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Monthly Archives: October 2018

How is Tax Reform Shaping Up for Real Estate Businesses and Investors? by John G. Ebenger, CPA

Posted on October 26, 2018 by John Ebenger

There’s no question that the Tax Cuts and Jobs Act (TCJA) provides a big win for real estate businesses and investors. However, realizing the full benefit of these provisions will require careful evaluation, strategic planning and flexibility, as the IRS and U.S. Treasury continue to trickle out guidance that taxpayers may apply to their unique circumstances. Here’s a brief overview of some of the new regulations that taxpayers should be addressing with their accountants and advisors.

Lower Income Taxes for Individuals and Businesses

For starters, the new law reduces the top marginal income tax rate for high-income earners from 39.6 percent to 37.0 percent and more than doubles the estate tax exemption, which allows individual taxpayers to exclude from estate tax up to $11.2 million in assets, or $22.4 million for married couples filing jointly. At the same time, the TCJA establishes a corporate tax rate of 21 percent, down from 35 percent, while also eliminating the corporate Alternative Minimum Tax (AMT).

Potential Deduction for Pass-Through Entities, Trusts and Estates

Businesses that are structured as pass-through entities, such as partnerships, LLCs, S corporations and sole proprietorships, may qualify to deduct annually as much as 20 percent of U.S.-sourced “qualified business income” (QBI) that flows through to their owners’ personal tax returns. While the deduction is subject to a myriad of restrictions, based on taxpayers’ lines of business and their taxable income, the consensus is that investors and professionals involved in the real estate industry can reap significant tax savings. Realizing these benefits may require taxpayers to reassess and perhaps restructure their existing operations, including how they pay employees and independent contractors, and evaluate more closely how the new law will treat specific items of income, such as triple net leases or ground lease real estate rentals.

First-Year Bonus Depreciation

The TCJA allows businesses to immediately write-off 100 percent of the costs they incur for an expanded list of qualifying tangible personal property, including previously used assets that they purchased or financed during the tax year. Under prior law, bonus depreciation was limited to 50 percent and applied only to new property. As a result, qualifying businesses may now immediately recover the full costs of more investments they make to grow their operations. Yet, because additional guidance is still forthcoming from the IRS, taxpayers should plan carefully.

Section 179 Expensing

Eligible businesses may take an immediate deduction of up to $1 million per year for the costs they incur to acquire qualifying improvement property and business assets. The amount of the deduction is reduced dollar-for-dollar when acquisition costs exceed $2.5 million. Previously, the Section 179 deduction was limited to $500,000, and it began to phase out at $2 million.

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

Net Operating Losses

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

Business Interest Deduction

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

Carried Interest

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

Section 1031 Like-Kind Exchanges

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

About the Author: John G. Ebenger, CPA, is a director of Real Estate Tax Services with Berkowitz Pollack Brant, where he works closely with developers, landholders, investment funds and other real estate professionals, as well as high-net-worth entrepreneurs with complex holdings. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

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.

Businesses Face Complex Rules for New Interest Expense Deduction in 2018 by Andreea Cioara Schinas, CPA

Posted on October 25, 2018 by Andreea Cioara Schinas

Despite the generous tax breaks that the Tax Cuts and Jobs Act (TCJA) delivers to most businesses, the new law also introduces a few unfavorable provisions, including a significant limit on the deductions that certain businesses can claim as business interest expense.

Changes to Regulations

Prior to the TCJA, most businesses generally could deduct 100 percent of the interest accrued and paid on loans, credit cards and other types of business-related debt instruments they entered into to finance their operations. The primary restrictions to the deduction applied to loan interest associated with a taxpayer’s passive activities and those items of interest U.S. corporations paid to their foreign affiliates that did not have exposure to U.S. federal income taxes or were located in countries with a lower tax rate than the U.S. To prevent U.S. businesses from abusing the deduction to strip earnings out of the U.S. to lower tax jurisdictions, the tax code disallowed the deduction when an entity’s net interest expense exceeded 50 percent of its adjusted taxable income, and when the borrower’s debt equaled more than one-and-a-half times its equity.

 This changes in 2018 with the passage of the TCJA, which eliminates the full deduction of business interest expense for those entities whose average annual gross receipts from all related businesses exceeds $25 million during the three years prior to the year in which the taxpayer is claiming the deduction. Rather than completely repealing the deduction, however, Congress limits the amount that large businesses may write off for business interest expense to the sum of:

  • Business interest income,
  • 30 percent of adjusted taxable income (ATI) before interest taxes, depreciation and amortization (EBITDA) for tax years 2018 through 2020, and
  • Floor-plan financing interest on debt that taxpayers extend to customers to finance the purchase or lease of motor vehicles, boats or self-propelled farm machinery or equipment.

In 2022, the deduction will be limited further to 30 percent of ATI before interest taxes (EBIT) depreciation. Any remaining business interest expense disallowed as a deduction under the new 30 percent ATI limit may be carried forward indefinitely and applied to future tax years unless the limitation amount is more than taxpayer’s net business interest expense for the year.

Who is Not Subject to the 30 Percent Limitation Rules?

The TCJA specifically exempts from the 30 percent deduction limitation those businesses whose aggregate gross receipts for the three most recent tax years are $25 million or less. According to the IRS, this exemption will exclude most all small and midsize U.S. businesses from the limitation rules.

It is important for taxpayers with affiliated corporations that file consolidated returns to recognize that they must apply the gross receipts test at the single-entity group level for all of their related companies. However, taxpayers may exclude intercompany debt from this gross receipts calculation. Taxpayers also should note that their calculation of average annual gross receipts will vary from year to year based on how their businesses performed over the most recent three years. For example, a business filing taxes for 2018 will be subject to the business interest expense deduction limitation when average gross receipts totaled $30 million for 2015, 2016 and 2017. However, if the company has a bad year in 2018 and average gross receipts for 2016, 2017 and 2018 total $20 million, it will be exempt from the limitation rules and be able to deduct the full amount of business interest expense on its 2019 tax returns.

The law also provides a special exemption for certain real estate and farming businesses. Specifically, businesses that develop/redevelop, construct/reconstruct, acquire, operate, manage, rent/lease or broker real property may elect out of the business interest expense limitation. However, doing so will require them to use the Alternative Depreciation System (ADS) to more slowly depreciate nonresidential property, residential rental property and qualified improvement property. Making this decision requires taxpayers to plan ahead and rely on their accountants to determine whether electing out of the rules and applying lower depreciation deductions would provide them with enough of a tax benefit.

