and Williamsburg.

Tax obligations that qualify for this relief include payments of 2018 third-quarter estimated income taxes (traditionally due on Sept. 17) and filings of quarterly payroll and excise tax returns (traditionally due on Oct. 31). In addition, business and individual taxpayers who have valid extensions to file their 2017 federal tax returns by the respective September 17 and October 15 deadlines now have until the end of January to meet those filing responsibilities without incurring a penalty.

It is important for businesses to recognize that penalties on payroll and excise tax deposits due on Sept. 7, 2018, and before Sept. 24, 2018, will be abated as long as they make the deposits by Sept. 24, 2018.

Taxpayers who live outside the designated disaster areas and are unable to meet their upcoming filing obligations may request a deadline extension when their records are located in the disaster areas or when they are working with a recognized government agency or philanthropic organization that is assisting with relief efforts. In addition, taxpayers should note that as storm recovery continues, other counties may be further designated as disaster areas eligible for the deadline extension.

Not only does this deadline extension alleviate the pressure for storm victims to timely complete and file their returns, it also provides taxpayers located in President-declared disaster areas to claim a casualty loss on their 2017 tax returns (rather than 2018), if they desire to do so.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached 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.

 

Taxpayers Receive Guidance on Deductions for Pass-Through Businesses

Posted on September 24, 2018 by Laurence Bernstein

The IRS recently issued its first round of proposed guidance concerning the pass-through deduction that tax reform introduced to qualifying business owners and to beneficiaries of trusts and estates beginning in the 2018 tax year. Taxpayers who own interests in pass-through businesses structured as LLCs, partnerships, S Corporations, or sole proprietorships now have guidance from the IRS on how they may qualify for and calculate a tax deduction of up to 20 percent of their U.S.-source qualified business income (QBI) that passes from each of their qualifying businesses through to their personal income tax returns. Taxpayers can use the proposed guidance for tax planning in 2018 and future years until the IRS issues final regulations, which are not expected until October 2018 at the earliest.

What is QBI?

The Tax Cuts and Jobs Act (TCJA) introduced the concept of QBI and defined it as the net amount of income, gains, deductions, and losses effectively connected with a taxpayer’s qualified U.S.-source trade or business, including LLCs, partnerships, S Corporations, sole proprietorships, and trusts and estates. QBI also includes qualified dividends taxpayers receive from real estate investment trusts (REITs), qualified cooperative dividends, qualified income from publicly traded partnerships (PTPs), and income generated from rental property or from trusts and estates with interests in qualifying entities. Under this definition, the QBI deduction may apply to U.S. citizens, resident aliens, and nonresident aliens (or foreign taxpayers) who receive qualified U.S.-source income from a trade or business, business trust, or estates of decedents.

QBI excludes income not effectively connected with a U.S.-source trade or business, investment income, interest income, and capital gains and losses.

How is the QBI Deduction Calculated?

For tax years 2018 through 2025, the maximum amount that a qualifying business owner, trust or estate may deduct from its QBI is the lesser of:

  • 20 percent of QBI from each of the taxpayer’s trades or businesses plus 20 percent of the taxpayer’s qualified REIT dividends and PTP income; or
  • 20 percent of the portion of the taxpayer’s taxable income that exceeds the taxpayer’s net capital gain.

Taxpayers must calculate the QBI deduction separately for each of their trades or businesses. Qualified taxpayers will then report their QBI, net of the QBI deduction, on their individual income tax returns. Taxpayers eligible for the full 20 percent QBI deduction are subject to a top effective tax rate of 29.6 percent on their QBI.

 Are there QBI Deduction Limitations?

Yes. Once annual taxable income (before the QBI deduction) exceeds $157,500 for individuals, or $315,000 for married couples filing jointly, the QBI deduction is subject to restrictions based upon the amount of wages paid to W-2 employees and the unadjusted tax basis of qualified property immediately after acquisition (UBIA). Note that the QBI deduction calculated from qualified REIT dividends and PTP income is not subject to these limitations.

