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6 Ways to Avoid another Tax Bill in 2019 by Jeffrey M. Mutnik, CPA/PFS

Posted on May 15, 2019 by Jeffrey Mutnik

If you are one of the millions of taxpayers who received a smaller-than-expected tax refund or a surprise tax bill after filing your federal income tax returns for 2018, you can take comfort in knowing you are not alone. If you do not want to end 2019 in a similarly disappointing financial position or worse, now is the time for you to take action and maximize your tax efficiency for the remainder of this year.

First the facts: According to the Tax Policy Center, the Tax Cuts and Jobs Act (TCJA), that went into effect beginning in 2018 did provide the majority of taxpayers with an average tax cut of $800 in the form of higher take-home pay. In addition, the IRS reported that the average refund check it issued as of April 19, 2019, was $2,725, down just 2 percent, or $25 from last year. Yet, when it came time to file their federal returns, many taxpayers forgot about the additional take-home pay they enjoyed during the year and instead focused on the smaller refund they received as compared to prior years. As good as it may feel to get a refund back from the government, doing so may mean you are missing out of other tax saving opportunities.

Following are six smart moves to make after filing your taxes for 2018.

Check your Current Paycheck Withholding

In general, taxpayers owe the government money when they do not pay their fair share of taxes during the year, either through quarterly estimated tax payments or by having the correct amount of taxes withheld from their wages by their employers. In contrast, taxpayers who overpay their tax liabilities during a year can end up with a refund from the government. The key to paying the appropriate amount of tax depends on the information taxpayers provide on Form W-4.

For 2018, a significant number of taxpayers received larger paychecks and smaller refunds due to a combination of factors in which the number of allowances on employees W-4 forms were not updated and aligned with the IRS’s new withholding tables that reflected the TCJA’s lower tax rates, limits to itemized deductions and loss of certain exemptions under the TCJA. In many cases, taxpayers ended up owing the government money even though their overall tax liabilities were reduced.

To avoid this problem in the future, it is important that you check their withholding against the number of allowances you claim on form W-4. The fewer allowances, the more money your employer will withhold for taxes, and the less likely you will end up with a tax bill. Under certain circumstances, it may be beneficial for you to increase your withholdings by a certain dollar amount for each pay period in order to limit your risks of receiving a tax bill at the end of the year.

While the IRS offers taxpayers the ability to check their withholding using its online calculator, be forewarned that this tool is complicated and requires users to know and understand complex tax matters. Instead, consider meeting with your accountant to provide you with a paycheck withholding checkup and provide you with the answers you need to accurately complete a new W-4 and to implement other strategies to maximize your tax efficiency.

Increase or Start Making Quarterly Estimated Tax Payments

If your withholding does not accurately represent your expected tax obligation for the year, or if you are self-employed or work a part-time job for which taxes are not withheld from your pay, you may need to make quarterly estimated tax payments to make up the difference between what you paid during the year and your actual tax liabilities come April 15.

Save for Retirement

Whether you are a few years or a few decades from retirement, it’s never too early to start planning. Contributions to 401(k) retirement plans can reduce your taxable income in the year of contribution, and the money you save will continue to grow tax-free until you begin taking withdrawals to fund your golden years. For 2018, the maximum amount you may contribute to these plans via salary deferral is $19,000, or $25,000 if you are age 50 or older.

If you don’t have access to an employer-sponsored retirement savings plan, you may qualify to set up an individual retirement account (IRA) for yourself and/or your spouse. The maximum amount you may contribute to a traditional IRA or Roth IRA for 2018 is $6,000, or $7,000 if you are age 50 or older. The type of IRA you are eligible to set up will depend on your filing status and annual income.

Share Your Wealth

The new tax law and its very generous estate tax exemption reduces the number of taxpayers who will be subject to federal estate and transfer taxes, at least through the end of 2025, when the exemption will be cut in half and return to its pre-TCJA levels. For 2019, individual taxpayers may transfer up to $11.4 million in assets to their heirs during life or at death without incurring federal estate or gift taxes, or $22.8 million for married couples. On the other hand, not all states follow federal laws, and some of those that do not have hefty estate taxes. If you live in one of these states, you should consider employing one of many strategies to remove assets and their related tax liabilities from your estate.

For example, the tax law allows individuals to annually give gifts of $15,000 or less to as many people as you wish free of gift taxes. If you are married, the exclusion amount is $30,000. Therefore, if you and your wife have four children, you could give four gifts totaling $120,000 without incurring transfer tax. All gifts to U.S. spouses, no matter the amount, avoid gift taxes as do the education and medical expenses you pay directly to a school or medical provider on behalf of another person. However, if you make a payment directly to a student or another individual, you will trigger gift tax consequences.

Conduct an Estate Plan Checkup

Building and preserving wealth over the long term requires advanced planning and consistent care and attention to ensure that that the plans you made yesterday continue to reflect your needs today and your goals for the future. This involves reviewing your will and the names of your beneficiaries on financial accounts and insurance policies at least once a year, at a minimum. Remember that your personal circumstances will continue to change over your lifetime as will tax and estate laws.

It is critical that you remain vigilant and frequently review the state of your personal and professional affairs. This will enable you to take swift action, as needed, (and possibly implement new strategies and structures) to protect your assets, along with any potential future appreciation in value, while minimizing your exposure to income, capital gains and estate and gift taxes.

Stay Informed

No one knows for certain what the future will bring, but the one thing you can count on is that there will be several more rounds of changes to the U.S. tax code during your lifetime. Even today, more than one year after Congress passed the TCJA overhauling the tax code, taxpayers are still awaiting IRS guidance to help them comply with the law. Working with experienced advisors and accountants can help you stay up-to-date on recent changes to the law, interpret it appropriately and provide you with sound strategies that will serve you well now and into the future.

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.

 

 

What’s New for Opportunity Zone Investors in 2019? by Arkadiy (Eric) Green, CPA

Posted on May 14, 2019 by Arkadiy (Eric) Green

 

The IRS recently issued a highly expected, second set of proposed regulations on the Opportunity Zone program intended to help more investors, developers, business owners and underserved communities across the U.S. begin working together to maximize the intended benefits of this program.

Congress established the Opportunity Zone program at the end of 2017, as part of the Tax Cuts and Jobs Act (TCJA), with the purpose of encouraging investment, economic growth and job creation in designated distressed communities (qualified opportunity zones) by providing federal tax incentives to taxpayers who invest in businesses located within these communities. The IRS issued a first set of proposed regulations on Opportunity Zones in October of 2018; however, these regulations left many unanswered questions and considerable uncertainty regarding many aspects of the program. A second set of proposed regulations provide many additional answers and deliver some much-needed clarity to investors.

What Are The Tax Benefits of the Opportunity Zone Program?

The Opportunity Zone program offers investors the potential ability to defer, reduce or even eliminate taxes on certain capital gains generated from the sale of appreciated assets, including real estate, stocks, bonds and other investment type property. To qualify for preferential tax treatment, investors generally have 180 days from the date on which the gain would be recognized to roll over a gain into a qualified Opportunity Fund (QOF) created specifically to invest in real estate projects and/or businesses located in any of the more than 8,700 distressed, low-income communities that the federal government has certified as qualifying Opportunity Zones (QOZs). The longer the taxpayer holds his or her investment in the QOF, the greater the tax benefit.

Taxpayers that reinvest capital gains into a QOF may defer paying tax on that amount until the earlier of Dec. 31, 2026, or the date they sell an interest in the QOF. If they hold the QOF investment for at least five years, they can receive a 10 percent step-up in the basis on the original investment and be able to exclude 10 percent of the rolled over gain from taxes. Investments held for at least seven years avoid taxes on 15 percent of the original deferred gain. Should investors keep their qualifying investment in a QOF for at least 10 years, they have an opportunity to completely avoid paying tax on post-acquisition appreciation of their investment in QOF.

What Does the April 2019 Opportunity Zone Guidance Cover?

The long-awaited regulations issued by the IRS on April 17, 2019, clarify many issues that are not addressed in the original language of the statute or the initial IRS guidance issued in October 2018. Taxpayers should meet with experienced advisors and accountants to understand how these provisions affect their unique facts and circumstances, and how they may fit into a larger strategy for preserving wealth and maintaining tax efficiency.

Among many other things, the regulations address the following issues:

  • Allow taxpayers to contribute cash and/or other property in a QOF partnership in exchange for a qualifying investment;
  • Clarify that only net Section 1231 gains are eligible for deferral, with the 180-day period beginning on the last day of the tax year;
  • Debt-financed distributions – subject to certain limitations, allow debt-financed distributions from a QOF partnership to investors without triggering gain inclusion.
  • Investment in operating businesses – provide helpful working capital safe harbor and income sourcing rules;
  • Treatment of leased property – clarify that, subject to certain rules, leased property can be treated as qualified opportunity zone business property (QOZBP);
  • Clarify original use and substantial improvement requirements for unimproved land and buildings that have been vacant for five years;
  • Sale of assets before 10-year holding period – provide 12-month period for a QOF to reinvest the proceeds;
  • Carried interests – clarify that carried interests are generally treated as a non-qualifying investment (i.e., not eligible for OZ program benefits);
  • Exit rules – allow investors who have held the QOF interest for at least 10 years to elect to exclude from income flow-through capital gains attributable to the QOF’s sale of qualified opportunity zone property (QOZP);
  • Exiting QOZ investment;
  • Reinvesting gains;
  • Defining qualified opportunity zone businesses (QOZBs) and qualified opportunity zone business (QOZB) property;
  • Satisfying the income and working capital tests;
  • Treatment of leased property; and
  • Treatment of transfers of ownership interest by gift and at death.

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.

How Can I Correct Mistakes On My Tax Return? by Rick Bazzani, CPA

Posted on May 03, 2019 by Rick Bazzani

Considering the amount of time and efforts taxpayers need to gather documents and prepare for the filing of their federal income tax returns, it’s no wonder that mistakes can occur.  Luckily, the IRS offers taxpayers a few options for fixing their tax return filing errors.

In general, you have three years from the date you filed an original tax return to file an amended tax return to claim a refund, or two years after you paid a tax liability, if that date is later.

When your originally filed tax return includes mathematical errors, done’ fret. The IRS will likely correct those calculations for you without requiring you to file an amended tax return. The same is true if you forgot to attach to your tax return your IRS Form W-2 or one of the required schedule.

However, if you made an error in your filing status, income, deductions or credits, you will need to complete an amended tax return on paper using IRS Form 1040X, which you may not file electronically. Rather you must put it in the mail to the IRS with other required forms and schedules. The IRS recommends that taxpayers expecting to receive a refund from their originally filed tax return wait until they receive that money back from the agency before filing an amended tax return.

If an amended tax return results in a higher tax liability for you, be prepared to pay the tax as soon as possible to avoid the imposition of penalties and interest. One of the easiest ways to accomplish this to use the IRS’s Direct Pay tool, which allows you to immediately transfer money directly to the IRS from your personal bank accounts.