Considerations for Electing Out of Business Interest Estate Rules

Real estate businesses that make an election to opt out of the interest expense deduction limit rules must recognize that doing so is a permanent decision they cannot revoke. Therefore, special consideration should be given to not only the potential advantages of making an election to be exempt from the new rules and claiming a full deduction for business interest expense, but also the reduced annual depreciation deductions and loss of first-year bonus depreciation that comes with electing out.

Making these decision is even more complicated today, while we await further guidance from the IRS on how businesses, including partnerships and pass-through entities, should interpret the law and apply it to their specific and unique circumstances.

The advisors and accountants with Berkowitz Pollack Brant work with businesses in all industries and across international borders to help them understand complex and evolving tax laws and develop sound strategies for complying with the law while maximizing tax-saving opportunities.

About the Author: Andreea Cioara Schinas, CPA, is a director with Berkowitz Pollack Brant’s Tax Services practice, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at 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.

4 Reasons Your Business Needs a Strategic Plan by Joseph L. Saka, CPA/PFS

Posted on October 25, 2018 by Joseph Saka

A business with the most innovative idea for solving a specific and immediate need for a majority of the population will likely fail if the owner and senior management team do not consider how and where they want the business to be five- or 10-years from now. Do the business’s mission and core values support its vision for the future? How will it adapt its goals, processes and people to respond to new technologies and changing environments in its industry or that of its clients? Will those modifications impact the business’s long-term vision? The truth is that a business cannot map out a plan for its future until it identifies its intended destination.

A strategic plan is a written document that points the way forward for your business by laying out your company’s goals and explaining why those objectives are important – not just to senior management but also to employees, business partners and clients. Yet, it is also a living and breathing tool that requires regular review to keep the business focused and readily adaptable to change. When properly executed, the plan becomes woven into your company’s culture and a rallying cry of unity for all important stakeholders.

What is Strategic Planning?

Strategic planning is an ongoing process in which a business identifies what it is, its short-term goals and its long-term vision of future success. It typically requires management to look outside of the boardroom and the corner offices to engage front-line employees in the planning process, since they will be the ones who actually carry out the ultimate strategy for moving the organization forward and progressing toward its goals. With this in mind, the planning process ensures that all members of an organization understand and agree to a shared focus and motivation for working together to carry out their individual responsibilities in pursuit of the business’s carefully defined and desired results. When done right, strategic planning will also help businesses realize the following benefits.

Attract and Retain Talent

Countless studies indicate that job seekers consider a business’s culture second to salary when deciding whether or not to accept an offer of employment. Therefore, it is critical that businesses define the culture they seek to create and the common goals on which that philosophy will be based. When employees understand and embrace a common goal, they are more apt to step up to the challenge of working together towards attaining it. Moreover, it is those goals and the plans for achieving them that helps the business attract and retain talent. After all, potential employees buy into the image of the business and work environment that you represent to them.

Promote Accountability

With a written strategy in place, a business can effectively communicate to employees its vision and map out the specific action steps it expects individual employees to take to achieve that vision. Ultimately, it establishes a series of benchmarks against which businesses can monitor and measure the performance and productivity of its individual workers, their contributions to the team and their impact on the business as a whole. Employees know what is expected of them to help move their careers and the firm forward.

Guide the Business Forward through an Uncertain Future

Businesses operate in a fluid and unpredictable environment in which new technologies, regulations, employees, clients, vendors and even new or existing competitors can upend a well-thought-out strategy and subsequent plan of action. The problem is that change is the one constant on which all entrepreneurs can rely; the future cannot be controlled.

Strategic planning provides an opportunity for business to anticipate, address and plan for a wide range of potential internal and external forces that may impede its progress on the path to success. These potentially damaging influences may include economic downturns, the emergence of a new and stronger competitor, a change in leadership and even an interruption in operations or a threat to the business’s reputation. However, a strategic plan will provide a solid foundation on which a business may maintain focus on its end-game while allowing it the flexibility to quickly shift priorities and reallocate resources to adapt to short-term changes without causing significant disruption normal business operations. Moreover, it will help the business minimize its exposure to risks and potentially costly outcomes, and it may even, at times, help the organization turn a potential negative threat into a market opportunity.

By regularly reviewing the plan in relation to market shifts, the business will be better prepared to respond quickly and effectuate change, as needed, while remaining true to its core mission, values and culture.

Identify Areas Where a Business Can Improve Performance

A key element of the strategic planning process is an honest assessment of a business’s strengths, weaknesses, opportunities and threats. Over time, these elements may change along with market conditions and the business’s own evolution. Are the business’s products or service offerings still viable or have they become stale and outdated? Is the business missing out on an untapped opportunity to leverage its expertise and offerings and grow its market share? Is it making the most out of its investment in technology to improve sales efficiency, comply with new regulations and protect company and customer data? For many businesses, identifying these operational weaknesses is a challenge, especially when employees are mired in their day-to-day tasks. However, when a business sets a schedule for regularly reviewing its strategic plan, its employees can more easily and quickly identify and respond to these issues and avoid scenarios in which emerging threats become the business’s downfall.

Strategic planning is a critical element of business success that requires all an organization’s constituents to abandon the status quo and think outside the box to define the “why” of its existence, its endurance and its survival. It is only with a plan that a business may navigate successfully into an uncertain future.

Berkowitz Pollack Brant’s team works with domestic and international businesses of all sizes and across a wide range of industries to advise in areas of tax minimization and structuring, financial consulting and auditing, strategic planning and management consulting, and shareholder and partner financial planning.

About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax and business consulting and compliance services, and financial planning expertise to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

 

Opportunity May be Knocking for Real Estate and Other Investors Seeking Significant Tax Savings by Arkadiy (Eric) Green, CPA

Posted on October 24, 2018

The IRS and U.S. Treasury last week issued long-awaited guidance on a new tax break introduced by the Tax Cuts and Jobs Act (TCJA) that may provide real estate and other investors with significant tax savings. While the proposed regulations provide some clarity about the Opportunity Zone program and how it will be administered, many questions remain unanswered and will require further guidance from the IRS and the Treasury. As a result, it is critical that taxpayers tread very carefully with the counsel of experienced advisors and accountants.