When taxable income exceeds the annual threshold of $157,500 for individuals or $315,000 for married couples filing jointly, the QBI deduction is limited to the lesser of (1) or (2):

  1. 20 percent of QBI, or
  2. the greater of:
    • 50 percent of the entity’s W-2 wages; or
    • 25 percent of W-2 wages plus 2.5 percent of the UBIA (or the original purchase price) of depreciable tangible property, including real estate, furniture, fixtures, and equipment, that the business owns and uses to generate qualifying business or trade income.

W-2 wages are limited to the compensation amount the trade or business pays and reports to its common law employees on Form W-2. For this purpose, the proposed regulations clarify that payments made by Professional Employer Organizations (PEOs) and similar entities on behalf of trades or businesses can qualify as W-2 wages, provided that the PEOs issue the W-2’s to persons considered common law employees by the trades or businesses.

Under these limitations, pass-through businesses that pay large sums of W-2 wages may be able to take a larger QBI deduction than businesses that pay less W-2 wages or have fewer W‑2 employees. Similarly, capital-intensive businesses may be in a better position to maximize their QBI deductions than entities without a significant amount of tangible assets.

Are there Additional Limitations?

Yes. The TCJA introduced a new concept of specified service trades or businesses (SSTBs), which are subject to additional QBI deduction limitations. SSTBs are entities that involve the delivery of services in any of the following fields:

  • accounting;
  • actuarial science;
  • athletics;
  • brokerage services;
  • consulting;
  • financial services;
  • health;
  • investing and investment management, trading, or dealing in securities, partnership interests or commodities;
  • law;
  • performing arts; or
  • any trade or business that generates income based on the taxpayer’s fame or celebrity.

Once a taxpayer has taxable income (before the QBI deduction) in excess of $207,500 ($415,000 for jointly filing taxpayers), the QBI deduction attributable to an SSTB is completely phased out. However, the new law does provide an exception for a trade or business with SSTB receipts to qualify for the QBI deduction when it meets either of the following tests:

  • Annual gross receipts from all operations are less than $25 million, and less than 10 percent of that amount comes from SSTB services; or
  • Annual gross receipts from all operations are more than $25 million, and less than 5 percent of that amount is derived from SSTB services.

 How Can I Maximize Tax Savings from the QBI Deduction?

 The rules for qualifying and calculating the new QBI deduction are complex and should not be addressed without guidance from experienced tax professionals. This is especially true when considering that the law and proposed guidance provide taxpayers with opportunities to improve their tax savings while maintaining compliance with the regulations.

For example, taxpayers may reduce their exposure to QBI deduction limitations when they increase the number of their W-2 employees or purchase equipment they currently lease. In addition, high-income taxpayers may be able to receive a larger QBI deduction when they aggregate their ownership interests in multiple qualifying businesses and treat them as a single business for calculating QBI, W-2 wages, and UBIA of property. Outside of QBI, some taxpayers may benefit by changing their entity to a C Corporation, which is subject to a flat 21 percent tax rate beginning in 2018. These decisions are neither easy, nor should they be made without weighing other key factors beyond the tax implications.

Taxpayers should meet with experienced tax advisors who not only understand the nuances of the law but who also can apply and substantiate claims of tax benefits based on the language of the guidance while adhering to the law’s anti-abuse provisions.

 

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.

 

IRS Limits States’ Attempts to Circumvent SALT Deduction Limits by Karen A. Lake, CPA

Posted on September 21, 2018 by Karen Lake

The IRS has issued a series of proposed guidance in response to the way in which many states have sought to help their residents work around the new tax law’s limit on the amount of state and local sales, income and property taxes (SALT) that are deductible for federal income tax purposes beginning in 2018.

The Tax Cuts and Jobs Act (TCJA) introduces a $10,000 cap on individuals’ state and local tax deductions ($5,000 for married couples filing separately), which represents a loss of significant tax savings for residents in high-tax states where property taxes alone often exceed the cap. In response, states such as New York, New Jersey and Connecticut, quickly established programs that would allow their residents to treat certain SALT payments in excess of the cap as either tax credits for contributions to state-run agencies or fully deductible charitable contributions.