There are times when you will need to make changes to several years of tax returns. In those instances, you must complete separate Forms 1040X for each year you are amending, and you should mail the amended returns separately to the IRS in such a way that you can track and confirm the agency received each one.

The advisors and accountants with Berkowitz Pollack Brant work with U.S. and foreign citizens and their businesses to develop tax-efficient solutions that meet regulatory compliance and evolving financial needs.

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.

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 Relaxes Rules Restricting Hardship Withdrawals from 401(k) Retirement Plans by Adam Slavin, CPA

Posted on April 30, 2019 by Adam Slavin

Thanks to the Bipartisan Budget Act of 2018, workers confronted with an “immediate and heavy” financial burden are finding it far easier to take hardship withdrawals from their employer-sponsored 401(k) and 403(b) plans beginning this year.

Effective Jan. 1, 2019, sponsors of defined contribution retirement plans may no longer require participants seeking early withdrawals of retirement funds to first take out a 401(k) plan loan, which requires timely repayment of the borrowed amount plus interest and a potential lump sum repayment upon termination of the participant’s employment or departure from the company. In addition, plan participants are no longer required to wait six months after receiving a hardship distributions to resume salary deferral contributions to the plan. This allows them to immediately begin rebuilding their savings after a hardship withdrawal.

In addition, the IRS is allowing plan sponsors the option to distribute as hardship withdrawals earnings on 401(k) and profit sharing contributions as well as qualified non-elective contributions (QNEC) and qualified matching contributions (QMAC) and the earnings on those contributions. This decision provides employers with the flexibility to decide what type of contributions they make available for hardship withdrawals while allowing them to preserve the retirement benefits of all of their plan participants.

Beginning on Jan. 1, 2020, 401(k) sponsors must make it easier for plan participants to demonstrate their need for a hardship withdrawal by simply requiring them to provide a written statement explaining that that they do not have enough cash or liquid assets to satisfy an “immediate and heavy financial need.” In addition, sponsors must expand the definition of financial need to include the financial needs of participants’ spouses, children and primary beneficiaries named on their accounts as well as the expenses and losses participants and their primary beneficiaries incur to their principle residences or places of business as a result of the federally declared disaster.

Complying with the new regulations requires employers to amend their plan documents and communicate these changes to participants by Jan. 1, 2020. In addition, employers should note that despite these relaxed rules, they must maintain appropriate records documenting hardship withdrawal requests, reviews and approvals.

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

 

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.

 

Guidelines for Retaining Tax Documents by Adam Cohen, CPA

Posted on April 24, 2019 by Adam Cohen

If you filed your federal income tax return for 2018, congratulations! Now begins the tedious task of filing away all of the critical legal and financial documents you should retain for your own record-keeping purposes and to protect yourself in the event that your return becomes the subject of an IRS audit.

In general, it is advisable that you hold on to certain legal and financial documents for as long as they are in effect or you can be responsible for making payments. For example, keep documentation for insurance policies and retirement accounts, including IRAs and 401(k)s,  indefinitely. All documents concerning the purchase, financing and improvement of real estate should be retained during all of the years you own the property and at least three years after a property sale. The same is true to records of stock and other investment purchases and sales, for which you will need to demonstrate your original basis in the assets as well as the fair market value of the date of sale. Finally, documents relating to student loans, mortgages and alimony and/or child support should be retained until you have fulfilled all of your financial obligations under those agreements.

You should also be aware that the IRS has the right to assess additional taxes for three years after you file a return, or six years if you underestimate the gross income reported on your return by 25 percent or more. Therefore, it is a good idea to hold on to previously filed tax returns, including proof of income and deductions for at least six years. However, be advised that in the rare case that you failed to file a tax return or you willfully filed a fraudulent return, the statute of limitations may never run out; the IRS can go after you for both civil and criminal tax fraud at any time.

While there are no fixed rules regarding how long you should keep tax records, it is possible to minimize your record-keeping burden by considering the following guidelines. Moreover, to protect yourself from identity theft, be sure to shred all documents that you do not need to save, especially when they contain personal information, such as Social Security numbers and the numbers of financial accounts.

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.

IRS Clarifies Tax Treatment of State and Local Tax Refunds under new SALT Deduction Limit by Karen A. Lake, CPA

Posted on April 22, 2019 by Karen Lake

The IRS recently issued guidance to help taxpayers in high-tax states understand how the new tax law’s $10,000 annual limit on deductions for state and local taxes (SALT), and property and real estate taxes affects the tax treatment of SALT refunds they receive beginning in tax year 2019.

In general, taxpayers may exclude from their taxable income any dollar amount they receive as a refund for SALT paid in a prior year in which they claimed a standard deduction, which for 2018 is $12,000 for single filers or $24,000 for married couples filing jointly. This is not the case when taxpayers itemize their deductions. Rather, when itemizers receive a refund for all or a portion of the state and local taxes they paid in a previous year, they must report the recovered amount the following year on their federal returns as taxable income, to the extent the taxpayer received a tax benefit from the deduction in the prior year. The legal theory behind this rule is that taxpayers who receive a tax benefit in one year (in the form of a SALT deduction) should not be permitted to also benefit from a refund they receive for that tax benefit in a future year.

Taxpayers in high-tax states, such as New York, New Jersey, Connecticut and California, who paid state and local taxes, property taxes and real estate taxes in excess of the $10,000 cap in 2018 and who subsequently receive a SALT refund in 2019 will need to determine how much of that refunded amount they must include as taxable income when they file their 2019 tax returns in 2020. After all, if taxpayers received a tax benefit from deducting state or local taxes in 2018, they may not receive a second benefit in the form of a tax refund in 2019. Instead, the taxpayer who recovers any portion of state or local state or local tax, including state or local income tax and state or local real or personal property tax, must include in gross income for 2019 the lessor of 1) the difference between the taxpayer’s total itemized deductions taken in the prior year and the amount of itemized deductions the taxpayer would have taken in the prior year had the taxpayer paid the proper amount of state and local tax or (2) the difference between the taxpayer’s itemized deductions taken in the prior year and the standard deduction amount for the prior year, if the taxpayer was not precluded from taking the standard deduction in the prior year.

The IRS’s revenue ruling illustrates the recovery of tax benefits with four examples, including one in which a taxpayer paid local real property taxes of $4,250 and state income taxes of $6,000 in 2018. Due to the SALT cap, the taxpayer could deduct on his 2018 federal income tax return only $10,000 of the total $10,250 he paid in state and local taxes. Including other allowable itemized deductions, the taxpayer claimed a total of $12,500 in itemized deductions in 2018. In 2019, the taxpayer received a $1,000 state income tax refund due to an overpayment of state income taxes in 2018. Had the taxpayer paid only the proper amount of state income tax in 2018 ($5,000 instead of $6,000) his state and local tax deduction would have been reduced from $10,000 to $9,250, and his itemized deductions would have been reduced from $12,500 to $11,750, which is less than the standard deduction of $12,000 that he would have taken in 2018. The difference between the taxpayer’s claimed itemized deductions ($12,500) and the standard deduction he could have taken ($12,000) is $500. Therefore, the taxpayer received a tax benefit from $500 of the overpayment of state income tax in 2018, and he must include that $500 in his taxable gross income in 2019.

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 Art of Bunching Deductions for Charitable-Minded Taxpayers by Joanie B. Stein, CPA

Posted on April 19, 2019 by Joanie Stein

Many individuals filing their first federal income tax returns since the enactment of the new tax law are surprised to learn that they were not able to write off the donations they made to non-profit organizations in 2018. While few people give to charity solely for a tax break, much ink has been spilled over whether the potential loss of the charitable deduction will cause taxpayers to cut back on their generosity or stop giving to charity altogether. The fact is the Tax Cuts and Jobs Act provides some philanthropic-minded taxpayers with an opportunity to change their giving strategies for greater tax efficiency and charitable impact.

The New Tax Law

Under tax reform, the charitable deduction is available only to those taxpayers who itemize their deductible expenses. With a near doubling of the standard deductions to $12,200 for individuals and $24,400 for married couples filing jointly in 2019, it is estimated that the number of households clearing this threshold and itemizing deductions for charitable contributions in 2018 is approximately half of what it was in 2017, before the passage of the TCJA.

On the other hand, the law provides taxpayers whose deductible expenses exceed the cutoff and are able to itemize their deductions greater tax savings for their charitable contributions. For tax years 2018 through 2025, the amount of the deduction itemizing taxpayers may claim for charitable cash gifts increases to 60 percent of adjusted gross income (AGI) while keeping the current deduction for gifts of appreciated assets at 30 percent of AGI. Moreover, the TCJA’s repeal of the Pease limitations means that high-income households can deduct significantly more of their qualifying itemized expenses through 2025.

Unfortunately, many taxpayers do not have a well-though-out giving strategy; they merely write checks to non-profit organizations here and there. The new law provides an opportunity for families to create a giving plan that allows them to make a greater impact on their favorite charities while at the same time improving their own tax circumstances.

The Solution: Bunching Charitable Gifts

One tactic families can employ to ensure they receive the full tax benefit of their philanthropic efforts is to bundle together two or more years of charitable donations into a single year. This strategy of “bunching” several years of charitable gifts into one year can push taxpayers above the threshold for itemizing deductions in that year and provide them with a deduction for the full value of their donation. In alternate years, taxpayers could give less and simply claim the standard deduction.

As simple as this may sounds, bunching deductions requires careful planning and timing of expenses. After all, philanthropy involves far more than making donations to non-profit organizations in exchange for tax savings. Rather, philanthropy is a state of mind and long-term commitment of time, money and resources to effectuate a positive change in communities around the world and the lives of the people who live there. It is a code of ethics and guiding principle that families share and pass down from one generation to the next. Therefore, philanthropic-minded families want their charitable giving to make a measurable impact on the organizations and people who receive their gifts. To best accomplish this goal, taxpayers may want to consider directing their bunched charitable gifts to donor-advised funds (DAF) that support the specific charities that matter most to them.

More about Donor Advised Funds

DAFs are savings accounts controlled by sponsoring organizations, such as financial services firms or community foundations, that accept and invest taxpayers’ irrevocable charitable donations and later distribute those funds via grants to designated charities. The funds themselves are 501(c)(3) charities that act as turnkey solutions to help taxpayers manage and maximize their charitable giving and tax efficiency. Because DAFs invest donations for tax-free growth, a gift to a DAF in one year can result in a larger grant to a recipient charity in future years.

In return for their multi-year, bunched gifts to DAFs, taxpayers receive an immediate tax deduction for the full amount of their gift in the year of contribution. For cash gifts, the annual deduction can be as much as 60 percent of the taxpayers’ annual AGI in tax years 2018 through 2025, or 30 percent of AGI for gifts of appreciated assets, such as securities, real estate or interest in a family business held for more than one year. By comparison, taxpayers who make charitable contributions to a private foundation can deduct up to 30 percent of AGI for cash gifts and only 20 percent of AGI for appreciated assets. These types of non-cash donations to DAFs or private charitable foundations also provide taxpayers with the ability to reduce or eliminate their exposure to capital gains tax on the appreciation of those assets while also giving a much larger gift to charity. When DAF contributions surpass the IRS limits, taxpayers may carry the deduction forward five years.