What is the Opportunity Zone Program?

Congress created the Opportunity Zones program as an incentive to help revitalize distressed neighborhoods with private investment rather than federal spending dollars. Under the hurriedly drafted tax reform bill passed into law at the end of 2017, taxpayers may defer and potentially eliminate capital gains tax liabilities from the sale of certain assets when they reinvest those gains into predominantly low-income areas certified by the U.S. Treasury as Opportunity Zones (OZs).

The law makes it clear that taxpayers may not invest directly into businesses or development projects in OZs. Rather, they must direct their capital into Qualified Opportunity Funds (QOFs) organized as corporations and partnerships, which in turn must invest at least 90 percent of their assets, directly or indirectly, into qualified businesses and real estate assets located in designated OZs. The QOFs, which are already being created by developers, private equity firms and even nonprofits, are made up of a portfolio of buildings and businesses located in more than 8,700 census tracts across the country that the Treasury has certified as Opportunity Zones.

How can I Reap Tax Savings?

The tax benefits that come with investments in OZs are impressive and become even more significant the longer investors keep their interests in QOFs. Here’s generally how it works. An individual or business that incurs a capital gain from the sale of real estate, stock or any other property to an unrelated person may reinvest or “roll over” the proceeds from the sale (in an amount equal to the gain to be deferred) in a QOF within 180 days from the date of the initial sale, and receive the following benefits:

  • Defer tax on the original capital gain until Dec. 31, 2026, or the date the taxpayer sells his or her interest in the QOF, whichever occurs first;
  • Exclude from taxation up to 15 percent of the rolled-over capital gain by receiving a 10 percent step-up in the basis of the investment after holding the QOF investment for at least five years, and an additional 5 percent step-up after holding the QOF investment for at least seven years; and
  • Avoid capital gains tax on the appreciation of QOF investments held for a minimum of 10 years by making an election to increase the basis of the QOF investment to the fair market value of the investment on the date they sell their interest in the QOF.

For example, consider an investor who sells a property and incurs a $1 million capital gain. If the investor rolls that gain into a QOF, he or she can defer paying taxes on that gain until 2026. If the investor holds the interest in QOF for seven years, he or she will be taxed on only 85 percent of the original gain, or $850,000, instead of $1 million. If the investor sells his or her interest in the QOF after 10 years, his or her basis increases, and he or she pays no tax on the appreciation of the QOF investment.

From an investor’s standpoint, qualified opportunity funds can be good alternatives to 1031 like-kind exchanges, especially if taxpayers have challenges satisfying the 1031 requirements to identify suitable replacement property within 45 days and close within 180 days. Also, because the new tax law limits the use of 1031 exchanges solely to real estate beginning in 2018, investing in QOFs may be the only way for some investors to defer paying tax on their capital gains until 2026.

Nevertheless, investors should recognize that QOFs are illiquid investments that yield the most rewards the longer investors hold onto them. Moreover, there is no guarantee that investments in distressed Opportunity Zones will appreciate in value. Therefore, investors seeking to capitalize on the tax-deferred treatment of gains invested into QOFs should be prepared to hold onto their QOF investments for a long-term and have other sources of liquidity available to them (e.g., to cover tax payments on the capital gains they will recognize in 2026).

What’s New?

The guidance issued by the Treasury and IRS on Oct. 19, 2018, is not a comprehensive list of rules that answer all of taxpayers’ questions concerning the Opportunity Zones program. In fact, the Treasury and the IRS are still working on additional guidance that is expected to address a number of other issues and questions posed by tax practitioners. Nonetheless, these proposed regulations provide some much-needed clarity regarding the requirements that taxpayers must meet in order to properly defer the recognition of gains by investing in QOFs, as well as certain requirements that corporations or partnerships must meet in order to qualify as a QOF. Taxpayers may now rely on these proposed regulations to help them implement tax-efficient planning strategies for the remainder of 2018 and into 2019. Following are some of the issues that the most recent government guidance addresses.

What Gains are Eligible for Tax Deferral?

Capital gains incurred from an actual or deemed sale or exchange of assets, or any other gains that are required to be included in a taxpayer’s computation of capital gain are eligible for deferral. Excluded are gains that arise from a sale or exchange of property with a related party (based on the 20 percent ownership rule).

Who Can Qualify for Tax Deferral?

Taxpayers that can elect tax-deferral benefits of the Opportunity Zone program include individual taxpayers, C corporations (including regulated investment companies (RICs) and real estate investment trusts (REITs)), partnerships and certain other pass-through entities (including S corporation, decedents’ estates, and trusts). Partnerships may elect to defer all or part of their capital gain to the extent they make an eligible investment in a QOF. If a partnership does not elect to defer capital gain, its partners may elect their own deferral with respect to their distributive share of capital gain to the extent they make an eligible investment in a QOF. Similar rules apply to other pass-through entities (including S corporations, estates and trusts) and their shareholders and beneficiaries.

When does the 180-day Period Begin?

Taxpayers generally must roll over capital gains into a QOF within 180 days from the date of sale or exchange giving rise to the capital gain. The proposed regulations provide that, in certain circumstances, the 180-day clock does not start running until the date the ultimate taxpayer would be deemed to have recognized the gain. For example, the 180-day period for partners in partnerships and shareholders of S corporations generally begins on the last day of the entity’s taxable year. The proposed regulations, however, provide an alternative for situations in which the partner knows (or receives information) regarding both the date of the partnership’s capital gain and the partnership’s decision not to elect deferral of the gain, in which case the partner may choose to begin its own 180-day period on the same date as the start of the partnership’s 180-day period. Similar rules apply to other pass-through entities (including S corporations, estates and trusts) and their shareholders and beneficiaries.

What Qualifies as an Eligible Interest Investment in a QOF?

In order to defer capital gains tax under the Opportunity Zones program, taxpayers must own an eligible interest in a QOF, which is an equity interest issued by the QOF, including preferred stock or a partnership interest with special allocations. Specifically excluded from the definition of eligible interest investment are debt instruments, such as bonds, loans or other evidence of indebtedness, as well as deemed contributions of money due to increase in partner’s allocable share of partnership’s liabilities.

 What is included in the Definition of Qualified Opportunity Zone Business Property?

