berkowitz pollack brant advisors and accountants

Local Lobbying Expenses are No Longer Deductible under Tax Reform by Thomas L. Smitha, JD, CPA

Posted on May 15, 2018 by Thomas Smitha

The recent tax act that reforms the U.S. Tax Code beginning in 2018 changes the rules for how the IRS treats expenses taxpayers incur for lobbying local government bodies, local government officials and Indian Tribal Governments. Under the new law, taxpayers may no longer deduct these costs for influencing local legislation, regardless of whether taxpayers incur them directly or through an outside consulting firm.

Historically, the tax laws disallowed taxpayers from deducting expenses paid or incurred in connection with influencing legislation at the federal and state levels. An exception to this rule existed for taxpayers who incurred these “ordinary and necessary” business or trade expenses in connection with influencing legislation at the local level. More specifically, the law allowed a deduction for expenses that were:

  1. in direct connection with appearances before, submission of statements to, or sending communications to the committees or individual members of such council or body with respect to legislation or proposed legislation of direct interest to the taxpayer, or
  2. in direct connection with communication of information between the taxpayer and an organization of which the taxpayer is a member with respect to any such legislation or proposed legislation which is of direct interest to the taxpayer and such organization, and
  3. that portion of the dues paid or incurred with respect to any organization of which the taxpayer is a member which is attributable to the expenses of the activities described in (1) or (2) carried on by such organization.

The new law repeals this deduction for local lobbying expenses.

While lobbying at the federal and state levels has been relatively easy to discern, this is not always true at the local level, where there are a large number of local government bodies and officials as well as an array of different types of activities, transactions and interactions that may or may not qualify as lobbying. As a result, it is imperative that business taxpayers begin to analyze and assess the expenditures they pay in 2018 to influence local governments, including, but not limited to, promoting or opposing zoning and other local law and regulation changes where the taxpayer has a direct interest, and communications with local government officials with respect to such activities. Careful attention should be paid to review the activities, arrangements and related agreements to determine whether lobbying expenditures are deductible under the new law.

The advisors and accountants with Berkowitz Pollack Brant work closely with businesses in the real estate, healthcare and hospitality industry to comply with complex tax laws while minimizing tax liabilities.

About the Author: Thomas L. Smitha, JD, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides accounting and consulting services, as well as tax planning and tax structuring counsel to private and publicly held companies. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Numbers Taxpayers Need to Know in 2018 by Tony Gutierrez, CPA

Posted on April 23, 2018 by Anthony Gutierrez

With the 2017 April tax-filing deadline in the rearview mirror, now is a good time to revisit the provisions of the Tax Cuts and Jobs Act (TCJA), which the IRS codified  for tax years beginning in 2018. The following information will apply to the tax returns that individuals file in 2019.

Lower Individual Tax Brackets through 2025

While the TCJA lowers the tax rates that apply to most income levels, it does not make income taxes any simpler. A seven-bracket system remains in effect with a low rate of 10 percent for taxable income up to $9,525 for individuals, or $19,050 for married couples filing jointly, to a high of 37 percent for taxable income above $500,000 for individuals, or $600,000 for married couples filing jointly. Figuring out an individual’s actual taxable income depends upon his or unique situation, including filing status, sources of income and claims for credits, deductions and exemptions that can potentially reduce tax liabilities.

Higher Gift and Estate Tax Exemption

The estate and gift-tax exemptions double in 2018, allowing individuals to exclude from their taxable estate up to $11.18 million in assets, or $22.36 million for married couples filing joint tax returns. Estates valued above these thresholds will be subject to a 40 percent tax. The estate tax exemption will be indexed for inflation until 2026, when it will revert to its 2017 pre-TCJA level.

Higher Standard Deduction

The TCJA eliminates personal exemptions in 2018 while increasing the standard deduction to $12,000 for individual taxpayers, or $24,000 for married taxpayers filing jointly. In future years, these amounts will be adjusted annually for inflation until 2026 when the deduction it is set to expire.

Limits to Itemized Deductions

Taxpayers continue to have the option to either claim a standard deduction or itemize each deduction for which they may be entitled. With the new, higher standard deduction in 2018, it is expected that fewer taxpayers will itemize. However, for high-net-worth individuals whose itemized deductions may exceed the higher standard deduction, itemizing may continue to be the best option, especially when considering that the TCJA suspends the overall 3 percent of adjusted gross income (AGI) limitation on itemized deductions.

