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Monthly Archives: March 2019

AICPA Issues Exposure Draft of New Standard for Forensic Accounting Services by Richard A. Pollack, CPA/ABV/CFF, ASA, CBA, CFE, CAMS, CIRA, CVA

Posted on March 25, 2019 by Richard Pollack

Forensic accounting services can play a pivotal role in cases involving financial fraud, breach of contract, hidden assets, lost profits and economic damages. As demand for these services continue to increase, the American Institute of CPAs (AICPA) has proposed a new professional standard for CPAs who perform forensic services. The exposure draft aims to “protect the public interest” and improve the delivery of forensic services, which legal counsel should rely on when evaluating a practitioner’s credentials.

The AICPA’s Statement on Standards for Forensic Services No. 1 (SSFS No. 1) applies specifically to services forensic accountants provide as part of either investigative or litigation engagements. The exposure draft defines investigative engagements as those in which forensic accountants apply their skills to collect, analyze, evaluate or interpret evidential matter in response to concerns about a wrongdoing. Litigation engagements are defined as those that involves actual or potential legal or regulatory proceeding before a trier-of-fact, regulatory body or alternative dispute resolution forum for which a forensic accountant may serve as an expert, consultant, neutral, mediator or arbitrator.

Any services a forensic accountant provides that is beyond the scope of an actual investigation or litigation engagement would not be bound by the SSFS No. 1. As an example, the new standard would not apply to a forensic accountant who is retained to collect data for a matter that is neither a litigation nor an investigation engagement.

In addition to requiring that forensic accountants retained for investigation and litigation engagements exercise professional competence, due care, honesty and objectivity, the proposed standard also references the need for forensic accountants to obtain “sufficient and relevant data to afford a reasonable basis for conclusions and recommendations.” While SSFS No. 1 allows forensic professionals to provide expert opinions relating to their objective evaluation of evidence and whether or not such evidence is consistent with certain elements of fraud, it prohibits forensic accountants from providing opinions as to the ultimate conclusion of fraud or legal determinations. That responsibility is reserved solely for judges or other triers-of-facts.

Finally, the standard prohibits forensic professionals and their firms from performing certain services on a contingent fee basis or entering into engagements in which there is a conflict of interest that may impair the forensic accountant’s judgement and objectivity. Attorneys who engage forensic accountants should stay up-to-date on any additional changes to the exposure draft and the additional final adoption of SSFS 1, which is scheduled to go into effect on May 1, 2019.

About the Author: Richard A. Pollack, CPA/ABV/CFF, ASA, CBA, CFE, CAMS, CIRA, CVA, is director-in-charge of the Forensic and Litigation Support practice with Berkowitz Pollack Brant, where he has served as a litigation consultant, expert witness, court-appointed expert, forensic accountant and forensic investigator on a number of high-profile cases. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

Businesses Face Challenges of New Limits to Excess Business and Net Operating Losses by John G. Ebenger, CPA

Posted on March 22, 2019 by John Ebenger

Two provisions of the Tax Cuts and Jobs Act (TCJA) are throwing some business owners for a loop as they prepare to file their federal income tax returns for 2018. The new law introduced a limit on the deductions that non-corporate taxpayers could claim for excess business losses while also limiting deductions for net operating loss (NOLs) carryforwards and repealing the use of NOL carrybacks. In addition, taxpayers should note that they must apply the at-risk limits and passive activity loss (PAL) rules under the old Tax Code before calculating the amount of any excess business loss.

An excess business loss is the amount by which the total deductions attributable to all of your trades or businesses exceed your total gross income and gains attributable to those trades or businesses plus $250,000 (or $500,000 in the case of a joint return).

Under the TCJA, taxpayers that are not structured as C Corporations may not deduct excess business losses in the current year. Instead, they can treat the disallowed deduction as a 2018 NOL carryforward that they may now use indefinitely to offset only 80 percent of a business’s future taxable income, according to the new NOL rules, which also prohibit taxpayers from carrying back NOLs that arise in tax years after Dec. 31, 2017. Exceptions apply for certain farming businesses and insurance companies, other than life insurance companies.