A QOF must be an investment vehicle legally structured as a corporation or partnership in any of the 50 states, D.C. or five U.S. territories. It must invest at least 90 percent of its assets in qualified opportunity zone property (QOZ Property), which includes qualified opportunity zone business property (QOZ Business Property) and certain equity interests in operating subsidiaries (either corporations or partnerships) that satisfy certain additional QOZ business requirements.

QOZ Business Property is generally tangible property that the QOF purchased from an unrelated party after Dec. 31, 2017, and used in the QOFs trade or business (substantially all of the use of such property must be in a qualified opportunity zone). The original use of such property must begin with the QOF (e.g., new construction), or the QOF must make substantial improvements to the property within 30 months of the date of its acquisition.

By and large, for the “substantial improvement” requirement to be satisfied, additions to the basis of the purchased tangible property in the hands of the QOF must exceed an amount equal to the QOF’s adjusted basis of such property at the beginning of the 30-month period. Based upon IRS guidance, if a QOF purchases a building located on land wholly within a QOZ, substantial improvement to the purchased tangible property is measured by the QOF’s additions to the adjusted basis of the building (thus, the “original use” requirement is not applicable to the land and the QOF is not required to separately substantially improve the land on which the building is located).

The proposed regulations also establish a helpful “working capital” safe harbor for QOF investments in QOZ businesses that acquire, construct, or rehabilitate tangible business property used in a business operating in an opportunity zone. Under this safe harbor, a qualified opportunity zone business may hold cash or cash equivalents for a period of up to 31 months, if there is a written plan that identifies these working capital assets as held for the acquisition, construction, or substantial improvement of tangible property in the opportunity zone, there is a written schedule showing that the working capital assets will be used within 31-months, and the business substantially complies with the schedule.

There’s no question that Opportunity Zones have the potential to yield immense tax benefits. However, since the regulations are complex and still evolving, investors and QOF sponsors will need to work closely with their tax and legal advisors to plan ahead and implement strategies that maintain compliance and maximize tax savings under application of the new law.

 

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.

What Real Estate Businesses, Investors Need to Know about the New Pass-Through Business Deduction by Laurence Bernstein, CPA

Posted on October 23, 2018

The vast majority of businesses in the U.S. are structured as pass-through entities, such as partnerships, S corporations and sole proprietorships. These entities pass their profits, losses and other attributes to their owners or partners each year, when tax is calculated at the individual’s tax return level. Although these businesses will not receive the benefit of a historically low 21 percent corporate tax rate introduced by the Tax Cuts and Jobs Act (TCJA), they may qualify for a new deduction of up to 20 percent of certain U.S.-source qualified business income (QBI). But first, taxpayers must take the time to understand the deduction and how it applies to their unique circumstances even without final regulations and guidance from the IRS. Following is what we know as of today.

What is the QBI Deduction?

The IRS defines QBI as the net amount of income, gains, deductions, and losses effectively connected with a taxpayer’s qualified U.S.-source trade or business and/or trusts and estates. Included in the QBI calculation are qualified dividends received 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. Specifically excluded is income that is not effectively connected with a U.S.-source trade or business, investment income, interest income, and capital gains and losses.

After computing QBI at the entity level, separately for each of a taxpayer’s trades or businesses, eligible business owners/partners will calculate and apply any potential deduction at their individual tax return level. Taxpayers eligible for the full 20 percent QBI deduction are subject to a top effective tax rate of 29.6 percent on their QBI.

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.

What are the Income Limitations to the QBI Deduction?

Married taxpayers with annual taxable income (before the QBI deduction) below $315,000 (or $157,000 for single taxpayers) who earn business income through a pass-through entity and not through W-2 wages are the biggest winners, who may be entitled to the full 20 percent deduction.

Once taxpayers’ income passes these annual thresholds, 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). Specifically, taxpayers who surpass these income tests will have a QBI deduction 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. Yet, it is important to note that the QBI deduction calculated from qualified REIT dividends and PTP income is not subject to these limitations.

 What about Limitations for Specified Service Businesses?

The TCJA introduced a new concept of specified service trades or businesses (SSTBs), which are entities that involve the delivery of services in fields that include, but are not limited to, health, law, accounting, brokerage services, financial services and consulting. Under the law, businesses that meet the definition of a SSTB and have taxable income above certain thresholds will be limited in their ability to receive the full 20 percent QBI deduction.

Businesses in the engineering and architectural fields should thank their representatives in Washington, D.C., for specifically excluding them from the SSTB limitation. Treasury recently clarified that real estate agents, brokers, and real estate property managers are also specifically excluded from the SSTB limitation.

 How Can I Maximize Tax Savings from the QBI Deduction?

 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.

About the Author: Laurence Bernstein, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax and consulting service to high-net-worth families, entrepreneurs and growth-oriented business owners. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at lbernstein@bpbcpa.com.

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

 

 

IRS Extends Tax Relief to Victims of Hurricane Michael by Jeffrey M. Mutnik, CPA/PFS

Posted on October 19, 2018 by Jeffrey Mutnik

Individuals who reside or own businesses in certain regions of Florida and Georgia, which the president declared as disaster areas following the October 7 landfall of Hurricane Michael, may qualify for various forms of tax relief from the Internal Revenue Services. The designated disaster areas in Florida are Bay, Calhoun, Franklin, Gadsden, Gulf, Hamilton, Holmes, Jackson, Jefferson, Leon, Liberty, Madison, Suwannee, Taylor, Wakulla and Washington counties. In Georgia, the relief extends to taxpayers in Baker, Bleckley, Burke, Calhoun, Colquitt, Crisp, Decatur, Dodge, Dooly, Dougherty, Early, Emanuel, Grady, Houston, Jefferson, Jenkins, Johnson, Laurens, Lee, Macon, Miller, Mitchell, Pulaski, Seminole, Sumter, Terrell, Thomas, Treutlen, Turner, Wilcox, and Worth counties.

As recovery efforts continue, it is crucial that taxpayers keep in touch with their accountants and pay attention to announcements from local and federal agencies, which may extend tax relief to other counties affected by the storm.