For example, a taxpayer who gives $6,000 to charity every year may not receive the benefit of a full tax deduction in each of those years. However, if the taxpayer gives $12,000 to a DAF every two or three years, he or she is more likely to clear the standard deduction ceiling and qualify to write off the full value of his/her bunched charitable gifts in those years. Moreover, because the DAF invests the taxpayer’s $12,000 gift, the recipient non-profit entity will receive the appreciated value of that gift.

The requirements for participating in donor advised funds varies from one sponsor to the next. Even though there is no law governing when or how often a DAF must grant assets to qualifying charities, most have policies in place requiring account owners to grant minimum gifts to nonprofits every few years to ensure that funds are put to work for charitable causes. However, DAF participants should note that while they will receive a tax deduction in the year of their contribution, their donations may not reach the intended charities in the same year. As a result, donors should investigate DAFs before making contributions to ensure that the selected fund squares with the donor’s unique philanthropic goals and philosophies.

Another Solution for Older Taxpayers

Charitable-minded taxpayers over the age of 70½ who are financially comfortable and do not need their individual retirement account (IRA) savings to fund their later years have another giving strategy available to them. More specifically, these taxpayers may make qualified charitable distributions (QCDs) from their traditional IRAs directly to certain non-profit organizations to satisfy their annual IRA required minimum distribution (RMD) obligations. While taxpayers will avoid income tax on the transferred amounts to non-profit entities, their QCDs will not qualify for a charitable deduction. Moreover, taxpayers should be aware that are specific rules prohibiting them from making QCDs to donor advised funds or private foundations or from SEP IRAs, SIMPLE IRAs or 401(k) plans.

Despite the changes that the new tax law brings to charitable deductions, most people will continue to give generously to those in need and carry on their philanthropic traditions. Yet, it behooves taxpayers to examine their existing giving strategies in light of tax reform and consider employing different methods to improve the charitable impact of their gifts and their potential tax savings.

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.

 

 

IRS Issues Safe Harbor for Business Vehicles that Qualify for First-Year Bonus Depreciation by Cherry Laufenberg, CPA

Posted on April 16, 2019 by Cherry Laufenberg

Under the Tax Cuts and Jobs Act (TCJA), businesses have an opportunity to claim larger depreciation deductions beginning in 2018 for qualifying new and used property, including passenger vehicles, they acquire and place into service between Sept. 28, 2017, and Dec. 31, 2026. However, it is critical that businesses pay particular attention to recent IRS guidance to determine deductions when vehicles are eligible for a 100 percent additional first-year bonus-depreciation deduction and subject to depreciation limitations.

In general, Section 179 and depreciation deductions for passenger automobiles are subject to dollar limitations for the year the taxpayer places the passenger automobile in service and for each succeeding year. A new or used passenger car, SUV or truck used by a taxpayer at least 50 percent of the time for business purposes can also qualify for an additional first-year depreciation deduction, which the TCJA increased to a maximum of $18,000 for tax year 2018.

Under prior law, the allowance for a new passenger vehicle was limited to $11,160 in the first year or $3,160 for a used car. According to the IRS, this generous provision of the new tax law could result in irregularities in tax years after the placed in service year and before the first tax year succeeding the end of the recovery period. The safe harbor method of accounting recently issued by the IRS aims to mitigate situations in which the depreciable basis of a passenger automobile for which the 100-percent additional first-year depreciation deduction exceeds the first-year limitation.

If the depreciable basis of a passenger automobile for which the 100-percent additional first-year depreciation deduction is allowable exceeds the first-year limitation, the taxpayer may apply the safe harbor accounting method to deduct the excess amount of depreciation deductions on their income tax returns in the first tax year after the end of the recovery period. Doing so requires taxpayers to use the IRS applicable depreciation tables.

Excluded from the benefit of the safe harbor are passenger vehicles that taxpayers place in service after 2022 or those automobiles for which a taxpayer elected out of the 100-percent additional first-year bonus depreciation deduction or elected under Section 179 to expense all of a portion of the cost of the vehicle.

The advisors and accountants with Berkowitz Pollack Brant work closely with businesses of all sizes and across virtually all industries to implement strategies intended to minimize tax liabilities, maintain regulatory compliance, improve efficiencies and achieve long-term growth goals.

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.

                                                         

IRS Enhances Security, Revises EIN Application Process by Angie Adames, CPA

Posted on April 10, 2019 by Angie Adames

Effective May 13, 2019, the IRS will only issue Employer Identification Numbers (EINs) to entities whose applications name a responsible party who has a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). No longer will the IRS accept Form SS-4 or online applications from entities that use their existing EINs to obtain additional EINs. The requirement will apply to both online EIN applications and paper Form SS-4, Application for Employer Identification Number.

An EIN is a nine-digit number that the IRS issues to sole proprietors, corporations, partnerships, estates, trusts, employee retirement plans and other entities to use as identification for tax reporting and tax filing purposes. The responsible party named on an EIN application is typically the entity’s principal officer, general partner, grantor, owner or trustee who has the authority to control, manage and/or direct the entity and the disposition of its funds and assets. When an entity has two or more responsible parties, it must select only one to name on its EIN application. This requirement does not apply to governmental entities (federal, state, local and tribal); as well as the military, including state national guards.

According to the IRS, this new policy is intended to strengthen security in the EIN process by requiring an individual to be the responsible party and improve transparency.

 

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

IRS Warns of Top Tax Schemes for 2019 by Edward N. Cooper, CPA

Posted on April 05, 2019 by Edward Cooper

By Edward N. Cooper, CPA

The IRS has issued its annual list of the Dirty Dozen scams that taxpayers should look out for in 2019. Under U.S. laws, taxpayers are legally responsible for the information contained in their tax returns, even when those documents are prepared by someone else. Therefore, it is critical that you take special care when selecting a tax preparer and reviewing your returns for errors. Your best defense to avoid falling victim to these scams is to learn how to spot them and remain vigilant throughout the year.

Phishing Attempts. Criminals are skilled as creating official-looking emails and websites that trick individuals into divulging their personal information. Taxpayers should be wary of all emails and text messages that request they log in to an established account or that ask for sensitive information, such as their social security or tax ID number. Moreover, remember that the IRS will never contact you via email or text, and any message purporting to come from the agency is most likely a scam.

Phone Scams. There has been a steady increase in phone scams in which criminals impersonate the IRS or claim to be IRS debt collectors in order con taxpayers into sending them bogus tax payments. Learn how to recognize these schemes and take extra precautions to protect yourself.

Identity Theft. Tax-related identity theft occurs when someone uses a stolen Social Security number or Individual Taxpayer Identification Number (ITIN) to file a fraudulent tax return and claim a refund. Safeguard your personal information and regularly review your credit report for signs of theft.

Tax Preparer Fraud. While the vast majority of tax professionals provide honest, high-quality service, there are some prepares who operate solely for the purpose of scamming taxpayers, perpetuating identity theft and reaping the benefits of refund fraud.

Inflated Refund Claims. Be wary of tax preparers who ask you to sign blank tax returns, promise you a refund before looking at your records or charging you fees based on a percentage of the refund. Do your homework and check references before selecting a tax preparer.

Falsifying Income to Claim Credits. Con artists have been successful in convincing taxpayers to invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. To avoid significant tax bills and penalties and interest, make sure that you verify the accuracy of the information contained in the tax return you file with the federal government.

Falsely Padding Deductions on Returns. Think twice before overstating deductions, such as charitable contributions and business expenses, or improperly claiming credits, such as the Earned Income Tax Credit or Child Tax Credit, in an effort to reduce your bill or inflate the amount of your tax refund.

Fake Charities. Before making donations to charitable organizations, take the extra time to confirm that the group asking for a contribution is, in fact, a qualified and legitimate non-profit agency. A complete search is available on the IRS website.

Excessive Claims for Business Credits: Avoid improperly claiming tax credits, such as the fuel tax credit and the research credit, unless you satisfy the requirements to legitimately use them.

Offshore Tax Avoidance. Hiding money and income offshore has been the target of a wide sweep of successful enforcement actions. The best option for avoiding penalties and potential criminal prosecution is to come clean and voluntarily report offshore assets.

Frivolous Tax Arguments. While taxpayers do have a right to contest their tax liabilities, they should avoid using frivolous tax arguments or other unreasonable schemes to avoid their tax liabilities. The penalty for filing a frivolous tax return is $5,000 and felony prosecution.

Abusive Tax Shelters. The vast majority of taxpayers pay their fair share to the federal government. However, it is not uncommon for individuals to fall victim to con artists who scam them into using abusive tax structures. Always seek the opinion of professional counsel when faced with a complex tax-avoidance product.

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.

 

IRS Expands Penalty Waiver for Underpayments of 2018 Federal Tax Liabilities by Jeffrey M. Mutnik, CPA/PFS

Posted on April 02, 2019 by Jeffrey Mutnik

In response to a chorus of concerned taxpayers and tax preparers, the IRS is providing additional penalty relief to taxpayers who have found that they did not pay enough in federal taxes in 2018 through W-2 withholding, quarterly estimated tax payments or a combination of the two.

Effective immediately, individual taxpayers, trusts and estates that paid at least 80 percent of their total tax liabilities during 2018 will escape penalties when filing their tax returns before the 2019 deadlines. In January, the IRS first lowered the penalty percentage threshold from 90 percent to 85 percent. Individuals who already filed their tax returns for 2018 but qualify for this expanded relief may claim a refund by filing on paper IRS Form 843, Claim for Refund and Request for Abatement, and include the statement “80% Waiver of estimated tax penalty” on Line 7. This form cannot be filed electronically.

Generally, the U.S.’s pay-as-you-go tax system requires taxpayers to pay at least 90 percent of their tax obligations during the year, as they earn income, or risk an underpayment penalty and interest on the unpaid amount. However, many taxpayers who took home larger paychecks in 2018, thanks to the new tax law, are now finding that they owe the government money because the IRS withholding tables did not reflect all of the changes contained in the new law.

To avoid an unexpected tax bill in future years, taxpayers should meet with their advisors and accountants during the first half of 2019 to confirm the accuracy of their estimated tax payments and to check the withholding on their most recent paychecks to ensure they are having enough tax withheld from their wages based on their filing status, number of dependents and other factors.

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.

 

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.

 

2019 Ushers in New Tax Treatment of Alimony by Sandra Perez, CPA/ABV/CFF, CFE

Posted on February 28, 2019 by Sandra Perez

Married couples considering a divorce in 2019 should first meet with their tax advisors and accountants to ensure their settlement negotiations reflect the way in which the new federal tax law treats alimony payments beginning this year.

For more than 75 years, alimony was treated as a tax deduction for the payor and taxable income to the recipient. This changes for all divorce decrees and legal separations executed after Dec. 31, 2018, and for future modifications to spousal maintenance orders that were settled before Jan. 1, 2019.

Under the Tax Cuts and Jobs Act (TCJA), the alimony deduction is eliminated and the tax burden for spousal support shifts from recipients of those payments to the paying spouse, who is typically on a higher tax bracket. As a result, families will pay more money to Uncle Sam and have less to divide amongst themselves.