On August 23, the IRS issued its first round of guidance restricting itemizing taxpayers from claiming a federal charitable deduction for the full amount of the state and local tax credits they receive. Instead, the regulations require taxpayers to reduce those deductions by the value of the state and local tax credits they receive from their local government. This is similar to existing tax laws that require taxpayers who receive something of value, such as a t-shirt, pen or tax credit, as a part of, or in return for, a donation to a qualifying charity, they must subtract the fair market value of that item from the amount they can claim as a charitable deduction.

This move is designed to prevent taxpayers from getting more money back in tax breaks than they contribute in donations. For example, if a taxpayer makes a charitable donation of $50,000 to pay property taxes in New York and receives an 85 percent state tax credit of $42,500, the amount they may deduct on their federal income tax returns is only $7,500, and only if they itemize their deductions beginning in 2018. However, when a state provides tax credits of 15 or less of the amount of their resident’s donations, the donor taxpayers can write-off the full amount of their contributions from their federal tax bills. For example, a taxpayer may deduct the full amount of a $50,000 donation to a state-run charitable agency if the tax credit he or she receives in return is less than $7,500.

It is important to note that charitable deductions made in 2018 through 2025 are available only to those taxpayers who itemize their deductions during those years. Because the new tax law doubles the standard deduction available to all taxpayers, it is estimated that far fewer taxpayers will choose to itemize in the future.

The SALT cap will continue to evolve as the IRS issues further guidance, and lawsuits brought against the federal government by states challenging the legality of the cap advance through the courts. In the meantime, taxpayers should err of the side of caution and meet with experienced SALT advisors to understand their options, risks and opportunities before taking any action.

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.

 

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.

 

Small Businesses Competing for Talent are Making Use of a Forgotten Benefit by Adam Cohen, CPA

Posted on September 18, 2018 by Adam Cohen

In the current labor market, small businesses that lack the budgets to afford employee benefits, such as onsite food service, medical care and even ping-pong tables, are having a hard time attracting workers. However, many of these small companies are just now recognizing that the government provided them with an affordable, tax-friendly and hassle-free option for helping workers afford the high costs of health care.

Just as President Obama was leaving the White House in 2016, he signed into law the 21st Century Cures Act. The law included a provision that allows businesses to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs), in which they set aside pre-tax dollars for employees to use to purchase qualifying minimal essential health insurance and/or to reimburse employees for out-of-pocket medical expenses. It is important to note, however, that any tax credit employees receive from the Health Insurance Marketplace to help them pay for coverage premiums will be reduced, dollar-for-dollar, by the health reimbursement plan.

 

Employers, including not-for-profits, receive a tax deduction for the amounts they contribute to workplace, while employees receive the benefit of using tax-free dollars as reimbursements for insurance premiums and/or the costs of prescription medications, doctor’s office visits, health-related transportation and health insurance premiums. Moreover, with a QSEHRA, employers eliminate their burdens of paying for expensive healthcare premiums and spending countless hours administering health plans for their workforce.

Do all Small Business Qualify for a QSEHRA?

No. In order to establish a QSEHRA, a business must meet the following criteria:

  • It must have less than 50 full-time employees or full-time equivalent employees (which excludes part-time and seasonal employees and those who have health coverage from a spouse’s group plan);
  • It cannot offer group health insurance presently to its workers. If a policy is in place, it will need to be cancelled before establishing a QSEHRA;
  • Its employees must purchase health insurance that meets the minimal essential coverage (MEC) required by the Affordable Care Act (also known as Obamacare).

Are there Limits to the Amount an Employer Can Contribute to a QSEHRA?

The IRS annually adjusts the contribution limits for inflation. In 2018, the maximum amount an employer can contribute to a QSEHRA is $5,050 per year for individual workers or $10,250 for family coverage, up from $4,950 and $10,000 respectively in 2017. According to PeopleKeep’s “The QSEHRA: Annual Report”, small businesses contributed to QSEHRAs an average of $280 per month per employee and $477 per month for families in 2017.