Despite Congress’s efforts to simplify the Tax Code, the new law can actually mean more work for taxpayers. For example, businesses will need to adjust carryovers from prior tax years to conform to the excess business loss limitations, and real estate professionals will need to apply the passive activity loss rules before calculating their business losses. In addition, taxpayers will need to carefully consider the scope of their income-generating activities and potentially implement new strategies to minimize the negative impact of these limitations and possible reduce their losses in 2018 and in future years.

The professional advisors and accountants with Berkowitz Pollack Brant have decades of experienced helping individuals and businesses across the globe implement tax-efficient strategies that comply with evolving tax policies.

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.

 

 

 

Deadline Approaches to Take First Required Minimum Distribution from Retirement Plans for 2018 by Rick D. Bazzani, CPA

Posted on March 20, 2019 by Rick Bazzani

Taxpayers who turned 70½-years-old during the 2018 calendar year have until April 1, 2019, to take their first required minimum distributions (RMDs) from their individual retirement accounts (IRAs) and workplace retirement plans.

In general, retired individuals age 70½ and older have a deadline of December 1 to take their annual RMDs from retirement savings accounts that include Simplified Employee Pension plans (SEP IRAs) and Savings Incentive Match Plans for Employees (SIMPLE IRAs) as well as of 401(k), 403(b) and 457(b) plans. Because RMDs are considered taxable income, they do not apply to individuals’ Roth IRA. Failure to take a required minimum distribution and pay the taxes on the distributed amount can result in penalties as high as 50 percent of the undistributed amount. However, the law carves out two exceptions to this rule.

The first exemption applies to working taxpayers who may postpone their RMDs until April 1 of the year in which they actually retire from work.

Secondly, taxpayers have a one-time opportunity to defer until April 1 of the following year their very first RMD in the year they turn 70½. When this occurs, taxpayers must then take a second catch-up RMD by Dec. 31 of that same year. Therefore, a taxpayer who was born between July 1, 1947, and June 30, 1948, and who turned 70 ½ in 2018, may elect to delay his or her first RMD until April 1, 2019. While this will effectively allow the taxpayer to defer recognition of the RMD amount as income until 2019, he or she should be prepared for the tax liabilities he or she will incur by taking two taxable RMBs in 2019. The only way for taxpayers to avoid having both amounts included in their income for the same year is to make their first withdrawal by Dec. 31 of the year they turn 70½ instead of waiting until April 1 of the following year.

The amount of a taxpayer’s RMD in any given year is based on a variety of factors, including the balance in their retirement accounts as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” Taxpayers preparing to file their tax returns can find the RMD amount by looking at IRS Form 5498 that they should receive from the trustee, bank or brokerage that holds the accounts.

About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or at info@bpbcpa.com.

IRS Warns Taxpayers about the Latest Phishing Schemes by Joseph L. Saka, CPA/PFS

Posted on March 19, 2019 by Joseph Saka

According to the IRS, the 2019 tax-return filing season has been plagued by a surge in fake emails, text messages, websites and social media posting in which criminals attempt to steal taxpayers’ personal information. To protect themselves and avoid becoming victimized, taxpayers must take some basic security steps, remain cautious and stay alert to recognize the warnings signs of these pervasive schemes.

Among the various methods that criminals use to prey on victims and get them to divulge their personal information are elaborate phishing attempts that begin with legitimate-looking emails purporting to come from the IRS a collection agency or another government agency with links to fake but convincing website landing pages and/or shortened URLs to social media postings.

In one scheme, thieves use taxpayers’ own bank accounts. After stealing a taxpayer’s social security number or other personal data, criminals file fraudulent tax returns and use the taxpayer’s bank account to direct deposit tax refunds. The thieves then pose as the IRS or other agency to reclaim the refund from the taxpayer.

One of the more advanced phishing schemes targets payroll professionals, human resource personnel, schools and other organizations that are trusted with taxpayers’ personal or financial information. Depending on the variation of these business email compromise scams (BECs) or business email spoofing (BES) scams, victims will typically receive a legitimate-looking email from a criminal posing as:

  • a business asking the recipient to pay a fake invoice,
  • as an employee seeking to re-route a direct deposit, or
  • as someone the taxpayer trusts or recognizes, such as an executive within the company, who asks for a wire transfer.