Couples in the midst of settlement negotiations must address the repeal of the alimony deduction within the framework of the other provisions of the TCJA, including lower tax brackets, increased standard deductions and caps on state and local taxes (SALT). All of these changes will impact the equitable division of marital property.

As the government works to develop guidance for applying the new tax law, couples considering a divorce should recognize that the entirety of the law is subject to modification and even repeal under a new presidential administration or a change in the congressional majority. As a result, it behooves taxpayers to consult with professional advisors to understand the law in its current state and address in divorce settlements any potential changes that may impact former spouses’ future income and tax liabilities.

About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensics practice with Berkowitz Pollack Brant, where she works with attorneys and high-net-worth individuals with complex assets to prepare financial affidavits, value business interests, analyze income and net-worth analysis and calculate alimony and child support obligations in all areas of divorce proceedings. She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email info@bpbcpa.com.

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

 

Reaping Financial Benefits of Residency in Low-Tax States is More Difficult than it Appears by Michael Hirsch, JD, LLM

Posted on February 25, 2019 by Michael Hirsch,

The Tax Cuts and Jobs Act and the new $10,000 cap on the deduction for state and local taxes (SALT) have caused many wealthy families in high-tax states to consider moving to more tax-friendly jurisdictions, such as Florida, where they can avoid the imposition of a state-level personal income tax. However, the rules for establishing tax residency in a new state are complex and rife with many challenges that families must prepare to address in advance of an actual move.

Before uprooting a family and business operations in search of tax savings, taxpayers must understand how their current state of residence determines “domicile” for personal income tax purposes. It is not enough for an individual to have a home or residence in a particular state. In fact, even when taxpayers have multiple homes throughout the world, federal and state governments will recognize only one domicile, or permanent place of residency. Once an individual establishes domicile, that location continues to be his or her tax home until he or she meets several tests for obtaining permanent domicile in a new state and has no intention of returning to the original location in the future.

How states determine domicile depends on a variety of factors, including the number of days a taxpayer spends in the state, where they keep their favorite personal belonging, where their children go to school and their level of involvement and ties to the local community. For example, taxpayers who spend more than 183-days of the year in New York, Connecticut, California or another high tax-state cannot claim domicile in Florida regardless of whether or not they have a home or drivers’ license in the Sunshine State.

Following is a checklist of some of the steps that taxpayers seeking domicile in Florida should take for income tax purposes:

  • Establish a permanent Florida address;
  • Obtain a Florida driver’s license (for you and your family members) and transfer vehicle  registration and insurance to Florida;
  • Register to vote in Florida with the applicable County Supervisor of Elections;
  • Tie health insurance to your Florida address and secure relationships and visits with local doctors, dentists, etc.;
  • Ensure Florida address is included on all estate planning documents, including wills, trusts and powers of attorney;
  • Transfer bank accounts, securities, brokerage accounts and similar investments to institutions located in Florida;
  • If applicable, move valuables from an out-of-state safety deposit box to one located within Florida and in close proximity to your permanent Florida address;
  • Move cherished family possessions, heirlooms and collectibles to the Florida residence you are claiming as your permanent home;
  • Change your mailing address for all magazines, catalogs, credit cards, etc. to Florida home;
  • Become a member of a Florida-based gym, country club, business association, charity, church or synagogue, etc., and let the organizations you belong to in your previous home state know of your change of address to Florida;
  • Maintain a record of your physical presence in Florida, such as a journal or calendar;
  • File a Declaration of Domicile with the county in Florida where you are establishing a permanent home.

While there is nothing stopping individuals from moving across state lines for tax reasons, it is critical that they maintain meticulous records, cross every “t” and dot every “i” to prove to state taxing authorities that they are committing to a permanent relocation that could result in significant lifestyle changes.

 

The advisors and accountants with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice help with individuals and businesses across the globe maintain tax efficiency while complying with often conflicting federal, state and local tax laws.

 

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

 

 

Will You Still Itemize Deductions On Your Tax Returns for 2018? by Joanie B. Stein, CPA

Posted on February 21, 2019 by Joanie Stein

Many U.S. residents and resident aliens accustomed to itemizing the expenses they were once eligible to deduct annually on Schedule A of their federal income tax returns may find it more beneficial to claim the standard deduction on the 2018 tax returns they will file in 2019. Under the new tax law, the standard deduction for single filers and married filing separately nearly doubles from the prior year to $12,000 (or $24,000 for married taxpayers filing jointly) while many of the popular deductions itemizers previously enjoyed have been eliminated or limited beginning in the 2018 tax year. Therefore, it behooves taxpayers to take the time to look at the deductibility of the expenses they previously itemized and consider if they have enough to exceed the standard deduction when filing their taxes this year.

Elimination of Miscellaneous Expenses

Taxpayers no longer have the benefit of many of the miscellaneous itemized deductions that they relied on in the past to reduce their taxable income. Gone are deductions for tax preparation and investment management fees, safe-deposit boxes, unreimbursed employee business expenses, costs for business-related entertainment, travel and association dues.

Limit on State and Local Income, Sales and Property Tax Deductions 
Taxpayers’ deductions for state and local income, sales and property taxes is limited to a total combined $10,000 for the year beginning in 2018. Amounts in excess of that threshold are not deductible. Therefore, a homeowner who pays property taxes of $9,000 in 2018, will be able to deduct no more than $1,000 for any state and local taxes he or she paid during the year.

 Limit on Deduction for Mortgage Loan Interest

Taxpayers who originated new mortgages or home equity lines of credit (HELOC) after Dec. 15, 2017, may only deduct interest on up to $750,000 of that debt and only when the loan is used to buy, build or substantially improve the taxpayer’s primary or secondary home. As a result, taxpayers who take out HELOCs to pay down student loans or credit card debt may not deduct loan interest regardless of the amount they borrow. However, taxpayers whose loans originated on or before Dec. 15, 2017, may continue to deduct interest on loans of up to $1 million.

Limit on Deductions for Casualty Losses

Taxpayers may only deduct the casualty losses they incur due to a federally declared disaster. If the taxpayer’s residence or place of business is not located in an area the president declares as a disaster zone, such as those states and counties affected by 2018’s California wildfires and/or hurricanes Florence and Michael, the taxpayer cannot deduct those losses on their federal income tax returns.

Changes to Deductions for Charitable Contributions

Beginning in 2018, only those taxpayers who itemize their deductions can receive the benefit of a deduction for their contributions of cash or property to qualifying non-profit organizations.

Taxpayers who claim the standard deduction in a tax year cannot also claim deductions for charitable giving, no matter how much they give. However, itemizers who make significant donations to non-profit organizations can deduct more of their giving in 2018, thanks to the new tax law’s increase in the deduction for charitable contributions of cash to 60 percent of the taxpayer’s adjusted gross income.

Increased threshold for Medical and Dental Expense Deductions

For the 2018 tax year, individuals can deduct the portion of their out-of-pocket medical and dental costs, including un-reimbursed insurance premiums, that exceed 7.5 percent of their adjusted gross income (AGI). In 2019, this will increase to 10 percent of AGI.

Suspension of Income-Based Limits on Itemized Deductions

One of the bright spots in the new tax law is the repeal of the Pease limitations, which reduced the total amount of itemized deductions taxpayers could claim based on their adjusted gross income.  As a result, high-income taxpayers will be able to deduct more of their qualifying itemized expenses in 2018 and through 2025, when many of the individual provisions of the new tax law are set to expire.

 

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.

 

You Cannot Deduct Lobbying Expenses Beginning in 2018 by Adam Cohen, CPA

Posted on February 18, 2019

The new tax law in effect on Jan. 1, 2018, repeals the business deduction for lobbying local governments and their officials, including the Indian Tribal Governments.

While businesses are prohibited from deducting lobbying expenses on the federal and state levels, they previously could qualify to deduct the “ordinary and necessary” expenses they incurred to promote their agendas and yield influence over legislative issues on 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: 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.

 

U.S. Beneficiaries of Foreign Trusts May Be In for an Unpleasant Surprise This Year by Arthur Dichter, JD

Posted on February 14, 2019 by Arthur Dichter

The Tax Cuts and Jobs Act (TCJA) has had broad-reaching impact on all taxpayers for 2018 and going forward. This includes U.S. persons who are beneficiaries of foreign non-grantor trusts.

As a result of the TCJA suspending the deduction for miscellaneous itemized deductions, which includes the deduction for investment management fees, trust distributable net income (DNI) is likely to be higher in 2018 than it was in prior years. Therefore, to avoid accumulation of income and later imposition of the onerous “throwback” tax rules, foreign trusts will likely have to make larger distributions (before March 6, 2019) to their U.S. beneficiaries to clear out all 2018 DNI. This will result in more taxable income and higher tax liabilities for the U.S. beneficiaries on their personal income tax returns. Finally, if a trust has insufficient cash available to pay those larger distributions (since it used the cash to pay those non-deductible investment management fees), it may have to sell assets to generate cash, which could result in an unexpected increase in DNI for 2019. This cycle could continue until 2026, when miscellaneous itemized deductions may be reinstated or indefinitely if the miscellaneous itemized deductions are not reinstated.

Let’s take a step back and review how we got here.

Every trust is presumed to be a foreign trust unless it meets both the court test and the control test. A trust meets the first test if a court within the U.S. is able to exercise primary supervision over the administration of the trust. A trust meets the control test if one or more U.S. persons have the authority to control all substantial decisions of the trust with no other person having the power to veto any of the substantial decisions. In other words, if one foreign person has authority to make one substantial decision, the control test is not met, and the trust is a foreign trust.

A foreign trust will be considered a grantor trust if either (i) the trust is revocable and, upon revocation, the assets re-vest in the settlor, or (ii) during the lifetime of the settlor and the settlor’s spouse, the only beneficiaries of the trust are the settlor and/or the settlor’s spouse.

A grantor trust is essentially disregarded for income tax purposes. The grantor or owner of the trust, usually the Settlor or other person making contributions to the trust, will be considered the owner of the trust and that person will continue to be subject to U.S. income tax on the income derived by the trust. A non-grantor trust is a separate taxpayer.

U.S. Income Taxation during a Settlor’s Life

Distributions made from a foreign grantor trust to a U.S. beneficiary during the lifetime of the settlor are typically considered gifts to the beneficiary from the settlor. The U.S. beneficiary has an obligation to file IRS Form 3520 to report receipt of any and all distributions from a foreign trust, even if the amount is just $1. Should the trust make a distribution to the settlor, who then makes a gift to a U.S. beneficiary, the beneficiary must file IRS Form 3520 only when the aggregate value of all such gifts exceeded $100,000 during the year.

While both of these circumstances subject U.S. beneficiaries to reporting obligations, they do not expose beneficiaries to U.S. income tax on the gifts/distributions they receive. On the other hand, when a corporation or partnership owned by a foreign grantor trust or its settlor makes a “gift” to U.S. beneficiaries, the IRS may recharacterize the transfer as a taxable dividend to the U.S. recipient. Furthermore, when gifts came from a foreign corporation or partnership owned by the trust or the settlor in 2018, the reporting threshold for Form 3520 is only $16,076. For this reason, direct transfers from a foreign corporation or partnership to a U.S. beneficiary should be avoided.