Tax Deadline Extensions

Affected taxpayers will have until Feb. 28, 2019, to meet all of the tax-filing and payment obligations that had original deadlines beginning on Oct. 7, 2018, including the extended filing of 2017 tax returns, normally due on October 15 and quarterly estimated income tax payments that are usually due on Jan. 15, 2019. The extension also applies to quarterly payroll and excise tax returns typically due on Oct. 31, 2018, and Jan. 31, 2019, as well as the annual tax returns of tax-exempt organizations that operate on a calendar-year basis that had an automatic extension due on Nov. 15, 2018. In addition, the IRS has granted penalty relief to qualifying businesses that had payroll and excise tax deposit obligation on or after Oct. 7, 2018, as long those companies make the deposits by Oct. 22, 2018.

 

Most taxpayers do not need to contact the IRS to receive the postponement of time to meet their tax obligations. The IRS automatically applies filing and payment relief to those individuals and businesses it identifies as being located the covered disaster areas. This relief is also granted to volunteers and other workers who travel to the covered areas to provide aid as part of an organized government or philanthropic organization.

Casualty Losses

Taxpayers who live or own businesses in federally declared disaster areas have the option to claim casualty losses resulting from Hurricane Michael on their 2018 or 2017 tax returns. Taxpayers who already filed their 2017 tax returns may choose to file an amended return for that year, especially when considering that deducting losses in 2017, when tax rates were higher, could yield a much larger tax break than if used those losses to offset income in 2018 when tax rates are lower and taxable income may be lower due to the disaster anyway. If taxpayers are party to a partnership or joint venture located or operating in the disaster area, they too should communicate with their partners to consider the benefits of amending their 2017 income tax returns as well.

Other Relief

Taxpayers who must rebuild and/or repair storm-damaged property may be able to deduct some of these expenses under the tangible property regulations. In addition, taxpayers whose losses from the storm include their prior year tax returns may receive copies free of charge as long as they complete and submit to the IRS Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, with the words “Florida Hurricane Michael” written in red ink at the top of those forms.

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.

 

It’s Time for a Free Credit Freeze to Fight Identity Theft by Joseph L. Saka, CPA/PFS

Posted on October 18, 2018 by Joseph Saka

Under a new law, consumers can finally freeze their credit files and protect themselves from the increasing frequency of identity theft without reaching into their pockets to pay a fee.

As of Sept. 21, 2018, all three of the major credit reporting bureaus, including Equifax, Experian and TransUnion, have made credit freezes free for all consumers in all U.S. states. In addition, the new law also allows parents to freeze the credit of their children under age 16 without any costs to them. Previously, consumers were required to pay as much as $10 to each reporting agency every time they froze or thawed their credit histories.

According to security experts, a credit freeze is the best way to prevent criminals from stealing your identity and using that information to fraudulently secure loans or open financial accounts in your name. It alerts the credit bureaus to keep your personal information private and block anyone from running a credit check on you without first receiving your approval, which can only be accomplished by a credit “thaw” that you authorize via a personal identification number (PIN).

Data breaches and identity theft have become all-too-common occurrences of everyday life. Even some of the most admired and well-known brands, including Amazon, Target, Verizon  and most recently Facebook, have fallen victim to attacks that exposed the personal information of millions of consumers. No one is safe. Even Equifax experienced a breach in 2017 that impacted more than 145 million people.

The fastest way to freeze your credit account is to separately contact each of the three reporting bureaus by telephone or by visiting their websites:

  • Equifax: 800-685-1111, 888-298-0045 or https://www.equifax.com
  • Experian: 888-397-3742 or https://www.experian.com
  • TransUnion: 888-909-8872 or https://www.transunion.com

Each agency will provide you with a PIN that can you can use to lift a freeze when legitimate financial institutions need access to your credit history in order to extend a loan or line of credit to you. After thawing your account, you may again contact each of the reporting agencies to reinstate the credit freeze.

It is important to note that credit freezes cannot protect you from all forms of identity theft and fraud, including unauthorized credit card transactions. Instead, consumers should carefully review their monthly credit card statements to flag suspicious charges. In addition, they may request that their financial institutions send them alerts them when credit card charges exceed a certain amount or they are processed over the phone or online. As an added layer of protection, you can set up free fraud alerts that require the credit bureaus to contact you and receive your approval to release your credit file anytime a company or financial institution requests that information. Fraud alerts can be established for one year with all three credit bureaus by contacting just one of the reporting agencies.

As a final layer of protection, consumers should check their credit reports throughout the year by visiting www.annualcreditreport.com. By law, you are entitled to receive one free credit report every year from each of the three credit bureaus. Once you receive a report, review it carefully looking for any activity that is out of the ordinary and confirming that it includes only those credit cards or loans of which you are aware and for which you applied.

About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax and business consulting and compliance services, and financial planning expertise to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

 

Wayfair Decision Imposes New State Tax Burden on Foreign Businesses Selling into the U.S. by Karen A. Lake, CPA

Posted on October 15, 2018 by Karen Lake

The U.S. Supreme Court’s June 2018 decision in South Dakota v. Wayfair has far-reaching impact on the state and local sales tax (SALT) obligations and previous competitive advantages of online and foreign businesses that sell products into the U.S.

The court’s ruling eliminates the prevailing physical presence test, which requires sellers to collect sales tax from customers who live in states where they own property or employ workers.

Instead, the court, under Wayfair, introduces an economic nexus test based on the sellers’ sales volume into each state. More specifically, U.S. states may now impose sales tax collection obligations on sellers, foreign or domestic, that conduct more than $100,000 in sales or more than 200 transactions in their jurisdictions in a given year regardless of whether the sellers has a physical presence in that locale. This economic nexus standard varies by state.

For example, if a foreign company that sells tangible goods from its headquarters in South America into the U.S. meets the sufficient dollar/transaction threshold in a particular U.S. state, the company would be required to collect sales and/or use tax on all orders received from customers in that state. This would apply even if the company does not have a permanent establishment (PE) in that state. When the company’s sales meet the test for establishing a meaningful and substantial presence in multiple states, it would need to collect and remit sales tax in each of those jurisdictions. With economic nexus laws, states will now be able to enact or enforce sales or transaction threshold and compel more companies outside of their borders to collect tax on sales made to in-state customers.