How Can Employers Set up QSEHRAs?

 The first step businesses should take is to meet with their tax advisors to confirm that they qualify to establish this plan and they understand and can abide by their responsibilities to substantiate claims while ensuring employee’s HIPAA rights.

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.

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.

Strategies for Minimizing Long-Term Capital Gains Taxes under Tax Reform by Adam Slavin, CPA

Posted on September 17, 2018 by Adam Slavin

Thanks to the equity market’s wild bull market run since bottoming out in 2009, many investors’ portfolios look rather rosy. However, with these impressive returns come taxes on capital gains. While the Tax Cuts and Jobs Act retains the 0%, 15%, and 20% tax rates on qualified dividends and long-term capital gains resulting from the sale of assets held for more than one year, the new law changes the income brackets that apply to these rates. For 2018 through 2025, the following rates will apply based on an individual’s taxable income and filing status:

 

Tax Rate Single Filers Married Filing Jointly
0% $0 to $38,600 $0 to $77,200
15% $38,601 to $425,800 $77,200 to $479,000
20% $425,801 and above $479,001 and above

 

Taxpayers should note that these brackets apply only to long-term capital gains and dividends, which may also be subject to the 3.8 percent Net Investment Income Tax (NIIT) for high-income earners. Conversely, the tax rates for short-term capital gains resulting from the sale of assets held for one year or less will continue to be tied to the seven ordinary income tax brackets, which beginning in 2018 are reduced to 10%, 12%, 22%, 24%, 32%, 35% or 37%.

Although these changes under the new law will result in many taxpayers owing less to the federal government, it is important for high-income taxpayers, in particular, to meet with their advisors and accountants and implement strategies that could reduce their long-term capital gain tax liabilities even further.

For example, taxpayers may take advantage of the TCJA’s higher standard deduction, which nearly doubles in 2018 to $12,000 for single filers and $24,000 for married filing jointly, in order to reduce their taxable income (including long-term gains and dividends) to a lower threshold and qualify for a lower tax rate.

Another strategy available to taxpayers is to remove appreciated assets and any related capital gains from their investment portfolios. One option is to donate appreciate assets held for more than one year to a charity or a donor-advised fund. The assets can continue to grow tax-free to the charity and provide the taxpayers with an immediate charitable deduction, subject to limitations. Alternatively, taxpayers may remove appreciated assets from their taxable income by gifting them to family members. In fact, in 2018, individuals may gift up to $15,000 in cash or assets to as many people as they choose without incurring gift taxes. When the taxpayer is married, he or she can annually gift as much as $30,000 per recipient tax-free. The amount of this gift tax exclusion is adjusted annually for inflation.

Finally, the tried and true method of harvesting capital losses to offset capital gains may be difficult to employ since many investors will be hard-pressed to find losses after the recent market run-ups. Yet it is critical for investors to pay attention to their capital gains and be prepared to take action if, and when, the amount of their resulting tax liability is beyond their budget.

About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

 

Why Real Estate Companies Should Consider REIT Structures to Attract Domestic and Foreign Investor Capital by Arkadiy (Eric) Green, CPA

Posted on September 12, 2018 by Arkadiy (Eric) Green

Investors around the world continue to view U.S. commercial real estate as an attractive asset to diversify their portfolios, minimize exposure to market volatility and build wealth. However, most of these projects require more capital than the average individual has to invest. In response, a growing number of businesses that own, operate or finance commercial properties are pooling their assets into public and private real estate investment trusts (REITs) to attract capital from individuals and institutional investors and yield preferential tax treatment. Understanding the nuances of qualifying for this type of real estate holding structure and adhering to a maze of complex regulatory requirements for structuring and negotiation REIT-related transactions requires the assistance of experienced tax professionals.

What is a REIT?