U.S. Income Taxation after a Settlor’s Death

A trust that was a grantor trust during the settlor’s life will be considered a foreign non-grantor trust for U.S. income tax purposes upon the settlor’s death. In additional to being reportable on Form 3520, any distributions to a U.S. beneficiary after that point are subject to U.S. income tax to the extent that the foreign non-grantor trust has current or accumulated income.

Distribution of a non-grantor trust’s current DNI to a U.S. beneficiary is taxable to the beneficiary and the character of that income generally flows through from the trust. Therefore, distributions attributable to the trust’s qualified dividend income or long-term capital gain entitles the beneficiaries to a reduced U.S. tax rate of 20 percent plus the 3.6 percent net investment income tax (NIIT). On the other hand, distributable net income that is not distributed in the same year becomes accumulated (undistributed) net income (UNI). Distributions of UNI are subject to a complicated set of “throwback tax” rules which allocate the UNI over the amount of time the trust has been in existence and imposes income tax, plus an interest charge, as if the income had been distributed pro rata over the accumulation period. The tax rate may be as high as 39.6%, plus NIIT and the interest charge may be substantial depending on the length of time that the trust has been in existence.

The trustee of the foreign trust typically provides an annual Foreign Non-Grantor Trust Beneficiary Statement to help beneficiaries understand and apply the appropriate U.S. tax treatment to the distributions they receive from foreign non-grantor trusts.

Impact of TCJA

Trusts are generally treated like individuals for tax purposes. For example, under the TCJA, a foreign trust that files a U.S. income tax return because it has income from a U.S. business, will face a top tax rate of 37 percent, reduced from 39.6 percent, on taxable income in excess of $12,500. At the same time, the TCJA reduces or eliminates many of the deductions to which trusts were previously entitled, including a new $10,000 limit on the deduction for state and local income taxes.

More importantly, the new tax law’s suspension of miscellaneous itemized deductions is likely to have a dramatic impact on the U.S. tax liability of U.S. beneficiaries of foreign trusts. These items, including tax-preparation fees, investment-management fees and unreimbursed business expenses, are no longer deductible for purposes of computing a trust’s DNI for 2018. The good news, however, is that expenses paid in the administration of an estate or a trust and that would not have been incurred if the property were not held in such estate or trust and that were not subject to the 2 percent adjusted gross income (AGI) limitation under prior law and are still fully deductible to the trust. This includes trustee fees and accounting, legal, and tax-return preparation fees to the extent such fees would not have otherwise been incurred by an individual.

In order to avoid the accumulation of income and the application of the throwback tax in future years, many foreign trusts will distribute all their DNI on an annual basis. Since it is difficult to compute a trust’s income for the year prior to the last day of the year, Section 663(b) of the tax code allows a trustee of a foreign trust to annually elect to treat a distribution in one year as though it was made on the last day of the prior year, as long as the distribution is made within the first 65 days of that next year. Thus, a calendar-year trust can make a distribution on or before March 6, 2019, to clear out all of its DNI from 2018 as long as it files its election with the IRS on or before June 15, 2019.

In order to make the 663(b) distribution on or before that 65th day, the trustee may find that they do not have sufficient cash on hand because they used the cash to pay those investment management fees. In that case, they may decide to sell assets which would potentially create additional gain that would be included in DNI for that year and the cycle starts all over again.

If you are a trustee of a foreign trust, you might consider starting the DNI computation process a little earlier this year to make sure that there is sufficient time to generate the cash needed to make the 663(b) distribution. If you are the beneficiary of a foreign trust, you might want to communicate with the trustee to make sure they are aware of these new rules.

The advisors and accountants with Berkowitz Pollack Brant work with settlors, trustees and beneficiaries of foreign trusts to help them understand and comply with U.S. tax and reporting obligations and to compute DNI and UNI.

About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. 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.

Time is Running Out for Consumers to Qualify for a Tesla Tax Credit by Rick D. Bazzani, CPA

Posted on February 12, 2019 by Rick Bazzani

Both GM and Tesla have sold in excess of 200,000 plug-in electric vehicles and have surpassed the limit to be eligible for the full federal tax credit.

If you are still considering the purchase of a Tesla or GM electric, plug-in vehicle, you may want to close the deal sooner than later to qualify for a potential tax credit that expires soon.

Under the Internal Revenue Code, consumers are eligible to receive a tax credit when they purchase or lease passenger cars or light trucks that qualify as plug-in electric-drive motor vehicles. However, by law, those credits begin to phase out when a manufacturer sells 200,000 qualifying vehicles in the United States. Both Tesla and GM surpassed that threshold during the last half of 2018. As a result, the tax credits that consumers may receive when they purchase or lease electric cars manufactured by Tesla or GM will phase out according to the following schedule:

Tesla                                                  GM

$7,500 Tax Credit No Longer Available Vehicles Purchased by March 31, 2019
$3,750 Tax Credit Vehicles Purchased by June 30, 2019 Vehicles Purchased from April 1 to September 30, 2019
$1,875 Tax Credit Vehicles Purchased from July 1 to December 31, 2019 Vehicles Purchased from October 1 to March 31, 2020
No Tax Credit Vehicles purchased after December 31, 2019 Vehicles purchased after March 31, 2020

It is important to note that as of Jan. 1, 2019, Tesla and General Motors are the only manufacturers whose sales of electric cars have reached the threshold limiting the tax credit. Consumers can continue to receive the full value of the plug-in car tax credit when they purchase electric vehicles manufactured by brands that include Audi, BMW, Ford, Honda, Porsche and Toyota, among others.

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 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.

 

 

Get Ready for Taxes by Adam Slavin, CPA

Posted on February 06, 2019 by Adam Slavin

As you wind down your holiday celebrations, it’s important to remember that the federal income tax filing deadlines for 2018 are just around the corner. To avoid the burden and stress of last-minute preparations, consider taking the time now to do some advance planning and get your tax house in order.

Gather Relevant Records

Whether you forgot to save your 2018 tax records or you stuffed them into shoe boxes or file folders throughout the year, now is the time to get all of your documents organized for the April tax-filing deadline. For example, if you contributed cash or other assets to a charitable organization in 2018 and you plan to itemize your deductions for the year, you will need to substantiate those contributions with either a bank record of the canceled check or a written communication from the charity that received your gift.

After the first of the New Year, you will start to receive W-2 wage statements from your employer(s) and/or 1099 statements of nonemployee compensation, royalties and rental income paid to you in 2018. You should also keep an eye out for other tax forms that specify additional income you received during the year in the form of Social Security benefits, interest income, dividends and/or capital gains. Similarly, make it a point to hold on to statements that detail the expenses you paid, including student and mortgage loan interest, state and local sales tax and contributions to retirement accounts, which you may be able to deduct from your taxable income. Because you will need these documents to file your federal and state income tax returns, consider organizing them in a folder and scanning them to save electronically on computers, back-up hard drives and/or flash drives. If you work with an accounting firm that prepares your annual tax returns, ask if it has a secure portal through which you may upload and store those documents temporarily.

The IRS’s online tool that helps taxpayers retrieve transcripts of their previously filed tax returns should be used only as a last resort, since it has been the target of data breaches and email phishing scams.

Know How Long to Hold Records

As a general rule, the IRS recommends taxpayers hold onto their tax returns and supporting documentation for a minimum of three years. However, you should consider keeping those documents for at least seven years, which is the length of time the IRS has to audit a previously filed return that understates income by more than 25 percent. If you failed to file a tax return for any year or if you filed a fraudulent return, there is no statute of limitations, and the IRS can audit you at any time in the future. Therefore, you may consider keeping certain documents, such as those relating to the purchase and sales of real estate and securities, for an even longer period of time.

Know How to Dispose of Documents

Tax records contain your personal information, including your social security number and bank and financial account details, which can get into the wrong hands and result in fraud and/or identify theft. Therefore, it is critical that you shred documents you are disposing of and wipe computer hard drives and any mobile devices on which you store sensitive data.

If you are unsure of what documents you need to meet your tax-filing obligations, how best to retain those documents and for how long, please contact your tax advisors.

 

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

 

 

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.

 

Partnerships Must Take Immediate Action to Review Operating Agreements, Name Partnership Representatives on 2018 Tax Returns by Dustin Grizzle

Posted on February 01, 2019 by Dustin Grizzle

Most of the buzz surrounding the 2018 tax year centered on the overhaul of the U.S. tax code and how individuals and businesses can comply with the provisions of the Tax Cut and Jobs Act (TCJA). Consequently, taxpayers may have forgotten the new centralized partnership audit regime, established by the Bipartisan Budget Act of 2015 (BBA), which went into effect for tax years after Dec. 31, 2017.

The new law shifts the responsibility for correcting a partnership’s tax underpayments away from its individual partners/members to the partnership entity (at the highest individual rate of 37 percent, rather than 29 percent). Moreover, it requires each partnership and LLC treated as a partnership for tax purposes to designate on its 2018 tax returns one person or entity to serve as its partnership representatives (PR) who has the sole authority to act on the partnership’s behalf before the IRS. One challenge faced by many entities has been understanding who or what qualifies as a PR.

In August 2018, the IRS issued the following regulations regarding the designation and authority of a PR under the new federal partnership audit rules:

  • A partnership must designate a partnership representative on its federal partnership income tax returns (Form 1063) for each applicable tax year. The designation must be made prior to the start of any IRS administrative proceedings. If the partnership does not appoint a PR, the IRS may appoint one for the partnership.
  • A PR must have a substantial presence in the U.S., which the law defines as someone who has a U.S. street address, telephone number and taxpayer identification number, and who is able to meet with the IRS at a “reasonable” time and place.
  • A PR may be a person or an entity, including the partnership itself and/or a disregarded entity.
  • A partnership named as a PR must have a substantial presence in the U.S., and it must appoint a designated individual (DI) to act on the entity’s behalf in the partnership’s role as a PR.
  • An individual named as a PR or DI need not be an employee of the partnership.
  • A partnership/LLC and each of its partners/members have the unilateral power to revoke a PR designation, including those made by the IRS, as long as the partnership receives IRS consent to do so.
  • A partnership may change its designated PR through revocation without IRS consent only when it receives notification that its tax return has been selected for IRS examination/audit.
  • Certain small partnerships may qualify to annually elect out of the PR designation requirement when they have 100 or less direct or indirect partners, who are either individuals, C Corporations, foreign entities treated as U.S. C Corporations, S Corporations, or estates of deceased partners. If an entity fails to elect out of the law, it must designate a PR.

