It is estimated that less than half the number of taxpayers who previously claimed deductions for charitable contributions will continue to do so beginning in 2018, when the rationale for itemizing deductions may no longer make fiscal sense. However, the passage of the Tax Cuts and Jobs Act (TCJA) does provide an opportunity for taxpayers age 70 ½ and older to continue to maximize the benefits of their philanthropic giving when they plan ahead.
Charitable Deduction Limits Under Tax Reform
Tax reform under the TCJA, allows taxpayers to continue to claim their charitable contributions as itemized deductions that they may subtract from their taxable income. Nonetheless, the law also limits the deductibility of several itemized expenses, eliminates many of the miscellaneous deductions that taxpayers previously used to reduce their tax liabilities while also doubling the standard deduction that is available to all taxpayers. As a result, more taxpayers will opt to simply claim the standard deduction and potentially lose any tax benefit from their charitable efforts. That is, unless they are retirees receiving required minimum distributions (RMDs) from their Individual Retirement Accounts (IRAs).
Converting RMDs into Charitable Contributions
The Internal Revenue Code requires U.S. taxpayers to begin taking annual RMDs from their traditional IRAs by April 1 in the year after they turn 70 ½, or risk significant penalties. The amount of the taxable RMD is calculated separately for each IRA a taxpayer owns, but the actual aggregate amount he or she receives may be paid out of one of more of his or her IRA accounts.
Individuals over the age of 70 ½ seeking to reduce their tax liabilities in a given year may transfer up to $100,000 of their annual RMD directly to a qualifying charity and exclude that amount from their taxable income. By making these qualified charitable distributions (QCDs), qualifying taxpayers meet their annual RMD requirements, avoid including distributed amount in their taxable income and allow those funds to further their philanthropic goals and support a charitable organization in need.
It is important to remember that while QCDs can yield significant tax savings, especially for high-earning taxpayers, they are neither considered income nor may they be claimed as deductions on an individual’s federal tax return. Moreover, special care should be taken to ensure the QCD is transferred directly by the IRA trustee to a qualifying charitable organization. If the IRA owner hands a check to the charity, the payment will not qualify for QCD treatment, even if the check comes from the IRA and is made payable to a charitable organization.
While the TCJA will make it harder for taxpayers to maximize the value that itemizing deductions once provided to them, philanthropic-minded individuals will continue to give to charity and some may even eke out a tax benefit.
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.
The Tax Cuts and Jobs Act (TCJA) brings a broad range of potentially significant tax savings to individuals and businesses involved in the construction, acquisition and renovation of commercial real estate. Property developers, owners and investors seeking to leverage these benefits will need to engage in advance planning and put into place appropriate strategies and structures in order to maximize their savings opportunities. This is especially true when considering how cost segregation studies may complement the expanded depreciation deductions that the new law allows taxpayers to apply to their investments in newly constructed or acquired commercial property as well as renovations or improvements to existing properties.
Bonus Depreciation and Section 179 Property Expensing
One of the easiest ways that businesses can increase cash flow is to accelerate depreciation deductions for the wear and tear, deterioration, or obsolescence of property and equipment used for business or income-producing purposes. The faster a business can claim the deductions, the faster they can recover the basis, or purchase price, of that property.
There are two provisions in the TCJA that can expedite taxpayers’ recovery period and expand their ability to accelerate depreciation deductions for tangible property used in a trade or business, including, but not limited to, machinery, equipment, furniture, computers and off-the-shelf software.
Beginning in 2018, businesses may qualify for bonus depreciation and immediately write off 100 percent of the costs they incur for both new and used tangible business property purchased or financed after Sept. 27, 2017. It is important to point out that the new rules make used property eligible for bonus depreciation. Under the old rules, bonus depreciation was limited to new properties only. This has provided taxpayers with an expanded avenue for deduction acceleration when they plan accordingly. In addition, the law increases the amount that certain businesses may elect to deduct for qualifying new and used Section 179 property from $500,000 to $1 million, while also expanding the definition of qualifying property to include non-structural components attached to commercial buildings and improvements made to a building’s roof, air conditioning/heating, fire protection and security systems.
While both of these provisions can yield significant and immediate tax savings, there is another way for business taxpayers to recoup even more of a buildings’ value in a shorter period. Enter the cost segregation study.
Benefits of a Cost Segregation Study
Under U.S. tax laws, the depreciation period for a commercial building is typically 39 years, whereas personal property, including plumbing, lighting, electrical systems, machinery and other assets that cannot be removed from the building, can be depreciated in as little as five, seven and 15 years. In order to identify the parts of a building that may qualify as tangible personal property eligible for accelerated depreciation deductions, taxpayers must engage qualified professionals to conduct what is known as a cost segregation study.