Criminals may then use the email credentials from a successful phishing attack, known as an email account compromise, to send phishing emails to the victim’s email contacts. Malicious emails and websites can infect a taxpayer’s computer with malware without the user knowing it. The malware downloads in the background, giving the criminal access to the device, enabling them to access any sensitive files or even track keyboard strokes, exposing login victim’s information.

The IRS’s Security Summit partners encourage taxpayers and the keepers of their personal information to be wary of communicating solely by email, especially when they involve requests that are out-of-the-ordinary or when they involve personally identifiable information. Always pick up the phone and call the employee, executive or client to confirm their identity and veracity of the email request. In addition, remember that the IRS will never initiate contact with taxpayers or request personal financial or information via email, text message or social media.

If you receive an unsolicited email or social media attempt that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it to the IRS by forwarding the message to phishing@irs.gov.

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.

How Can I Pay My Tax Bill? by Adam Cohen, CPA

Posted on March 15, 2019 by Adam Cohen

For many taxpayers, the joy they felt while taking home larger paychecks in 2018 due to the Tax Cuts and Jobs Act has turned to frustration as they file their federal income tax returns. Many are finding that they have a surprise tax bill or their refund from the government is significantly less than what they received last year. Why the disconnect?

It is common for taxpayers to assume that a tax cut automatically translates to a higher tax refund or a lower tax bill. The reality is that the size of refund or tax bill is based on how much you prepay to the government throughout the year through payroll tax withholding or estimated quarterly tax payments. If you withheld too much in 2018, you essentially gave the government an interest free loan that it will pay back to you as a refund when you file your returns. If you underpaid your tax liabilities, you may very well have a tax bill come April 15.

Many taxpayers are realizing that the new law’s lower tax rates and doubling of both the standard deduction and the child tax credit did not make up for the many deductions the law now limits or eliminates. According to the IRS, the number of taxpayers who qualified to receive a refund during the first week of this year’s filing season declined 24.3 percent from the same period last year, while the average dollar amount of refunds the agency did issue declined 8.4 percent. By Feb. 15, the average refund declined even further, falling 16.7 from the same period last year.

So how can you pay a tax bill that you did not expect to receive? The IRS offers several options for you to pay your liabilities either immediately or through an agreed-upon installment plan, for which interest and penalties may apply.

Here are some electronic payment options for you to consider:

  • Electronic Funds Withdrawal (EFW) allows you to pay through your bank account when you e-file your tax return. EFW is free and only available through e-File.
  • Direct Pay allows you to make a payment directly to the IRS from your checking or savings account. The service is free and you will receive an email confirmation when the agency receives your payments. This option allows you to schedule payments up to 30 days in advance and change or cancel them two business days before the scheduled payment date.
  • Credit Card or Debit Card payments are accepted online, by phone, or with a mobile device. Card payment processing fees vary by service provider, but no part of the fee goes to the IRS.
  • Pay with Cash is available when you visit one of 7,000 participating retail partners across the country, such as 7-Eleven stores, which can be found at https://www.irs.gov/paywithcash. Cash payments come with a $3.99 fee.

If you are unable to pay your tax debt immediately, you may visit the IRS’s online payment tool at https://www.irs.gov/payments/online-payment-agreement-application to apply for a payment plan. Eligibility will depend on your unique tax situation, and fees will apply.

If you do receive a tax bill for 2018, the good news is that you still have time to take action and minimize or even eliminate any amount you may owe in 2019. One of the easiest ways to accomplish this to the change the number of allowances you claim on your Form W-4, which tells your employer how much to withhold from your pay for tax purposes. If you are self-employed, you may choose to increase the amount of the estimated tax payments you make to the IRS each quarter. A tax accountant can help you estimate your projected income and related year-end tax liabilities and implement strategies to help you maximize your tax efficiency.

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.