With this in mind, taxpayers should consider the following changes to common deductions.

  • Casualty and Theft Losses are no longer deductible unless they result from a president-declared federal disaster, such as the 2017 hurricanes or California wildfires.
  • Charitable Deductions are available only to taxpayers who itemize their deductions. However, the amount of cash contributions that an eligible taxpayer can deduct increases to 60 percent of his or her AGI.  Benevolent taxpayers can maximize their tax-deductible gifts by bunching together several years of small donations into one year when the contributed amount will exceed the standard deduction. Similarly, taxpayers may realize tax benefits and stretch their philanthropic dollars by focusing their giving toward donor-advised funds and/or private foundations.
  • The Foreign Earned Income Exclusion for 2018 increases to $103,900.
  • Medical and Dental Expenses are deductible to the extent they exceed 7.5 percent of an itemizing taxpayer’s AGI.
  • Miscellaneous Itemized Deductions are disallowed beginning in 2018. This includes deductions for use of a home office, unreimbursed job expenses, expenses incurred while searching for a job, as well as tax preparation and other professional service fees.
  • Mortgage Interest is deductible on new loans executed on or after Jan. 1, 2018, on acquisition indebtedness of $750,000 or less for individual taxpayers. This dollar limit does not apply to mortgages existing on or before December 15, 2017. For 2018, taxpayers who refinance loans existing on or before December 15, 2017, will be able to deduct interest on up to $1 million of indebtedness.  In 2018, there is no longer a deduction for interest paid on a home equity line of credit (HELOC).
  • Moving expenses are no longer deductible regardless of whether or not they resulted from a taxpayer’s job change.
  • Property Tax, and State and Local Tax (SALT) deductions are limited to a combined total of $10,000 for single and married filing jointly taxpayers. A number of U.S. states, including New York, New Jersey and California, have or are planning to introduce laws to reduce the impact of the SALT deduction limit on its residents. How the IRS will treat these state-level provisions is unclear at this time.
  • Retirement Savers continue to receive favorable tax treatment when making annual contributions to retirement accounts. In 2018, the maximum amount that taxpayers may contribute to a 401(k) and receive a tax deduction is $18,500, or $24,500 for taxpayers age 50 and older. The limit on contributions to traditional and Roth IRAs remains at $5,500, or $6,500 for individuals age 50 and older. In addition, because the TCJA increases the income thresholds for taxpayers to contribute to IRAs and Roth IRAs, more taxpayers will be able to take advantage of these qualified retirement plans to save for the future.
  • Student Loan Interest continues to be deductible up to $2,500, regardless of whether taxpayers choose to itemize or not. However, the deduction begins to phase out when taxpayers’ modified adjusted gross income (MAGI) exceeds $65,000, or $135,000 for married filing jointly. The deduction is not available to taxpayers whose MAGI reaches $80,000, or $165,000 for married couples filing joint returns.

A Mixed Bag for Families with Children

529 Savings Plans continue to be tax-efficient vehicles for families to save for a child’s future college education. New for 2018 is the ability for families to take from 529 plans tax-free distributions of up to $10,000 per year to pay for a child’s K through 12 private or religious school tuition. Annual 529 savings plan contributions of $15,000 per beneficiary, or $30,000 per beneficiary for married couples filing jointly, are generally not subject to federal gift taxes. There are also planning opportunities that allow taxpayers to elect to treat contributions in excess of the annual gift tax exclusion as if they were spread over a five-year period.

An Adoption Credit is available for families to recover up to $13,810 in adoption-related expenses. Families that adopt children with special needs are treated as having paid the maximum $13,810 credit regardless of the actual expenses they incur.  This nonrefundable credit is subject to a phaseout when MAGI exceeds $207,140 and completely phases out when MAGI exceeds $247,140.

The Child Tax Credit increases to $2,000 per qualifying child and is refundable up to $1,400, depending on a family’s AGI. Once a taxpayer’s AGI reaches $200,000, or $400,000 for married taxpayers filing jointly, the Child Tax Credit begins to phase out.

Obamacare Shared Responsibility Penalty

Taxpayers who go without health insurance in 2018 will continue to be subject to the Affordable Care Act’s individual mandate. The penalty for failing to have health coverage for any month during the year is the greater of 2.5 percent of AGI, or $695 per adult and $347.50 per child up to a maximum of $2,085. The individual mandate is scheduled to be eliminated beginning in 2019.