The Wayfair decision places a significant administrative burden on foreign businesses. International tax treaties generally apply solely to income taxes on the federal level. As a general rule, tax treaties do not apply to U.S. states, and bilateral tax treaties generally do not apply to non-income taxes at the state level. Therefore, foreign companies with U.S. customers may not escape sales and use tax obligations on the state and local levels. Instead, non-U.S. companies have a potential U.S. tax collection and filing responsibility when they meet the sufficient dollar/transaction threshold in a particular state regardless of whether or not they have a permanent establishment (PE) there.

It is important to note that while the U.S. Commerce Clause prohibits states from imposing excessive burdens on interstate commerce without Congressional approval, the Supreme Court has demonstrated its authority to “formulate rules to preserve the free flow of interstate commerce” when Congress fails to enact legislation. In its opinion in Wayfair, the court affirms that the dollar/transaction threshold satisfies South Dakota’s burden to establish economic nexus and impose tax on businesses that are “fairly related to the services provided by the state,” including “the benefits of a trained workforce and the advantages of a civilized society”. This final factor, which demonstrates a fair relationship between the tax imposed and the services provided by a state, can be easily applied to foreign companies that conduct business in U.S. states.

Foreign businesses must consider how the Wayfair decision will affect their sales and profits, and they must take steps to comply with state-level taxation going forward. This may involve assessing the volume of their transactions in each U.S. state, gaining an understanding of and a method for applying the SALT regimes in each U.S. state to their sales orders, and developing communication to let customers know that sales tax will be added onto future purchases.

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.

 

 

 

 

 

The ABCs of IRAs by Nancy M. Valdes, CPA

Posted on October 11, 2018 by

Individual Retirement Arrangements, or IRAs, are financial accounts that taxpayers may set up with an IRS-approved financial advisor, financial institution or life insurance company to save money for retirement.  However, because not all IRAs are created equally, taxpayers should take the time to learn the following terms and definitions.

contribution is the money individuals put into their IRAs, whereas a distribution is the amount of money that taxpayers withdraw from these accounts. Each type of IRA has different rules for eligibility and the tax treatment of contributions and distributions, and taxpayers who take distributions before they reach retirement age may be subject to tax and penalties on those amounts.

There are four types of IRA’s: Traditional IRAs, Roth IRAs, Simplified Employee Pensions (SEP-IRAs) and Savings Incentive Match Plan for Employees (SIMPLE IRAs).

Traditional IRAs allow individuals to take an immediate tax deduction for the full amount of their contribution in the years they make those contributions. The amount taxpayers can take as a deduction on contributions depends on various factors, including annual income and the taxpayer’s access to an employer’s retirement plan. Earnings grow tax-deferred until account owners turn 59½ years of age, at which point withdrawals are subject to tax. After age 70 ½, account owners must annually take required minimum distributions (RMDs) from their traditional IRAs.

In contrast, contributions to Roth IRAs are taxable in the years they are made, and account owners receive the benefit of tax-free withdrawals during their retirement years, as long as they are at least 59 ½ years old and owned the account for a minimum of five years. With Roth IRAs, owners are not subject to RMDs; they may take tax-free withdrawals of any sum, or they may instead leave their savings in the Roth IRAs to pass onto their spouses or other family members.

For 2018, annual contributions to Traditional IRAs and Roth IRAs are limited to $5,500 of earned income (plus an additional $1,000 when taxpayers are age 50 or older). These amounts are indexed annually for inflation.

Savings Incentive Match Plans for Employees (SIMPLE IRAs) are retirement savings plans set up by small businesses for the benefit of their employees, in which employees and employers make contributions to a traditional IRA. They are ideal for small businesses that do not have a significant number of employees and do not have the resources to manage a more complex qualified plan.

Simplified Employee Pensions (SEP-IRAs) allow owners of small businesses, such as sole proprietorships, partnerships, limited liability companies, S corporations and C corporations, to make contributions toward their own retirement and that of their employees’ without the costs and complexity of managing a qualified plan. Each employee owns and controls his or her own SEP-IRA. Self-employed business owners can contribute to SEP-IRAs as much as 20 percent of their net income, up to $55,000 in 2018. The rules for withdrawals are similar to those for traditional IRAs in that taxpayers must be at least 59 ½ to take avoid penalties and RMD will be required after taxpayers turn 70 ½.

On a final note, taxpayers should meet with experienced advisors and accountants to understand the rules for transferring and/or rolling over withdrawals from one IRA into another and how the IRS treats IRAs that a taxpayer inherits from a deceased family member.

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.

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.

 

 

Can I Deduct Interest on a Home Equity Line of Credit in 2018? by Joanie B. Stein, CPA

Posted on October 09, 2018 by Joanie Stein

With real estate values appreciating and interest rates still relatively low, an increasing number of consumers have been using the equity in their homes as collateral against lines of credit that they can use to immediately pay for large expenses, including home upgrades, medical bills, college tuition, and even lavish vacations. However, the new tax laws limit homeowners’ ability to deduct interest on home equity lines of credit (HELOC) for eight tax years beginning in 2018.

Under the Tax Cuts and Jobs Act, interest deductions are available only on a combined total of new mortgage loans and HELOCS originating in 2018 through 2025 that are $750,000 or less. In addition, the law allows taxpayers to deduct the interest on HELOCs only when they use the loan proceeds to buy, build or substantially improve a primary home or a second qualifying residence. Interest is not deductible when taxpayers use a HELOC for any other purposes.

Therefore, a taxpayer can deduct interest on a HELOC they enter into in 2018 to replace a home’s roof, build an addition or renovate a kitchen or bath, as long as the total loan amount is below the limit. Loan interest is neither deductible when the combined total of loans used to buy, build or improve the taxpayer’s main home and second home exceeds the $750,000 threshold nor when taxpayers use the proceeds to pay off credit card debt, pay down student loans or help them afford a new car. This does not mean that taxpayers cannot borrow against the equity in their home to access cash. Rather, they just cannot deduct the loan interest they pay annually.

In light of these new limitations, homeowners with liquidity needs should meet with their tax accountants and financial advisors to identify other tax-efficient strategies for paying needed expenses without exposing themselves to any additional risks.

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.

 

What you need to Know about Employer Reimbursements for Moving Expenses in 2018 by Flor Escudero, CPA

Posted on October 04, 2018 by

The IRS recently clarified how employers should treat payments and reimbursements they make in 2018 for work-related moves that employees made in a prior year, in light of the new tax law.