With enactment of the partnership audit rules taking effect in 2018, parties to a partnership should meet with experienced advisors and accountants to review their operating agreements and take steps, as needed, to make changes to protect themselves from personal liabilities that may result from any decisions the PR makes on the partnership’s behalf. Under certain circumstances, it may be beneficial to specify in partnership/LLC agreements that any IRS audit decisions require a vote of the partners/members. In addition, meeting with professional advisors can help ensure that all partners/members understand their responsibilities to correct underpayments and remit taxes at the highest individual rate plus penalties and interest in effect during the adjustment year, rather than the audit year, regardless of whether or not they were in fact partners during the audit year.

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.

IRS Waives Penalties for Underpayments of 2018 Federal Tax Liabilities by Jeffrey M. Mutnik, CPA/PFS

Posted on January 30, 2019 by Jeffrey Mutnik

The IRS is providing penalty relief to the millions of taxpayers it says may have fallen short of their total tax liabilities for 2018 due to the revamp of the U.S. tax code under the Tax Cuts and Jobs Act (TCJA).

Thanks, in part, to the efforts of the accounting profession, including of the American Institute of CPAs (AICPA), the IRS recognizes that many individual taxpayers may not have properly adjusted their withholding and estimated tax payments to reflect the provisions of the new law. As a result, taxpayers who paid at least 85 percent of their total tax liabilities for last year through withholding and/or estimated tax payments can avoid underpayment penalties. Typically, a penalty waiver requires taxpayers to have paid 90 percent of their tax liabilities during the tax year.

U.S. taxes are based on a pay-as-you-go system for which individual taxpayers are required by law to pay most of their tax obligations during the year, either by having federal taxes withheld from their paychecks or by making quarterly estimated tax payments directly to the IRS. While the federal tax withholding tables released by the IRS in early 2018 reflected the lower tax rates and higher standard deductions under the TCJA law, they did not consider all of the changes brought about the new law. Despite efforts by the IRS and CPAs to encourage taxpayers to get a paycheck checkup and confirm that they had enough taxes withheld from their paychecks, many taxpayers did not submit revised W-4 withholding forms to their employers or increase their estimated tax payments.

According to the IRS, many taxpayers filing their 2018 will be surprised to learn they owe additional taxes to the federal government. To avoid an unexpected tax bill in future years, taxpayers should meet with their advisors and accountants during the first half of 2019 to confirm the accuracy of their estimated tax payments and to check the withholding on their most recent paychecks to ensure they are having enough tax withheld from their wages based on their filing status, number of dependents and other factors.

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.

 

 

New York Issues Guidance on State Sales Tax Nexus by Michael Hirsch, JD, LLM

Posted on January 28, 2019 by Michael Hirsch,

On Jan. 15, 2019, the New York Department of Taxation and Finance finally issued its response to the Supreme Court’s June 2018 decision in South Dakota v. Wayfair, which expands states’ abilities to impose sale tax reporting and collection responsibilities on out-of-state vendors regardless of whether or not the sellers have a substantial physical presence in their jurisdiction.

The court’s decision in Wayfair represents a significant shift in state sales tax administration, moving from a purely physical presence test to one that considers the number of transactions and sales volume that a vendor makes in a particular state. While most states were quick to enact economic nexus legislation based on South Dakota’s 200 transactions or $100,000 in sales threshold as established in Wayfair, a handful, including New York, took their time.

According to New York’s recent guidance, businesses without a physical presence in the state are required to register as New York sales tax vendors and collect and remit sales tax when they met the following criteria during the immediately preceding four sale quarters:

  • the vendor conducted more than 100 sales of tangible personal property for delivery, and
  • the vendor made more than $300,000 of tangible personal property sales into the state.

New York’s imposition of economic nexus is effective immediately. Businesses that meet the law’s sales threshold tests should register with the state if they have not done so already.

It is important for businesses to recognize that New York’s sales tax economic nexus law differs in many ways from the standard established by Wayfair. For example, New York’s test considers both the number of sales into the state and the dollar value of those transactions. Therefore, an out-of-state vendor that makes a mere 15 sales totaling more than $1 million during the year to customers in the state may not be required to collect and remit state sales tax. Even though sales volume exceeds the $300,000 threshold, the vendor does not meet the number of transactions test.

In addition, although the language of New York’s tax law refers specifically to sales of tangible personal property, businesses that sell services to customers in the state may not be entirely free from state sales tax administration responsibilities. For example, because New York considers software to be taxable tangible property, sales of services that are tied to the use of that software may also be subject to sales tax but the vendor may not be required to register with the states.

Finally, sellers should recognize that New York’s economic nexus test is not based on a calendar year. Rather, sellers must measure their sales during the state’s sales specific tax quarters, which are March 1 through May 31, June 1 through August 31, September 1 through November 30, and December 1 through February 29.

The advisors and accountants with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice help with individuals and businesses across the globe maintain tax efficiency while complying with often conflicting federal, state and local tax laws.

 

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort 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.

How Does the New Tax Law Treat Rental Vacation Property? by Angie Adames, CPA

Posted on January 21, 2019 by Angie Adames

The prospect of having a vacation property that you can use as your own personal retreat for part of the year and lease to others in return for rental income during other times is appealing to many individuals. However, it is important to understand the tax implications of renting your residential property, whether it be a house, an apartment, a room or a boat, to ensure that you maximize the potential benefits without incurring unexpected tax liabilities.

In general, rental income is taxable unless you rent out a residential property 14 days or less during a calendar year. Once you hit the 15-day mark, you must report and pay taxes on any and all payments you receive for renting out the property during the year. However, under U.S. tax laws, you may be able to offset the rental income and reduce your tax liabilities if you qualify to deduct the expenses incurred for renting the property, including advertising, cleaning and maintenance, mortgage interest, property insurance and taxes. Your eligibility to take those deductions depends on the amount of time you spend renting the property as a business as compared to the amount of time you spend enjoying the property for personal use.

Personal-Use Residence vs. Rental-Use Business Property

The IRS classifies vacation homes as either personal residences used by you or your family members or rental business property.

A property is considered a personal residence when:

  • You rent out the property to others for more than 14 days during the year; and
  • You enjoy the property for personal use during a period of time that exceeds 14 days or 10 percent of the days you rent out the home at fair market price.

Conversely, the IRS will consider a vacation home to be rental income property for which you may be able to claim tax deductions for eligible business expenses when:

  • You rent out the property to others for more than 14 days during the year; and
  • You enjoy the property for personal use during a period of time that does NOT exceed the greater of 14 days of the year, or 10 percent of the days you rent out the home at fair market process.

When calculating the number of days your home is used for personal vs. rental use, you must disregard any days in which the property was vacant or was undergoing maintenance and repairs. In addition, careful attention should be paid to the days in which you rent the property for less than the fair market rate, perhaps to a family owner or friend, which the IRS considers to be personal use.

Tax Treatment of Multi-Use Vacation Property

When a vacation home qualifies as rental property, you must allocate property taxes, costs for repairs and improvements and other potentially deductible business expenses between the actual days you rent out the property and the days you use it for personal enjoyment. As a rule, you may only deduct amounts that are proportional to the actual number of days you rent the property to non-family members. In addition, when you operate a property as a rental business, you may qualify to deduct up to $25,000 in losses per year from the rental income you earn. While you may not deduct rental expense in excess of the gross rental income limitation ( less the rental portion of mortgage interest, real estate taxes, and casualty losses, and rental expenses like realtors’ fees and advertising costs), you may be able to carry forward some of these rental expenses to the next year.

Due to the new tax law’s significant increase in the standard deduction, fewer taxpayers will take the time and effort to itemize many of the deductions they previously relied on to reduce their taxable income in prior years. Moreover, the tax law places significant restrictions on deductions for mortgage interest and property taxes, thereby limiting the potential tax savings that rental property owners can yield. For example, the mortgage interest apportioned to the personal use of a rental property may not be considered as an itemized deduction if the taxpayers did not use the property for more than 14 days.

Other Rules, Limitations and Exceptions to the Rules

Vacation homes classified as rental property may generate deductible losses for taxpayers whose rental expenses exceed their rental income. However, under the passive activity loss (PAL) rules, taxpayers may deduct losses from passive activities, including renting real estate, only from income that they generate from similarly passive activities. You may not, for example, deduct the losses from passive rental activities from the income you earn as wages from your full-time job. Any losses that do not qualify for a deduction under the PAL rules in the current year may be carried over into future years to be deducted when you have additional passive income or when you sell the rental property that created the passive losses.

There is an exception to the PAL rules that allows “certain” taxpayers who actively participate in rental activities and have adjusted gross income (AGI) of less than $100,000 to potentially deduct up to $25,000 of annual passive rental real estate losses from current year income. In addition, depending on the number of hours you spend materially participating in the delivery of real estate services, you may qualify as a real estate professional which means, the rule treating rental activities as automatically passive would no longer apply.

On a final note, if your property is located near the site of a major, multi-day event that attracts out-of-state visitors, such as the Miami International Boat Show, Art Basel or the South Beach Food and Wine Festival, you may be able to generate tax-free rental income as long as you do not rent out your property for 15 days or more during the year. This is especially beneficial in today’s economy, for which homeowners can quickly and easily market their properties, often, at unusually high short-term rates via services such as Airbnb and VRBO. In these circumstances, however, the property owner will not qualify as a business operator and will not be able to deduct any portion of expenses for repairs, maintenance, cleaning or rental agency fees.

Before handing over the keys to your vacation home, seek the guidance of professional accountants and advisors to help you navigate the complexity of the tax laws and maximize your earnings without increasing your tax liabilities.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

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

 

 

 

How Businesses Must Treat Certain Employee Fringe Benefits by Dustin Grizzle

Posted on January 18, 2019 by Dustin Grizzle

Companies must be prepared for how the new tax law affects their bottom lines and the tax liabilities of their businesses and their employees. For example, tax reform changed the treatment of many of the benefits that businesses extend to their workers. As a result, businesses should evaluate whether or not the value of providing these fringe benefits to employees outweigh the costs they incur for doing so, especially when it could result in the loss of a tax deduction and/or the addition of a new tax liability.

Meals and Entertainment

While the new tax law eliminated the availability of deductions for entertaining clients and employees, businesses can continue to deduct 50 percent of the costs they incur for meals they enjoy with current or potential clients, consultants or other business contacts at entertainment events, as long as those meals are not lavish, and they are considered ordinary and necessary for the active conduct of the taxpayer’s trade or business. Doing so requires businesses to retain receipts demonstrating that the food costs were separate from and independent of any amounts they paid for “entertainment,” such as tickets to a sporting event.

Reimbursements for Employees’ Qualified Moving Expenses

Under prior law, payments businesses made to reimburse their employees for qualified moving expenses were provided to those workers tax-free. With the new tax laws, however, businesses must generally treat those payments as employee wages subject to federal income and employment taxes unless they qualify for one of the following exceptions:

  • The employee is an active duty member of the U.S. Armed Forces whose move is a result of a military order and he or she would have qualified to treat moving expenses as a tax deduction had he or she not received reimbursements from his or her employer;
  • The reimbursement paid in 2018 is for costs related to a move that an employee made in 2017 or prior years; and
  • The employer paid a moving company directly in 2018 for qualified moving services provided to an employee before 2018.