Engineers involved in a cost segregation study will typically conduct a thorough and in-depth analysis of a building’s blueprints and site plans to break down all of the assets and costs involved with the construction, purchase or renovation of a property into separate components with different costs basis and recovery periods. Taxpayers may use the final report to document asset classification and substantiate to the IRS any claims they have to depreciate some of those assets over a shorter life than the building itself.
As an example, consider the benefits of a cost segregation study on a commercial rental building purchased for $975,000 in 2018 (net of purchase price allocated to land). Typically, a taxpayer in the highest tax bracket of 37 percent for 2018 would be able to depreciate the property straight line over 39 years for an annual depreciation deduction of $25,000. This yearly depreciation would provide the taxpayer with a reduction in his or her taxable income, which, in turn, would reduce his or her tax liabilities by an estimated $9,250 in 2018.
However, a cost segregation study may help the taxpayer identify portions of the building that are eligible for depreciation at accelerated rates. For example, the study may be able to divide the purchase price of the property into $100,000 as 5-year tangible property, $50,000 as 15-year land improvements and the remainder as 39-year real property. In addition, the study may identify that the 5-year and 15-year property are eligible for bonus depreciation. Not only will this result in a new annual depreciation of $21,153 ($825,000/39 years), the taxpayer will also receive an immediate bonus deduction of $150,000 during 2018. All told, with the benefit of a cost segregation study, the taxpayer may increase his or her 2018 deduction to $171,153 from an original amount of $25,000 and reduce his or her taxes by $63,327 for the year. While a cost segregation study does not change the overall depreciation deduction over the life of the property, it does change the timing of the deduction, which the taxpayers can accelerate into the current period as opposed to spreading it over a longer life. This acceleration of deductions creates current tax savings, which, in turn, increase cash flow to taxpayers and provide a time value of money savings.
Cost segregation studies are practical and beneficial for businesses that own or lease recently acquired, constructed or substantially improved or renovated commercial property. However, planning for a cost segregation study should begin prior to the construction or remodeling process with the understanding that it is never too late to perform a cost segregation study in the years after the property is placed in service. A typical report will identify a percentage of a building that can qualify for shorter recovery periods, often in the first year of the study, which can yield taxpayers significant deductions, reduced tax liabilities and increased cash flow as well as catch-up deductions when performed in a year after the asset was placed in service.
The best way for taxpayers to know if a cost segregation study is right for them is to consult with qualified tax accountants and advisors with experience in commercial real estate.
About the Author: Joshua P. Heberling is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he focuses on tax planning and compliance services for high-net-worth individuals and businesses in the commercial real estate, land development and office market industries. He can be reached at the 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.
The Tax Cuts and Jobs Act created a new tax credit for businesses that voluntarily offer their employees up to 12 weeks of paid family and medical leave in tax years 2018 and 2019. Here are all of the details that employers need to know about claiming the credit.
How can Businesses Qualify for the Tax Credit?
Employers must voluntarily provide qualifying full-time employees with a minimum of two weeks of paid family and medical leave per year with a benefit of at least 50 percent of the worker’s normal wages, pursuant to a written policy. For part-time workers, employers must also provide a proportionate amount of paid leave based on the number of hours those employees work.
Who is a Qualifying Employee?
Businesses must have employed a worker for at least one year and paid him or her a certain amount in compensations. For 2018, businesses seeking to claim the credit must have paid the worker less than $72,000 in 2017.
How Much is the Credit Worth?
Employers that provide workers with the minimal leave benefit of 50 percent of normal compensation may claim a tax credit of 12.5 percent of that benefit amount. This credit can increase up to a maximum of 25 percent based upon a percentage of the normal compensation the employer pays to the employee above 50 percent.
The employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Any wages taken into account in determining any other general business credit may not be used toward this credit.
What Circumstances Qualify for Paid Family and Medical Leave?
A business may qualify for the tax credit when it has an employee who takes a leave of absence for any of the following reasons:
- To care to his or her newborn child,
- To care to his or her newly adopted child or a for a foster child placed under the employee’s care,
- To care to his or her child, spouse or parent who has a serious health condition,
- To care for a child, spouse, parents or next of kin who serves in the military
- He or she has a serious health condition that prevents him or her from performing his or her job,
- A qualifying event occurs in which his or her child, spouse or parent is on or called for covered active duty in the Armed Forces.
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.
In an effort to revitalize economically distressed communities around the country, Congress included in the Tax Cuts and Jobs Act a program that gives individuals and businesses preferential federal tax treatment when they reinvest capital gains into low-income communities. However, to reap the benefits of the newly enacted legislation and other valuable tax incentives offered by local governments, investors must understand how the program works and how they may qualify for it.
The Basics of Opportunity Zone Investments
The new legislation gave governors the ability to designate up to 25 percent of their state’s low-income census tracts to serve as Opportunity Zones (OZs) eligible for capital investment. As of June 2018, the Department of the Treasury has certified 8,762 OZs representing all 50 U.S. states, the District of Columbia and five U.S. territories, which can now begin attracting private investment capital from the estimated $6 trillion in capital gains that individuals and businesses left unrealized at the end of 2017.