The Tax Cuts and Jobs Act that the government quickly passed into law at the end of 2017 requires employers to treat moving expenses as taxable income to employees. However, when an employee receives reimbursement in 2018 for moving expenses they incurred in a prior year, they may treat those amounts as tax-free for 2018 federal income and employment tax purposes. The same is true if the employer pays a moving company in 2018 for qualified moving services provided to an employee prior to 2018.

This tax relief is not available for moves that occur in 2018 or later unless the employee is an active-duty member of the U.S. Armed Forces whose move is due to or related to his or her military service.

The new tax law makes a number of changes to how employers and employees may treat certain work-related expenses in 2018 through 2025. Taxpayers should meet with experienced advisors and accountants before the end of the year to plan accordingly.

About the Author: Flor Escudero, CPA, is a senior manager of Tax Services with Berkowitz Pollack Brant, where she provides domestic and international tax guidance to businesses and high-net-worth individuals. 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.

New Lease Accounting Standards Require Advance Planning and Preparation by Whitney K. Schiffer, CPA

Posted on October 03, 2018 by Whitney Schiffer

Businesses across all industries are facing a serious time crunch to come onto compliance with two new accounting standards that will materially affect the financial metrics and performance they report in the future. While most private companies have focused the majority of their efforts on meeting the more time-sensitive deadline of Dec. 15, 2018, to apply the new revenue recognition standards, many are woefully unprepared to tackle the equally complex and time-consuming lease accounting requirements that go into effect one year later.

The new lease accounting standard requires businesses to identify and record for the first time on their balance sheets all operating lease agreements, including assets, liabilities and expenses with terms greater than 12 months. In addition to recording a right-of-use asset and the corresponding lease liability on their balance sheets at the present value of the lease payments, business will also need to record amortization of the right-of-use asset on their income statements, generally on a straight-line basis over the lease term.

From an organizational perspective, identifying qualifying leases necessitates commitments of time, careful planning and collaboration across many business units beyond the finance and/or accounting functions. For example, it is not sufficient for businesses to merely look back at last year’s financial statements and convert leases previously included in notes as line items on their balance sheets going forward. Instead, identifying leases will internal executives and external advisors who oversee real estate, transportation, equipment procurement, legal contracts and IT across multiple offices to physically comb through all of the existing contracts and purchase orders in their physical and digital file cabinets to determine if they involve lease arrangements. Under certain circumstances, the existence of a lease may be not be easily identifiable. For example, service contracts for IT software and systems commonly include embedded leases, which businesses may easily overlook and fail to include on their balance sheets.

After a business locates every single one of their qualifying leases, they must inventory those arrangements with exacting detail, perhaps on a spreadsheet or entering them into any of the new lease accounting software programs that store and automate the future reporting requirements for those and other leases. At that point, the business must analyze each contract and extract from each individual lease arrangement all relevant data, including lease payments, variable lease payments, debt obligations and lease renewal options, which must move onto the balance sheet. This can be a challenge considering that not all employees tasked with uncovering leases will have the skillset required to cull needed information from those contracts, nor will every employee understand the potential risks or rewards of those arrangements.

For businesses with significant portfolios of leased assets, transitioning to the new lease standard may negate and eliminate the use of many of the tax-planning strategies they relied on in the past to keep leases off their balance sheets. Additionally, businesses with a high-dollar value of lease obligations must be mindful that the new accounting standard may result in substantial changes to the net income, cash flow, return on assets and other metrics that they report and that they and their stakeholders rely on to make important business decisions. To minimize the impact of these balance sheet changes, businesses must begin planning immediately and carefully to identify with as much accuracy as possible the amount they expect to record as lease assets in the future. This will give businesses ample time to prepare for the changes, communicate them with stakeholders and seamlessly implement new strategies to mitigate any potentially damaging effects on their future operational and financial performance.

A final warning to businesses preparing for the new lease accounting standards is the need to establish appropriate systems, policies and controls for monitoring existing leases, flagging new lease arrangements and recognizing them on their balance sheets in the future. This may require an investment in new technology, the hiring of new employees and/or the engagement of outside advisors who are qualified to manage these responsibilities.

There is no doubt that the lease accounting standards will add new complexities to a broad range of business functions, including sales, lending, contracting and financial reporting. However, under the new rules, businesses will be able to centralize the inventory and management of all lease arrangements and gain a clearer view of whether those assets are improving business performance.

Coming into compliance with the new lease standards by the deadline date may seem overwhelming, especially in light of the multitude of pressures businesses face complying with other new reporting standards, the new tax laws and the day-to-day demands of running a profitable operation. However, there is little time left for procrastination. Business should allocate needed resources now to get started on implementing a scalable lease accounting compliance program that is sustainable over the long term. One way that businesses can ease their compliance burdens is to meet with their accountants and auditors, who can develop and implement strategies that may ultimately improve financial performance.

About the Author: Whitney K. Schiffer, CPA, is a director of Audit and Attest Services with Berkowitz Pollack Brant, where she works with hospitals, health care providers, HMOs, third-party administrators and real estate businesses. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

2018 Year-End Planning Discussion Topics

Posted on October 02, 2018

Here is a list of some of the new tax rules, issues and year-end planning opportunities that we are discussing with our clients:

 

Corporate and General Business Provisions

 

  • New 21% corporate tax rate, repeal of corporate AMT (taxpayers with AMT credit can still use the credit to offset regular tax and claim refunds) and new NOL use limitations (80% of TI, repeal of two-year carryback, indefinite carryforward).
  • More taxpayers are now eligible to use cash method of accounting and exempt from requirements to maintain inventories and use certain long-term contract accounting and UNICAP rules ($25M average annual gross receipts threshold).
  • Increased immediate expensing under Section 179 (up to $1M), new phase-out threshold amount ($2.5M) and expanded definition of “qualified real property.”
  • 100% bonus depreciation on qualified property (phased down after 2022) and expanded definition of qualified property (including used property).
  • New interest expense limitation (30% of EBITDA) for higher income taxpayers, but certain taxpayers (e.g., real property businesses and farms) may be able to elect not to apply the limitation.
  • New revenue recognition rules for accrual-basis taxpayers with applicable financial statements (this should be considered in conjunction with adoption of new GAAP revenue recognition standards under ASC 606).
  • New rules for amortization of research & experimental (R&E) expenditures, including software development expenditures (generally amortized over 5 years).
  • Repeal of Sec. 199 deduction for domestic production activities.
  • Repeal of deduction for entertainment activities, membership dues, and certain employee transportation fringe benefits.
  • Expanded limitations on deductibility of officer compensation and related restructuring considerations for senior executive compensation programs.
  • State tax implications of the federal tax reform and new post-Wayfair sales tax economic nexus laws passed by many states.