A REIT is a company that owns and operates income-producing real-estate assets, such as office buildings, shopping malls, multi-family properties, and warehouses, or that invests in mortgages secured by real estate. It typically includes a portfolio of real estate investments and is comparable to a mutual fund in that it allows a significant number of investors to own a share of large-scale real estate projects and receive dividend income without requiring them to invest significant dollars up front or exposing them to liquidity risks.

REITs may be traded publicly in the equity markets or a group of investors may hold them privately. They generally come in three forms:

 

  • Equity REITs own and operate income-producing real estate,
  • Mortgage REITs provide money to real estate owners through mortgages or mortgage-backed securities,
  • Hybrid REITs are a combination of equity and mortgage REITs

What are the Tax Benefits of REITs?

 For tax purposes, REITs are treated as C Corporations, similar to mutual funds, they receive the benefit of a tax deduction for the dividends they pay to their shareholders. As a result, REITs typically do not pay income tax at the corporate level. Instead, they enjoy a lower effective tax rate than typical C Corporations, which, beginning in 2018 is a 21 percent flat federal income tax rate.

Investors who own shares in REITs must pay taxes on the dividends they receive, which can be either ordinary or capital gains dividends. Indirectly, REIT shareholders get the benefit of the deductions that are usually available to real estate owners. These include interest payments, depreciation, and operating expenses taken at the REIT level. In addition, beginning in 2018, the Tax Cuts and Jobs Act (TCJA) introduces a substantial benefit for individual REIT shareholders by establishing a deduction equal to 20 percent of the shareholder’s ordinary REIT dividend income. Unlike a similar deduction for flow-through entities, REIT shareholders are not subject to limitations on this deduction based on the wages paid and the basis of qualified property.

REITs can also provide significant benefits to foreign investors, who may use REITs as “blockers” to help minimize their U.S. federal and state tax filing obligations. In addition, domestically controlled REITs, in which U.S. persons own more than 50 percent of the value of its stock directly or indirectly, can be structured to allow foreign investors to sell their stock of the domestically controlled REIT without incurring U.S. tax.

 

How can a Real Estate Holding Company Qualify as a REIT?

In exchange for preferential tax treatment, REITs must meet a number of burdensome organizational and operational requirements, including the following:

Organizational Requirements

  • REITS must be organized as corporations, trusts or associations, and managed by one or more trustees or directors;
  • Beneficial ownership must be evidenced by transferable shares;
  • There must be a minimum of 100 shareholders; and
  • More than 50 percent of REIT shares cannot be held by five or fewer individuals.

Quarterly Asset Tests

  • At least 75 percent of the value of total assets at the end of each quarter must consist of cash or cash items, government securities and real estate assets, including real property, mortgages on real property, shares in other REITs, and certain personal property leased with real property (that does not exceed 15 percent of combined real and personal property value);
  • No more than 20 percent of the value of REIT may consist of securities of one or more Taxable REIT Subsidiary (TRS);
  • No more than 25 percent of the value of the REIT assets may be represented by non-qualified publicly offered REIT debt instruments;
  • Investment in securities of any one issuer (except for securities qualifying for the 75% asset test and securities of a TRS) cannot 1) exceed 5% of the value of the REITs total assets, 2) represent more than 10% of the total voting power of any one issuer’s securities, or 3) represent more than 10% of the value of the securities of any one issuer.

 

Income Tests

At least 75 percent of the REIT’s gross income for the taxable year must be derived from the following items:

  • rents from real property,
  • interest from mortgage obligations,
  • gain from the sale of real property and mortgages on real property,
  • other specified real estate source income,
  • dividends from other REITs,
  • abatements or refunds from real property tax,
  • income and gain from “foreclosure property,”
  • certain commitment fees, and
  • income from certain temporary investments of new capital.

In addition, at least 95 percent of the REIT’s gross income must be from income items that qualify for the 75 percent income test, and other interest, dividends and gain from the sale of stock or securities.