These are the only situations in which workers may exclude from their taxable income the amounts they received as employer reimbursements of moving expenses beginning in tax year 2018. In addition, employees must not have deducted those expenses on the tax returns they filed for 2017. If an employer mistakenly treated reimbursed moving expenses covered by these exceptions as taxable employee income in 2018, it must take steps to correct those employee’ taxable wages and employment taxes.

Reimbursements for Employees’ Bicycle Commuting

While businesses may continue to deduct as business expense the amounts they reimburse workers for qualified bicycle commuting, they must now include all of those amounts as taxable wages to employees for tax years 2018 through 2025. In other words, employees will no longer receive the same tax-free benefits for commuting to work on bicycle as they did in prior years.

Deductions for Qualified Commuter Transportation

Beginning in 2018, businesses and non-profit organizations may no longer deduct the expenses they incur for providing workers with transportation fringe benefits, including employee parking and the costs associated with transporting workers for commuting purposes. The one exception to this rule applies to transportation that is necessary for employee safety, such as a car service to take the employee home after a late night meeting or event.

Employee Awards

Businesses may claim deductions for plaques, watches and other awards of tangible personal property that they award to employees, subject to annual deduction limits; awards of cash, gift certificates, vacations or event tickets are not deductible business expenses. Similarly, employees may exclude from their taxable income the value of awards that are considered tangible personal property.

 

The new tax law made a number of changes to how employers and employees may treat certain work-related benefits in 2018 through 2025. Businesses should meet with experienced advisors and accountants to navigate the new law and implement smart strategies that may help them use fringe benefits to attract and retain workers without incurring additional costs.

 

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.

 

How do Flexible Health Care Spending Arrangements Work in 2019? by Adam Cohen, CPA

Posted on January 17, 2019 by Adam Cohen

Eligible employees who enrolled to participate in their employers’ health care flexible spending arrangements (FSAs) for 2019 will be able to contribute and use up to a maximum of $2,700 tax-free dollars to pay for certain medical expenses not covered by their health insurance plans this year. That’s a $50 increase from the 2018 FSA contribution limits.

FSA contributions are typically made via payroll deductions and are not subject to federal income tax, Social Security tax or Medicare tax. Throughout the year, employees can use these funds to pay for qualified medical expenses, including certain prescription and over-the-counter medications, co-pays for doctor visits and out-of-pocket costs that go toward their health insurance deductibles. In addition, participants may use FSA money to pay for a broad range of medical, dental and vision products and services, including eyeglasses, hearing aids, first-aid kits, weight-loss and smoking-cessation programs and even child care, some of which may not be covered by workers’ health insurance plans.

FSAs generally operate under the principle of use-it-or-lose-it, meaning that workers risk losing any amounts of money they failed to use by the end of the last day of the calendar year. However, many employers choose to offer their employees the flexibility of either carrying over up to $500 of unused funds into the following year or granting employees a grace period of up to two-and-a-half months into the following year (until March 15) to spend FSA savings left over from the prior year. By law, employers may offer one or none of these options, but not both. Therefore, it is critical for workers to check with their employers to determine if either of these options are available to them and act accordingly. Every year, more than $400 million of earned money is forfeited because employees either miss or forget the FSA spending deadline.

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.

 

Florida Reduces State Sales Tax on Commercial Real Estate Leases for 2019 by Karen A. Lake, CPA

Posted on January 15, 2019 by Karen Lake

Effective Jan. 1, 2019, Florida’s sales tax rate on the total rent that commercial real estate owners charge and receive from tenants is 5.7 percent, a decrease from 5.8 percent in 2018, and 6.0 percent in 2017.  Real property rentals subject to the reduced rate include commercial office space, retail, warehouses and certain self-storage units, excluding storage for motor vehicles, boats and aircraft.

It is important for commercial real estate owners to recognize that the applicable sales tax rate is based on the timing of when the tenant occupies or has a right to occupy the property and not the month or year in which the tenant pays the rent. Therefore, the 5.7 percent tax rate applies only to rental charges a tenant pays for occupancy on or after Jan. 1, 2019.  Should a tenant pay rent after Jan. 1, 2019, for a rental period prior to the New Year, the applicable sales tax rate would be 5.8 percent plus any applicable discretionary sales surtax. Similarly, rent a tenant paid in December 2018 for occupancy in 2019 would be subject to the new, reduced rate of 5.7 percent.

Real property leases are taxed on base rent as well as other payments tenants must make as a condition of their occupancy. This includes common-area maintenance fees, property taxes and utilities that a lease agreement specifies are the responsibility of the tenants.  In addition, it is the responsibility of the property owner to collect from tenants any County imposed local-option sales surtax on the total rent charged. Depending on the County where the property is located, landlords may be subject to higher surtaxes in 2019 as detailed in the graph below:

Property owners who send invoices to tenants for rental periods after Jan 1, 2019, must account for both the 0.1 percent reduction in state tax rates state tax rate as well as any changes in local option tax rates for 2019.

The advisors and accountants with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice work with individuals and businesses to understand and comply with tax policy and sales tax compliance.

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.

 

Business Identity Theft and W-2 Scams are on the Rise by Joseph L. Saka, CPA/PFS

Posted on January 14, 2019 by Joseph Saka

With the start of the 2019 tax season, businesses must educate employees, implement controls and take other steps to avoid falling victim to a growing wave of identity theft and W-2 scams.

Identity thieves have been targeting small businesses at an alarming rate. Not only are criminals stealing business data to open credit card accounts and file fraudulent tax returns looking for bogus refunds, but they are also gaining access to employees’ personal information found on W-2 forms. Too often, businesses are tricked into willingly handing over this sensitive information to cybercriminals simply because their employees fail to pick up the phone to confirm the identities of email senders who request such data.

In a typical W-2 scam, an employee will receive an email that appears to come from an executive or another leader in the organization. It may start with a simple, “Hey, you in today?” and, by the end of the exchange, all of an organization’s Forms W-2 for their employees may be in the hands of cybercriminals. This puts workers at risk for tax-related identity theft.

Because employees perceive that they are communicating with a company executive, it may take weeks for someone to realize a data theft has occurred. Generally, the criminals are trying to quickly take advantage of their theft, sometimes filing fraudulent tax returns within a day or two.

In order to avoid falling victim to these traps, employers must put steps and protocols in place for the sharing of sensitive employee information such as Forms W-2. For example, a business may require employees to receive verbal confirmation before emailing W-2 data and/or have two people within the organizations review any distribution of sensitive W-2 data or wire transfers. In addition, it is the responsibility of businesses to educate their workers about the telltale signs of phishing emails and how employees can protect themselves and the organization from cyber fraud.

The advisors and accountants with Berkowitz Pollack Brant work businesses to assess their cyber-security risks and implement strong internal controls to build trust and protect themselves against identity theft.

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.

 

IRS Sets Inflation Adjustments for 2019 by Tony Gutierrez, CPA

Posted on January 10, 2019 by Anthony Gutierrez

The IRS announced the annual inflation adjustments to various provisions of the tax code for 2019. You should consider each of these changes very carefully as you plan for tax efficiency this year and when you prepare your 2019 tax returns in 2020.

Tax Rates

The top tax rate of 37 percent applies to individual taxpayers whose income exceeds $510,300 in 2019, or $612,350 for married taxpayers filing joint returns. The other six tax rates break down as follows:

  • 35 percent for income over $204,100 ($408,200 for married couples filing jointly);
  • 32 percent for income over $160,725 ($321,450 for married couples filing jointly);
  • 24 percent for income over $84,200 ($168,400 for married couples filing jointly);
  • 22 percent for income over $39,475 ($78,950 for married couples filing jointly);
  • 12 percent for income over $9,700 ($19,400 for married couples filing jointly);
  • 10 percent for income of $9,700 or less ($19,400 for married couples filing jointly).

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax exemption amount for tax year 2019 increases to $71,700 for individuals and begins to phase out when taxpayer income reaches $510,300. For married couples filing joint returns, the AMT exemption rises to $111,700 and begins to phase when income reaches $1,020,600.

Deductions

The standard deduction available to all taxpayers increases slightly from the prior year to $12,200 for individuals and for those married filing separately, and $24,400 for married couples filing jointly. Taxpayers whose expenses exceed these amounts may opt instead to itemize their deductions for the year without being subject to income limitations which the Tax Cuts and Jobs Act (TCJA) eliminated in 2018. However, taxpayers should be mindful that the new tax law repeals and restricts many of the miscellaneous itemized deductions they may have enjoyed prior to 2018.

Estate and Gift Tax Exemptions

The maximum amount excludible from the taxable estate of a decedent in 2019 is $11.4 million in assets, up from $11.18 million for 2018. The maximum amount an individual may gift (other than gifts of future interests in property) to other persons in 2019 without incurring gift tax remains at $15,000. Married spouses, however, can continue to make an unlimited number of tax-free gifts to each other as long as both are U.S. citizens.

 Retirement Plan Contributions

For 2019, individual taxpayers may contribute up to $19,000 in annual salary deferrals to an employer-sponsored 401(k), 403(b) and most 457 plans, up from $18,500 in 2018. Catch-up contributions for retirement savers age 50 and older remains at $6,000.

The contribution limit to IRAs and Roth IRAs increases $500 from the prior year to $6,000, plus an additional $1,000 for savers age 50 and older. However, the IRS will increase the income eligibility thresholds for taxpayers to contribute to traditional IRAs and Roth IRAs.

Foreign Earned Income Exclusion

The foreign earned income exclusion for 2019 is $105,900, up from $103,900 for the prior tax year.

Health Care

Taxpayers may for the first time go without health insurance during any and all months of 2019 without being subject to an individual shared responsibility penalty.

The dollar amount that employees may contribute to health flexible savings accounts via salary deferrals rises $50 in 2019 to $2,700. In addition, Medical Savings Account plans with self-only coverage in 2019 must have an annual deductible that is not less than $2,350, but not more than $3,500. The maximum out-of-pocket expenses for self-only coverage increases to $4,650, or $8,550 for family coverage.

To learn more about how you may leverage these inflation adjustments and implement planning strategies to maximize savings while minimizing your tax liabilities in 2019, please contact the advisors and accountants with Berkowitz Pollack Brant.

About the Author: Tony Gutierrez, CPA, is a director of Tax Services with Berkowitz Pollack Brant, where he focuses on income and estate tax 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.

 

Do I Qualify for a Child Tax Credit? by Nancy M. Valdes, CPA

Posted on January 08, 2019 by

Raising children is expensive. To help families offset some of their child-rearing costs, the U.S. tax code offers a tax credit for each child under the age of 17 who lives with a taxpaying parent or guardian for more than half of the year. Effective Jan. 1, 2018, more families qualify for the Child Tax Credit, which the new tax law doubled and made partially refundable.

The Tax Cuts and Jobs Act (TCJA) increased the Child Tax Credit in 2018 and 2019 to $2,000 per qualifying child who meets the following criteria:

  • He or she is a U.S. citizen or U.S. resident alien and 16 years old or younger on the last day of the tax year;
  • He or she is claimed as a dependent of the taxpayer’s federal income tax return and does not pay for more than half of his or her living expenses; and
  • He or she lived with the taxpayer for more than half of the tax year and is either the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of those family members.