Tax reform is a game-changer for most U.S. taxpayers. However, leveraging the benefits of the new law and mitigating the risk of exposure to an increased tax burden in 2018 and in future years requires careful planning under the guidance of experienced tax advisors and accountants.

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

 

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

 

Tax Reform Reaffirms Tax Liabilities of Foreign Partners in U.S. Businesses by James W. Spencer, CPA

Posted on April 16, 2018 by James Spencer

The overhaul of the U.S. Tax Code that the president signed into law in December 2017 reverses a Tax Court decision from earlier in the same year, which, at that time, represented one of the most significant changes in international taxation in nearly 30 years.

In in July 2017 ruling in the matter of Grecian Magnesite Mining, Industrial & Shipping Co. v. Commissioner of Internal Revenue, the tax court held that the gain a foreign partner yielded from the sale of its interest in a U.S. trade or business was not considered effectively connect income (ECI) and was therefore exempt from U.S. income tax treatment. Prior to this decision, the tax laws followed Revenue Ruling 91-32, which treated such gains as taxable U.S. income.

The passage of the Tax Cuts and Jobs Act, however, revives Revenue Ruling 92-32 and codifies under new section 1446(f) a foreign partner’s gain from the disposition of U.S. partnership assets as taxable U.S. trade or business income, effective for all sales or exchanges occurring on or after Nov. 27, 2017.  Moreover, the new law introduces a 10 percent withholding tax to the amount a foreign person realizes from the sale of the partnership interest that occurs after Dec. 31, 2017.

A partner’s actual tax liability could actually be greater than the 10 percent withheld, especially when also considering the partner’s sale of partnership interest as well as a separate, 15 percent withholding tax on sales of U.S. property as required under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

It is critical that foreign partners stay abreast of developments on this matter, especially as the IRS issues technical guidance to help taxpayers apply the new Code Section 1446(f). For example, in January 2018, the IRS issued guidance temporarily suspending the withholding tax from foreign investors dispositions of interests in publicly traded partnerships. In addition, because the IRS has appealed the court’s decision in Grecian Magnesite, it is possible that foreign investors will be required to pay taxes retroactively on gains they may have reaped from sales of interests in a U.S. trade or business that occurred during the fourth month period between July and November 2017.

About the Author: James W. Spencer, CPA, is a director of International Tax Services with Berkowitz Pollack Brant, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at jspencer@bpbcpa.com.

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

Tax Reform Amplifies Court Ruling that Family Offices are Businesses for Expense-Deduction Purposes by Lewis Kevelson, CPA

Posted on April 04, 2018 by Lewis Kevelson

There is no doubt that the Tax Code is made up of a complex set of rules with often-conflicting provisions that are subject to different interpretations. Making this understanding of the law even more difficult is the tax reform legislation that went into effect beginning on Jan. 1, 2018.

Take, for example, the recent tax court case involving Lender Management, a family office with employees and outside consultants providing investment advice and financial planning services to three separate investment LLCs owned by members of the Lender’s frozen-bagel empire. Each LLC has an operating agreement that names Lender Management as its sole manager with the exclusive right to direct its business affairs. In exchange for its services, Lender Management receives a profits interest in each LLC based on a percentage of each’s investment net asset value, a percentage of any increase in net asset value, a percentage of trading profits and other factors.

The issue before the court centered on the more than $1 million in deductions the family office claimed each year from 2010 to 2012 as ordinary and necessary business expenses under Tax Code Section 162.  The IRS disagreed with the taxpayer’s interpretation of the law, stating that Lender Management’s activities do not qualify as a business eligible to deduct expenses for items such as rent, depreciation, salaries and wages under Section 162. Instead, the IRS argued that absent a trade or business, the family office could deduct some of its expenses that qualify as miscellaneous income- or profit-oriented activities Section 212 of the code.

The tax court ruled in favor of Lender Management, affirming that the family office qualifies as an operational business that can use business-related expenses to reduce its gross income. In weighing the facts and circumstances of this particular case, the court explained that the family office’s activities “went far beyond those of an investor.” Not only did the family office consider the business needs of non-family investors, most of the family members did not have an ownership interest in Lender Management. In addition, the court viewed favorably the fact that the management company had a full-time staff of financial professionals performing high-level functions and earned a fee in exchange for the services the family office provided.