For income-test purposes, rents that REITs receive from real property may include 1) amounts received for the right to use real property; 2) additional amounts collected from tenants for their share of real estate taxes or operating expenses and utilities; 3) rent attributed to personal property leased under a lease for real property if personal property rent does not exceed 15 percent of the total rent; and 4) charges for “customary” services rendered in connection with rental or real property.

 

Rents from real property generally exclude 1) rent based on net income or profits of any person (however, rents based on gross income are generally permissible), 2) related party rents (if the REIT owns 10% or more interest in the tenant, determined by applying specific attribution rules), and 3) impermissible tenant services income. If impermissible service income from a property exceeds 1% of total revenue derived from the property, then all income from the property is “tainted” as non-qualifying income (however, a TRS can generally provide impermissible services income to REIT’s tenants without tainting rents).

Distributions

REITs must distribute 90 percent of their real estate investment trust taxable income (REITTI). The deduction they receive for dividends paid to shareholders in a taxable year must generally equal or exceed 90 percent of REITTI (excluding capital gain and without regard to the dividends paid deduction).

Failing to meet any of the REIT qualification requirements can lead to significant fines, treatment as a regular C corporation (i.e., losing the dividends paid deduction) and a loss of REIT status for five years.

Conclusion

Forming a private or public REIT structure can be a tax-efficient way for real estate businesses to attract capital from a wide variety of domestic and foreign investment sources, especially under the new U.S. tax laws. While REITs can raise capital and hold assets directly, most use more complicated structures in order to take advantage of certain tax benefits and the additional flexibility that these structures may provide. Structuring and managing this type of REIT structure is a complex, time consuming and potentially costly undertaking for which experienced real estate tax advisors should be engaged early on in the planning process.

 

About the Author: Arkadiy (Eric) Green, CPA, is a director of Tax Services with Berkowitz Pollack Brant, where he works with real estate companies, commercial and residential developers, property management companies, real estate investors and high-net-worth individuals to structure investments and complex transactions for maximum tax efficiency. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 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.

Artificial Intelligence Improves Audit Function, Helps Businesses Save Time and Money by Hector Aguililla, CPA

Posted on September 12, 2018 by Hector Aguililla

Artificial intelligence (AI) is quickly becoming a mainstay of our lives, helping us to control the appliances in our homes, recommend movies or products based on our previous behavior, and take us on rides in self-driving cars. Similarly, AI has crept into the corporate environment, helping to sort through the voluminous amounts of data created by the new breed of software and systems that businesses large and small use to manage their operations. When it is combined with expertise of professional auditors, AI helps businesses enhance the audit processes, improve efficiencies and reduce costs.

Audits historically involve a qualified third-party professional’s objective assessment of all of an entity’s financial records, documents and processes to ensure the business presents a fair and accurate representation of its financial position to all of its key constituents, including senior management, board members, investors and lenders. They can help businesses prevent and detect fraud and noncompliance with government regulations and validate the credibility of information that stakeholders rely on to make informed decisions about the organization’s direction and long-term growth.

Combing through thousands of records and transactions to identify potential issues and/or hidden opportunities that can affect business performance requires the specialized skills of highly trained auditors. While the proliferation of software programs that automate business processes and documentation has helped to expedite auditors work, AI and machine learning go even further, helping businesses reap significant savings of time, money and resources for their investment in audit services.

AI saves businesses time by automating many tedious and repetitive audit tasks. It can continuously collect and process the massive amounts of data businesses create, learn and predict acceptable patterns of behavior and algorithms, and identify anomalies and trends between seemingly unrelated activities as they occur in real time. As a result, when AI is embedded in the audit function, businesses have an easier time staying on top of all their audit risks throughout the year and are able to respond immediately to potential threats rather than waiting for a suspicious transaction to be identified during their next external audit. Similarly, business can also use AI to monitor the day-to-day progress of specific strategies and initiatives by flagging those activities or behavior patterns that either differ from an established plan or fail to occur at all.