 

 

Flow-through Entities and Real Estate Businesses

 

  • New 20% pass-through (Section 199A) deduction on certain qualified business income, REIT dividends and publicly traded partnership income, and related restructuring opportunities and aggregation elections.
  • Qualified Opportunity Zones – temporary (and some permanent) deferral of capital gains reinvested in Qualified Opportunity Funds (QOF) and permanent exclusion of gains from sale of investment in QOF after 10 years of ownership.
  • Section 1031 like-kind exchanges – nonrecognition treatment limited to real properties, but it may be possible to mitigate unfavorable impact on personal property by using immediate expensing provisions.
  • Carried interest rules – new three-year hold requirement to treat capital gains as long-term capital gains for certain partnership profits interests, and related deal structuring and planning considerations.
  • Repair studies and analysis of fixed asset additions under tangible property regulations is still very relevant.
  • Cost segregation studies are now more beneficial than ever due to new bonus depreciation rules (i.e., used personal property and land improvements are now eligible for 100% bonus depreciation).
  • Real property businesses that elect out of interest expense limitation rules are required to use Alternative Depreciation System (with no bonus depreciation, but ADS recovery period for residential rental property shortened to 30 years).
  • Certain capital contributions, such as contributions in aid of construction, subjected to tax under modified Section 118.
  • Repeal of local lobbying expense deduction.

 

 

International Provisions

 

  • 100% of foreign-source portion of dividends received from certain foreign subsidiaries (of which US Corp owns at least 10%) are exempt from US tax.
  • Global intangible low-taxed income (GILTI) and Subpart F income planning.
  • Domestic International Sales Corporation (DISC) and Foreign Derived Intangible Income (FDII) regimes and related tax planning.
  • Repatriation of foreign earnings subject to the Sec. 965 toll charge before the end of 2018.
  • Non-U.S. planning to reduce withholding tax that may no longer be creditable in the U.S. due to tax reform.
  • Certain gains/losses on foreign partner’s sale of a partnership interest treated as ECI, which may create additional tax and withholding requirements.
  • Repeal of certain cross border attribution rules which may cause tax inefficiencies to existing structures
  • Trust planning for cross border families with U.S. beneficiaries who will no longer be able to rely on the 30-day rule to plan out of controlled foreign corporation (“CFC” status)

 

 

Individual Provisions

 

  • Changes in tax rates, larger standard deductions (but no personal exemptions), no phase out of itemized deductions, larger AMT exemptions and child tax credit.
  • Elimination of miscellaneous itemized deductions, including portfolio deductions, but some planning including use of investment management LLCs may still be available.
  • New “excess business loss” limitations (for business losses over $500,000 for joint filers / $250,000 for all other filers), converting disallowed losses to NOLs.
  • Grouping of trade or business activities for purposes of minimizing passive loss limitations and the 3.8% net investment income tax is still very important, and now there is another level of complexity with new aggregation rules for purposes of 20% flow-through deduction on certain qualified business income.
  • Mortgage interest deduction limited to interest on $750,000 of acquisition indebtedness (but certain mortgages are grandfathered).
  • State and local tax deductions limited to $10,000, but taxes on property used in a trade or business or held for investment may still be deductible.
  • Increased depreciation deduction for certain luxury passenger automobiles.
  • Charitable contribution deductions limit increased to 60% of AGI for cash and CG property contributions to public charities and private operating foundations.
  • Personal casualty loss deductions limited to losses incurred in federally declared disaster areas.
  • Section 529 qualified tuition plans can now be used not only for college tuition expenses but also for K-12 tuition expenses up to $10,000 per year.
  • Estate and gift tax – basic exclusion amount increased to $10M, indexed for inflation after 2011.
  • Need for new independent valuations for purposes of partner / shareholder buy-sell agreements.

 

Signs of Small Business Identity Theft, New Protection Methods by Joseph L. Saka, CPA/PFS

Posted on October 02, 2018 by Joseph Saka

Individual consumers are not the only victims of identity theft. According to the IRS, criminals are increasingly targeting small businesses and the confidential data they manage. Too often, businesses neither have the proper controls in place to prevent or detect frauds nor are they prepared to deal with the fallout that can occur after a breach, including loss of income and irreparable damage to their reputations. To minimize their risks and defend against these scams, businesses must have a strong offense.

One of the most common forms of small business identity theft involve scammers using a business, partnership, trust or estate’s legitimate Employer Identification Number (EINs) to apply for a line of credit or file a fraudulent tax return with the hope of receiving a bogus refund. To protect themselves from these schemes, businesses should take the time to verify the legitimacy of the tax returns they file by responding to the following “know your customer” requests from the IRS, state taxing agencies and/or their tax preparers:

  • What is the name and Social Security number of the individual who signed the tax return?
  • What are the company’s tax filing and tax payment history?
  • Provide information about the business’s parent company.
  • Provide additional information about the deductions the business claimed.

Sole proprietorships that file Schedule C and partnerships filing Schedule K-1 with Form 1040 may be asked to provide additional information, such as a driver’s license number, in order to help taxing authorities identify suspicious business-related tax returns.

It is equally important that businesses stay on alert and recognize these signs that may indicate that they have in fact become victims of identity theft:

  • The IRS rejects a business’s e-filed tax return or extension to file request because it already has on file a duplicate Employer Identification Number or Social Security number or tax return with this information;
  • Taxpayers receive from the IRS Letter 5263C or 6042C notifying them that their identities have been stolen;
  • Taxpayers receive an unexpected receipt of a tax transcript or IRS notice that does not correspond to anything they submitted to taxing authorities;
  • A business fails to receive expected and routine correspondence from the IRS, which could mean that a thief changed the business’s mailing address.

Small businesses looking to protect and secure their identity should speak with their accountants to help assess their existing security protocols and efforts to minimize risks, make recommendations to better protect information assets, and educate employees on how to spot and avoid falling victim cyberattacks.

About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax and business consulting and compliance services, and financial planning expertise to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

 

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