Owners of Rental Properties May Now Qualify for a Pass-Through Business Tax Deduction by Dustin Grizzle

Posted on March 13, 2019 by Dustin Grizzle

Businesses that own rental property and are organized as pass-through entities recently received welcome guidance from the IRS concerning their ability to qualify for a potential deduction of 20 percent of qualified business income (QBI) that the new tax law introduced at the end of 2017.

Based on the original language contained in the Tax Cuts and Jobs Act (TCJA), it was unclear if owners of rental real estate could qualify for the QBI deduction. For one, it appeared that the income these taxpayers earn from rental activities could be construed as investment income rather than rising to Section 199A’s requirement that it be trade or business income for purposes of claiming the deduction. Moreover, there was uncertainty as to whether real estate brokerage services would qualify as a specialized service trade or business (SSTB) that is either not entitled to the QBI deduction or subject to additional deduction limitations. Over the past year, the IRS has issued a stream of guidance attempting to clarify these and other issues and most recently providing a safe harbor for rental real estate enterprises structured as relevant pass-through entities (RPEs) to qualify for the deduction.

Section 199A Safe Harbor for Real Estate Rentals

The IRS defines a rental real estate enterprise as an interest in real property held for the production of rents that may consist of an interest in multiple properties. To be treated as a trade or business for purposes of claiming the QBI deduction, a real estate enterprise must first be a relevant pass-through entity (RPE) structured as an S corporation, limited liability corporation (LLC), partnership or sole proprietorship, or it must be a trust or estate. It must treat each property it owns for the production of rents as either a separate enterprise, or it must aggregate qualifying businesses together treat all similar properties held for the production of rents as a single enterprise. In both cases, commercial and residential real estate may not be part of the same enterprise, and taxpayers may not vary treatment from year-to-year unless there has been a significant change in their facts and circumstances.

To make a safe harbor election for treatment as a business or trade, taxpayers must also satisfy the following conditions:

  • Maintain separate books and records to reflect income and expenses for each rental real estate enterprise;
  • Perform at least 250 hours of rental services per year per rental enterprise for tax years 2018 through 2022. Beginning in 2023, taxpayers can satisfy this 250-hour test during three of the five consecutive tax years that end with the tax year;
  • Maintain contemporaneous records, including time reports, logs or similar documents that detail the dates, hours and descriptions of all qualifying services performed and by whom for tax years beginning in 2019; and
  • Attach to tax returns claiming Section 199A QBI deductions a statement signed by the taxpayer or the RPE’s authorized representative that the entity has satisfied the safe harbor requirements.

It is important for taxpayers to recognize that under the guidance issued by the IRS rental services that qualify as a trade or business may not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; or planning, managing, or constructing long-term capital improvements. In addition, the guidance specifically excludes from the safe harbor test all real estate that taxpayers use as a residence for any portion of the year (such as a vacation home) as well as triple-net-lease (NNN) property, for which tenants are responsible for paying along with their rents property taxes, insurance, utilities and maintenance costs. This last point may require further clarification from the IRS since it could be argued that NNN still constitutes a valid trade or business under the definition contained in Section 162 of the tax code. In addition, the guidance does not change a rule under the TCJA that excludes all items treated as capital gain or loss from the calculation of QBI.

On a final note, taxpayers should understand the rules they must now follow to make an appropriate election to aggregate two or more separate trades or business together in an effort to maximize the QBI deduction, which include the following:

  • The same person or persons must own a majority interest in each the business, either directly or indirectly;
  • None of the businesses may be considered an SSTB, as defined by the law
  • All of the businesses must have the same tax year
  • The aggregated businesses must meet two of the following three requirements:
  • They provide products and services that are the same or customarily provided together;
  • They share facilities or centralized elements; and/or
  • They are operated in coordination with, or in reliance on, other businesses in the aggregated group.

The Section 199A QBI deduction can provide significant tax relief to pass-through entities, including those that own rental real estate. However, taxpayers should be aware that calculating the actual tax savings can be quite complex, based on the definition of QBI and the various limitations that can apply to the deduction. For this reason alone, it is critical that businesses work closely with professional tax advisors and accountants to accurately interpret the law and apply it to their unique facts and circumstances.

About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax-planning and compliance services to high-net-worth individuals and businesses in the manufacturing, real estate management and property investment industries. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

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.