AI also helps businesses improve reporting accuracy by downloading data directly from existing accounting software systems and legal contracts and even linking line items on financial statements or accounting ledgers to supporting documentation, such as invoices or cancelled checks. Not only does this minimize the risk of human error, it also helps businesses account for every line item and maintain compliance with a multitude of constantly changing rules and regulations. Moreover, AI can provide auditors with the ability to assign weight and priority to specific risk factors and narrow in on specific threats that may be inherent or specific to a particular line of business or industry. For example, an external auditor is required to test journal entries.  Using AI software, an auditor is able to sift through 100% of all journal entries made during the period being tested to produce a risk score for each transaction to highlight those for further investigation. Sifting through 100% of journal entries would take an excessive amount of time not using AI software.

To be sure, the application of AI in the audit processes is both practical and affordable. However, it does not eliminate the need for external auditors, nor does it replace the professional assessment and judgement that only humans can bring to data analytics. After all, not all business metrics are black and white. There are often nuanced factors that companies must identify and take into consideration before making important decisions that can affect their business operations. This responsibility should remain in the hands of professional auditors who understand and know how to leverage big data and AI to bring meaningful insight, improved efficiency and greater confidence to business decisions and high quality audit services.

About the Author: Hector E. Aguililla, CPA, is a director with Berkowitz Pollack Brant’s Audit and Attest services practice, where he provides business consulting services, conducts audits, reviews, compilations, and due diligence for mergers and acquisitions. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Time is Ticking Away on your Tax-Filing Extension by Adam Slavin, CPA

Posted on September 06, 2018 by Adam Slavin

If you requested an extension to file your federal income tax return six months later than the traditional April deadline, it is now time to start preparing. You do not want to rush through the preparation process to meet the upcoming October 15 filing extension deadline, especially when considering that most mistakes occur when taxpayers wait until the last minute.

Following are some of the most common errors that will delay the amount of time the IRS will take to process a tax return and/or issue a refund to a taxpayer.

  • Entering an incorrect Social Security Number (SSN) or forgetting to enter a taxpayer’s SSN;
  • Misspelling the names of the taxpayers, their dependents, the names of their employers, etc.;
  • Entering incorrect bank routing and account numbers that could delay or impede a taxpayers’ receipt of a tax refund via direct deposit;
  • Claiming the wrong filing status (i.e. claiming married when the taxpayer is single);
  • Claiming credits and deductions that the taxpayer is not entitled to, or forgetting to claim tax attributes that could reduce taxpayers’ liabilities;
  • Making math mistakes, which is most common when taxpayers prepare their returns without the help of qualified tax accountants
  • Forgetting to sign a tax return
  • Filing with an expired Individual Tax Identification Number (ITIN)
  • but won’t allow any exemptions or credits. Taxpayers will receive a notice explaining that an ITIN must be current before the IRS will pay a refund. Once the taxpayer renews the ITIN, the IRS will process exemptions and credits and pay an allowed refund. ITIN expiration and renewal information is available on IRS

The sooner taxpayers begin gathering documents and meeting with their accountants to file their federal income tax returns, the less stressful the process.

About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

Will We Feel GILTI under Tax Reform? by Andre Benayoun, JD

Posted on September 01, 2018 by Andrè Benayoun, JD

In an effort to prevent U.S. businesses from shifting profits offshore to low-tax countries, the Tax Cuts and Jobs Act 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. However, under this Global Intangible Low Taxed Income (GILTI) regime, U.S. owners of foreign corporations may exclude from this calculation some items of income, including income that is considered “high-taxed” (i.e., income subject to a local tax rate above 18.9 percent). While this can be a very powerful tool to avoid GILTI, the language used in the current version of the law does not exempt all income subject to high-tax. Rather, the exemption applies only to income subject to high-tax that would have otherwise been picked up on a pre-existing anti-deferral regime known as Subpart F.