Under the law, investments in the form of business profits, publicly traded stock or appreciated property are to be pooled into Opportunity Funds (O Funds) organized as corporations and partnerships, and authorized by the Treasury to invest at least 90 percent of its assets in OZ businesses. For example, a fund may be earmarked to renovate existing commercial real estate or build new developments in an OZ, or a fund may focus on supporting the expansion of existing businesses in the OZ or incentivizing new businesses to open there. O Funds are similar to mutual funds, stock portfolios or other vehicles for which individuals expect a return on the capital they invest in the fund. However, investors in OZs receive economic benefits in the form of tax incentives and the more esoteric advantage of helping to improve the local community.
The Tax Benefits Available to Opportunity Zone Investors
In return for their capital, businesses and individuals may receive the following federal tax benefits when they roll over their unrealized capital gains from business and real estate investments into Opportunity Zone Funds:
- Temporarily defer tax on reinvested capital gains until Dec. 31, 2026, or the date the opportunity zone fund sells the investment, whichever occurs sooner;
- Permanently remove/exclude from taxable income the capital gains yielded from the sale or exchange of an investment in a qualified opportunity zone fund that investors held for a minimum of 10 years;
- Receive a step-up in the basis of an original investment by 10 percent when the taxpayer holds the investment in an opportunity zone fund for at least five years, and by an additional 5 percent when the investment is held for at least seven years, excluding up to 15 percent of the original gain from taxation.
The value of this preferential tax treatment is based on the amount of time the taxpayer holds his or her investment in the O Fund. The longer the holding period, the greater the tax benefit. Therefore, an investor could conceivably roll over into an O Fund the capital gains he or she earns from a stock portfolio, a mutual fund or the sale of highly appreciable property, such as real estate, and avoid capital gain tax when he or she holds onto the O Fund for 10 years. A more modest tax benefit is available when the holding period is between five and seven years.
As simple as this may sound, it is important to remember that the Investing in Opportunities Act is a part of the federal tax code and therefore requires taxpayers to meet certain criteria to realize the potential tax benefit. For example, capital gains must apply only to sales between unrelated parties. A developer who sells property A that he or she owns cannot defer tax when he or she reinvests the capital gains into property B that the developer, a member of his or her family or a subsidiary of its business owns. In addition, the reinvestment of capital into an OZ fund must be made within 180 days from the date the taxpayer realized the taxable gain. Moreover, investors must understand the rules guiding what qualifies as an equity investment eligible for reinvestment in an OZ for federal tax purposes. For example, eligible investments in real estate are limited to a taxpayer’s ownership interest in new construction or assets that will be improved substantially within 30 months of acquisition by the O Fund.
Individuals who own, invest in or develop commercial real estate in OZs can receive the added benefit of local tax incentives when their property is located in empowerment zones, community redevelopment agency (CRA) districts or other underserved neighborhoods that rely on public and public-private dollars to support job creation, affordable housing and business development. The challenge, for individuals and businesses is to understand how the creation of O Funds and investment in OZs can fit into a larger tax strategy and allow taxpayers to leverage these vehicles to maximum tax savings.
While final guidance on the application of the new law is pending release from the U.S. Treasury, taxpayers should meet with their advisors and accountant now to begin planning for the establishment and seeding of O Funds. The earlier one begins planning, the more prepared he or she will be to pull the trigger and rollover unrealized gains to receive the benefit of the law’s preferential capital gain treatment.
About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business- and tax-consulting services to real estate entities, multi-national companies, investment funds and high-net-worth individuals. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
While the Tax Cuts and Jobs Act (TCJA) reduces the corporate rate from a high of 35 percent to a flat 21 percent for calendar years beginning after Dec. 31, 2017, businesses whose fiscal years include Jan. 1, 2018, will pay federal income tax in 2017 and 2018 using a blended tax rate.
To determine their income tax liabilities for fiscal years that include Jan. 1, 2018, applicable corporations must first calculate their tax for the entire taxable fiscal year using the rates that were in effect prior to the TCJA. Next, they must calculate their tax using the new 21 percent rate and proportion each tax amount based on the number of days in the taxable year when the different rates were in effect. The sum of these two amounts will be the corporation’s fiscal year federal income tax.
If a fiscal-year corporation did not use the blended rate when filing their 2017 federal tax returns, it should speak with its accountants and consider filing an amended return to reflect this change.
In addition, barring the enactment of any new laws, refund payments issued to, and credit elect and refund offset transactions for, corporations claiming refundable prior year minimum tax liability on returns processed on or after Oct. 1, 2017, and on or before Sept. 30, 2018, will be reduced by a 6.6 percent sequestration rate for fiscal year 2018.
About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