Miscellaneous Itemized Deductions – On the Brink of Extinction or Just in a Seven-Year Ice Age? by Jeffrey M. Mutnik, CPA/PFS

Posted on March 07, 2019 by Jeffrey Mutnik

Individual taxpayers have long relied on miscellaneous itemized deductions as a catch-all for a variety of business- and investment-related expenses that the tax code did not already allow as specified itemized deductions, such as those for medical expenses or contributions to charitable organizations. However, with the passage of the new tax law, these miscellaneous itemized deductions are no longer available for taxpayers to claim on their tax returns beginning in 2018.

Many taxpayers will not even notice the removal of these deductions, which were previously subject to being phased-out based on the taxpayer’s adjusted gross income (AGI). The only way taxpayers could yield the benefits of these deductions was if the total amount exceeded 2 percent of AGI. The peculiarity of the U.S. tax system was that the more income a taxpayer earned (creating a higher AGI), the greater the likelihood that the taxpayer would have more miscellaneous itemized deductions, but continue to lose the tax benefits since the higher income also increased the 2 percent limitation of these deductions. Additionally, the higher a taxpayer’s income, the more likely they would be subject to the alternative minimum tax (AMT), which essentially eliminating all tax benefits of the miscellaneous itemized deductions.

From a public policy point of view, eliminating these deductions will raise revenue and save the IRS time and money by not having to review, audit or litigate such matters. However, the impact on taxpayers can be significant, especially when they do not engage in advance planning to account of the loss of the deduction and improve their tax positions.

For example, while the new law prohibits individual taxpayers from deducting the costs they incur for hiring professionals to prepare their tax returns, taxpayers whose returns include a business reported on Schedule C have an opportunity for that business to fully deduct the associated fees on the Schedule C. This is similar to how an incorporated business would deduct professional fees on its corporate tax return. Since fees for the preparation of an individual tax return is not always segregated into its component parts, taxpayers should request their professional accountants provide them with an appropriate allocation of these fees.

In addition, without the benefit of deductions for unreimbursed business expenses (reportable on IRS Form 2016) beginning in 2018, taxpayers should consider requesting that their employers reimburse them directly for these expenditures. The employer’s reimbursement should become a business expense deduction for the employer without becoming taxable income to the employee. The employer’s policies and procedures should be reviewed and updated appropriately.

Additionally, without the availability of the miscellaneous expense deduction in 2018, taxpayers should weigh the benefits of paying their IRA fees individually with after-tax dollars versus having their IRAs pay those fees with pre-tax dollars. Under prior law, taxpayers often chose to pay IRA fees directly from their own funds to allow their IRAs to continue to compound growth without reducing their account balances for such fees.   Along the same lines, the new law’s elimination of deductions for investment fees may compel high net worth taxpayers to potentially create new organizational structures that allow them to treat these expenses as operating deductions rather than investment costs. The family that created Lender’s Bagels may be considered a pioneer of this strategy, creating a roadmap through litigation with the IRS in the Tax Court (TC Memo. 2017-246, Lender Management, LLC). Other families will find the facts and circumstances of their unique situation do not align with this case, and they will seek out alternate strategies. No matter what route taxpayers choose to take, their decision should always be made with the benefit of advice from informed tax professionals.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at 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.

 

IRS Issues Standard Mileage Rates for 2019 by Richard Cabrera, JD, LLM, CPA

Posted on March 05, 2019 by Richard Cabrera

The IRS issued the 2019 optional standard mileage rates that taxpayers may use to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 58 cents per mile driven for business use, an increase of 3.5 cents;
  • 20 cents per mile driven for medical care or for moving purposes, an increase of 2 cents; and
  • 14 cents per mile driven in service of charitable organizations.

It is important to note that a recently enacted change under the Tax Cuts and Jobs Act, taxpayers will not be able to use the business standard mileage rate as a miscellaneous itemized deduction for unreimbursed employee travel expenses. In addition, taxpayers cannot claim a deduction for moving expenses unless they are members of the Armed Forces on active duty under orders of a permanent change of station.

Taxpayers may not use the business standard mileage rate for any vehicles after they use any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

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

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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