As the IRS continues to issue guidance to help taxpayers apply the new law, it is possible that the agency will interpret the language contained in the TCJA to mean that only high-tax income already exempt from Subpart F income should be exempt from GILTI. At this point in time, it appears that this interpretation is very likely to be the correct one. The reason for this exemption is that if the IRS does not allow taxpayers to exempt from GILTI high-taxed income that would have been Subpart F, then the pre-existing exception to Subpart F would be rendered meaningless. This is because taxpayers would simply pick up that same income by the new tax law’s GILTI anti-deferral regime after exempting it under the older Subpart F rules.

Keeping this exception in mind, will more businesses feel GILTI under the new law? Maybe, maybe not.

U.S. C corporation taxpayers receive a credit against GILTI inclusions for foreign taxes they paid at the level of their foreign corporate subsidiaries (albeit a reduced benefit of 80 percent). They also receive a 50 percent deduction on GILTI income that reduces their corporate rate from 21 percent to 10.5 percent. In essence, if a U.S. C corporation has foreign entities that pay taxes locally, in a foreign jurisdiction, at a rate of 13.125 percent (20 percent more than the U.S. rate charged on GILTI of 10.5 percent), then, the foreign tax credits allowed against GILTI should theoretically eliminate the corporation’s U.S. tax liability. However, this is not always the case. For example, if a C corporation has interest expense at the U.S. level, it may allocate and apportion some of that amount in such a way as to reduce the entity’s foreign tax credit, and subsequently leave the entity with some additional U.S. tax liability.

What about U.S. individual taxpayers who may be taxed as high as 37 percent on GILTI income? They neither receive the 10.5 percent tax rate on GILTI inclusions, nor do they benefit from the possibility of getting credit for foreign taxes paid by foreign-owned subsidiaries. However, eligible taxpayers may be able to reduce their GILTI liability by making Section 962 elections to be treated similar to C corporations. When this occurs, a U.S. individual taxpayer may receive a credit for foreign taxes paid at the corporate level to be used against his or her individual GILTI liability.

Yet, the law does not yet make clear whether a Section 962 election would also allow an individual taxpayer to take advantage of all of the tax benefits afforded to C corporations. For example, it is yet to be seen if the IRS will permit an individual to apply the 50 percent deduction against GILTI inclusions that a C corporation may use to reduce its effective tax rate to 10.5 percent, rather than the 21 percent rate that a corporation would otherwise have on GILTI inclusions. Even without this deduction, a 21 percent tax rate would still be better than the maximum 37 percent that could apply to U.S. individuals. Currently, it appears that an individual making a Section 962 election will only be entitled to the 21 percent rate and will not receive the 50 percent deduction afforded to corporate taxpayers.

Are there any other options that a U.S. individual could employ to reduce or eliminate the GILTI inclusion? Since many foreign jurisdictions effectively tax income at a rate greater than 18.9 percent, U.S. individual taxpayers may be able to use the new tax law’s high-tax exception to avoid the GILTI inclusion. However, the language used in the new tax law relevant to the GILTI provision allows this exception only for income that would otherwise have been picked up as Subpart F income.

As an example, consider that a U.S. individual owns a foreign distribution business carried out by two foreign subsidiaries, CFC1 and CFC2. Both subsidiaries are located in different jurisdictions and subject to effective tax rates that are greater than 18.9 percent in their local countries. If CFC1 and CFC2 buy widgets from suppliers and then sell each widget in their local markets, the income on these transactions would not be considered Subpart F, regardless of the high local taxes the subsidiaries paid. Therefore, neither CFC1 nor CFC2 would be eligible for the GILTI exception to include income that would have been treated as Subpart F income, but for the high-tax exception. What if the operations change and, instead, CFC1 and CFC2 can treat their foreign income as Subpart F income (but for the high tax)? Presumably, this type of a change in operation would allow for an exemption from the GILTI inclusion.

No matter what the circumstances, taxpayers with offshore earnings should engage in careful advanced planning under the guidance of experienced international tax advisors to maximize their exemptions from GILTI. Under some circumstances, it may behoove taxpayers to restructure their international operations to avoid or minimize feeling GILTI in the future.

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.

 

 

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.

 

 

 

 

 

 

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