The significance of this ruling is more important than ever in light of the Tax Cuts and Jobs Act of 2017. Under the new tax law, deductions for trade or business expenses under Section 162 remain available to qualifying taxpayers whereas miscellaneous itemized deductions for investment expenses are no longer available to help individuals reduce their taxable income in 2018 through 2025. With this in mind, it is critical that family offices review their operations and existing structures to ensure they avoid the restrictions of the new tax law and instead receive the ongoing benefit of deducting business expenses in the future.

The accountants and advisors with Berkowitz Pollack Brant have extensive experience providing family office administrative services and managing the various details of high-net-worth families’ businesses, investments and other financial interests across the globe.

About the Author: Lewis Kevelson, CPA, is a director with Berkowitz Pollack Brant’s International Tax practice, where he assists cross-border families and their advisors with family office services, personal financial planning and wealth management strategies. He can be reached at the CPA firm’s West Palm Beach, Fla., office at (561) 361-2050 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.

 

Know Your Intent to Qualify for 1031 Exchange Tax Deferral (Updated for Tax Reform) by John G. Ebenger, CPA

Posted on April 02, 2018 by John Ebenger

Despite governmental efforts to repeal or limit taxpayer use of 1031 exchanges, a robust real estate market is continuing to drive demand for this powerful tax-planning tool.  Under Section 1031 of the Internal Revenue Code, individuals may defer taxes on the sale of certain commercial real estate property when they reinvest the profits into new, similar property of equal or greater value. Essentially, money that taxpayers would have paid to cover taxes on the gain from a sale of one asset are instead reinvested in a similar asset, or assets, and treated by the IRS as a reinvestment of capital that is not subject to taxation.  As a result, taxpayers may sell a long-held, low-tax-basis investment property that has appreciated in value without incurring significant federal and state income taxes, and they may change the form of the “like-kind” asset to allow their original investment dollars to continue to grow tax-free.

Yet, taking advantage of 1031 exchanges requires careful planning and understanding of a complex set of rules.

Definition of Like-Kind Property

To qualify for 1031 treatment, both the real estate sold and the real estate acquired must be “held for either productive use in a trade or business or for investment.” Because the law requires the properties for exchange to be of similar nature but not of the same quality, investors, developers or builders may swap a residential condo building for an office building or a retail complex for unimproved land.  They may also exchange investment property for real estate used in their business or trade.

The Importance of Intent

To determine whether a transaction qualifies for 1031 treatment, the IRS looks at the property holder’s intent to use the real estate in a trade or business or for investment purposes by considering the following factors:

Frequency of Taxpayer’s Real Estate Transactions

The tax code allows taxpayers to engage in multiple 1031 exchanges in a year. However, the more property sales a taxpayer has, the more likely the IRS will consider he or she to be real estate “dealers” who must hold assets for sale. In most cases, this restriction will not meet the qualified-use test required for 1031 treatment.

Taxpayer’s Development Activity

A property may be disqualified from 1031 treatment when the taxpayer makes efforts to improve the asset through the addition of utility services, roads or other activities that can influence the gain on the sale of the property.

Taxpayer’s Efforts to Sell the Property

The IRS looks at the amount of time, effort and involvement a taxpayer expends to control the sale of property to determine the applicability of a 1031 exchange.

Length of Time Taxpayer Holds the Property

While there are no specific rules detailing how long a taxpayer must hold real estate for investment or business purposes to qualify for a 1031 exchange, the IRS generally accepts a period of two years.  “Flippers” and other investors who purchase a property immediately prior to a 1031 sale or who sell a property soon after a 1031 transaction can be disqualified from claiming the benefit of tax deferral.

Purpose for which Taxpayer Holds the Property

The IRS considers the purpose for which the property is held at the time of sale to determine application of 1031 exchange tax benefits. The purpose for which the property was originally acquired may have no influence on the decision. Therefore, a developer may purchase raw land with the intent to build single-family homes and then, later build rental units or sell portions of the land.  Similarly, a homeowner who purchases a primary residence may later decide to rent out the home for investment purposes and subsequently sell the property as part of a 1031 exchange.

The Tax Cuts and Jobs Act that overhauls the U.S. Tax Code beginning in 2018 preserves the use of 1031 exchanges to help investors extend the value of their real estate holdings.  Yet, the tax code remains a complicated maze of provisions for which individuals should meet with tax professionals to assess relevant planning opportunities and take advantage of their ability to reinvest profits rather than paying capital gains tax.

About the Author: John G. Ebenger, CPA, is a director in the Real Estate Tax Services practice of 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 in the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at jebenger@bpbcpa.com.

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