Unlike a tax deduction that reduces the amount of income subject to tax, a tax credit provides taxpayers with a dollar-for-dollar reduction in the amount of money they owe to the IRS. In addition, because the Child Tax Credit is partially refundable, taxpayers who do not have tax liabilities after filing their federal income tax returns in April 2019 may receive a credit of up to $1,400 for each eligible child, depending on the taxpayers’ adjusted gross income (AGI) for the year. The refundable portion of the Child Tax Credit remains at $1,400 for tax-year 2019 and is set to be adjusted upward for inflation in subsequent years.

The TCJA also makes it easier for more families with young children to qualify for the full amount of the Child Tax Credit by lowering the income threshold to $2,500 per family while also increasing the income level at which the credit begins to phase out. For 2018, the Child Tax Credit begins to phase out when a taxpayer’s adjusted gross income (AGI) reaches $200,000, or $400,000 for married couples filing jointly. The credit completely disappears when a taxpayer’s income reaches $240,000, or $440,000 for married couples filing jointly.

Taxpayers who do not qualify to claim Child Tax Credits may be eligible to claim a new, $500 nonrefundable Credit for Other Dependents. Introduced by the TCJA, this family credit is available to taxpayers who provide support to a dependent over the age of 17, including aging parents or disabled adult family members.

 

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.

 

Voluntary Disclosure of Previously Unreported Offshore Assets Just Got More Expensive by Andrew Leonard, CPA

Posted on January 04, 2019 by Andrew Leonard

Sept. 28, 2018, marked the end of the IRS’s Voluntary Offshore Disclosure Program (OVDP), which provided reticent taxpayers with protection from criminal prosecution and an opportunity to pay reduced penalties when they came forward to report and pay taxes on unreported foreign income and assets. As a result, the IRS has put into place new, more expensive processes and procedures for taxpayers to come clean with the caveat that amnesty from criminal investigations and civil penalties will now be assessed by the IRS on a case-by-case basis.

Background

U.S. tax law requires U.S. citizens, resident aliens, trusts, estates and domestic entities to annually report to the IRS information about any and all foreign bank and financial accounts (FBAR) with an aggregate value of more than $10,000 in which they have an ownership interest.

Taxpayers who unwillingly forget to file an FBAR by the April 15 federal income tax filing deadline have an opportunity to correct the mistake by filing amended or delinquent tax returns or availing themselves of the IRS’s Streamlined Compliance Filing Procedures. Conversely, those taxpayers who willingly fail to file an FBAR will be exposed to criminal prosecutions and significant penalties of up to $100,000 or half of the highest account balance during the unreported year.

Current Options for Voluntary Disclosure

Despite the elimination of the OVDP, taxpayers still have an opportunity to voluntarily disclose those assets that they willingly failed to report avoid criminal prosecution and potentially minimize fraud and FBAR penalties.

Under the IRS’s new framework, taxpayers wishing to make a voluntary disclosure must first submit a timely pre-clearance request to the agency’s criminal investigation unit (CI), which, in turn, will determine if the taxpayer is eligible for the program. If CI grants clearance, taxpayers must submit all required voluntary disclosure documents and a narrative describing the facts and circumstances of their previous noncompliance, including details about assets, entities and related parties involved in the failure to report.

CI examiners will then gather information and build a case to determine the appropriate tax liabilities and applicable penalties, much in the same way that the IRS will audit taxpayers’ prior year returns. It is important for taxpayers to recognize that this new investigation and resolution framework involves many

  • The IRS has the discretion to expand the scope of their investigation to taxpayer’s domestic assets and income.
  • The disclosure period will now require examinations of the taxpayer’s returns for the most recent six years
  • Fraud and FBAR penalties, which are now referred to as civil fraud penalties, will be applied to the one tax year over the six-year disclosure period in which the taxpayer would have incurred the highest tax liability. However, based on the facts and circumstances of each individual case, examiners have the ability to apply these penalties to each of the six years, or more when taxpayers do not cooperate with investigations.
  • Taxpayers retain the right to appeal the IRS’s findings after an examination, but they also carry the burden of proof to present convincing evidence to justify an appeal.

While there is little doubt that the new framework for voluntary disclosure will result in higher penalties, taxpayers should discuss this option with their tax advisors in order to avoid criminal prosecution and related penalties.

About the Author: Andrew Leonard, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. 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.

Reconstructing Records Following a Disaster Event by Adam Cohen, CPA

Posted on January 03, 2019 by Adam Cohen

Taxpayers affected by disasters, such as fires, floods or hurricanes, may need to reconstruct their records to prove they suffered losses for tax purposes and to qualify for federal assistance and insurance reimbursement. Following are some resources to help individual obtain copies of documentation that they may have lost as a result of a disaster event.

Proof of Loss. Losses sustained in certain disaster situations may qualify for insurance reimbursement when an active policy is in place. Alternatively, taxpayers may qualify to deduct unreimbursed losses on their federal income tax returns. As soon as possible after a disaster strikes, taxpayers should take photographs and narrate a video recording the extent of the damages to their property.

In an ideal world, individuals will already have a cloud or digital back-up of receipts as well as a photographic and video inventory of all of the assets they own, from highly valued jewelry to common household appliances. Such digital documentation is critical for proving ownership and demonstrating the fair market value of property at the time of the loss. If taxpayers did not keep these records in a safe place, they may be able to find photographic evidence of the assets on their phones. Purchases taxpayers made by credit or debit card may be available online or by contacting their financial institutions directly.

Property Records. Taxpayers must demonstrate that they own property and provide some evidence of the property’s value before it sustained damage. When a loss involves a car, taxpayers can obtain the auto’s fair market value by going online and looking it up on Edmunds or Kelly’s Blue Book.

For real estate, taxpayers may contact the title company, escrow company or bank that handled the purchase of their home to get copies of appropriate documents. If the taxpayer received the property as a part of an inheritance, he or she can check court records for probate values or contact the attorney who handled the decedent’s estate. When no other records are available, taxpayers can check the county assessor’s office to find records that address the property’s value.

If taxpayers made improvements to their homes, which in turn improved the property’s value, they may contact the contractors they worked with in order to obtain statements verifying the cost of the work. As a last resort, taxpayers can request that their friends and relatives provide written statements describing the home before and after the improvements were made.

Prior Year Tax Returns

It is recommended that taxpayers hold onto their tax returns for a minimum of seven years since the IRS can go back six years to audit a return in which the agency presumes a taxpayer omitted income. However, there is no statute of limitations when the IRS proves that a taxpayer filed a fraudulent return.

While individuals can often receive copies of their most recently filed returns by contacting their tax accountants, a better option may be to visit the IRS website or call the agency at 800-908-9946 to can get free copies of their tax return transcripts.

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.

 

To Give Or Not to Give Is No Longer A Taxing Issue by Jeffrey M. Mutnik, CPA/PFS

Posted on December 27, 2018 by Jeffrey Mutnik

One of the welcome provisions contained in the Tax Cut and Jobs Act (TCJA) is a doubling of the estate, gift and generation-skipping transfer tax exemptions for the years 2018 through 2025. Nevertheless, on Jan. 1, 2026, the law calls for those amounts to roll back to their inflation-adjusted 2017 levels. Due to the temporary nature of this provision, many high-net worth families have been left to wonder whether the government will penalize them later for making gifts during the brief period of higher exemption limits. This is no longer an issue, thanks to proposed regulations recently issued by the IRS and U.S. Treasury.

Under U.S. tax law, transfers of assets between U.S. spouses are generally tax-free. However, U.S. citizens and residents who make transfers to all other people via gift or bequest must account for the potential tax liabilities of each of those transactions. If the total of all gifts one person makes to another person in 2018 does not qualify for or exceeds the annual gift-tax exclusion of $15,000, then the excess amount will be absorbed by the grantor’s lifetime exclusion, which the TCJA increased to $11.18 million in 2018, up from $5.49 million in 2017. This higher lifetime exclusion will be adjusted annually for inflation beginning in 2019, when it will be $11.40 million, and through tax year 2025.

Because the TCJA increased the exemption for only eight years and failed to provide immediate guidance about what the sudden reduction in the exemption level would mean for taxpayers after 2025, many families put their estate planning on hold for most of 2018. With the recently issued Proposed Regulations, the government makes it clear that it desires to respect transactions that occur during this eight-year period using the heightened exemption and will not penalize taxpayers who take advantage of this. Therefore, even if your total assets do not rise to the level of being taxed today, the hope of winning the lottery is alive and well and could certainly change your fortunes tomorrow.

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.

 

Protect Yourself and Your Business from the Rising Threat of Cyber Fraud by Anya Stasenko, CPA

Posted on December 21, 2018 by Anya Stasenko

As you ring in a New Year and prepare for the April tax filing deadline, it is critical you recognize that this season brings with it a heightened risk of identity theft and cyber fraud for which you must take necessary precautions to protect yourself, your businesses and your clients. Criminals are continuously coming up with new and more sophisticated methods to trick unsuspecting taxpayers into willingly handing over their money and/or personal information to scammers. The good news is that you can take steps to detect and prevent these scams throughout the year.

Common Scams 

Criminals are known to pose as government agencies or other trusted sources, including financial institutions, payroll services companies, accounting software providers and even taxpayer’s own employees and friends, in an attempt to get victims to pay a fictitious bill or release sensitive information. Not only do fraudsters make these communications look official and sound like they are from a legitimate source, they even go so far as to create imitation websites that are extremely difficult for victims to differentiate from the real ones.

In one common scheme, criminals pose as the IRS and either email, telephone or text taxpayers to demand payment of a phony tax liability. If taxpayers do not comply, the scammers become aggressive and threaten victims with arrest and even deportation. Similar frauds alert victims that one of their passwords are expiring or one of their accounts need to be updated. The criminal’s goal is to entice users to click on a link to a fake website that steals usernames and passwords or to open an attachment that downloads malware or tracks keystrokes on victims’ computers.

In addition, there are a number of scams in which criminals may impersonate your business’s actual employees, including payroll and human resource executives, or vendors who you know and work with on a regular basis. These phishing attempts, which appear to be legitimate, involve requests for lists of employees’ names, social security numbers and bank information and/or instructions for changing the pay to account of an employee or vendor. Unless you actually verify through telephone or face-to-face contact that the email is in fact from the purported sender, you may unwittingly send payment to an actual criminal and essential say goodbye to those dollars.

Protect Yourself and Your Business

 Identity theft and cyber fraud are very real problems that endanger individuals and businesses and their financial information. According to the IRS, there was a 60 percent increase in tax-related bogus email schemes alone in 2018.

Here are a few steps to take to protect against phishing and cyber fraud schemes in 2019:

 

  • Be vigilant; be skeptical. Never open a link or attachment from an unknown or suspicious source. Even if the email appears to come from someone you know, proceed with caution. Cyber crooks are adept at mimicking trusted businesses, friends and family — including the IRS. Thieves may have compromised a friend’s email address, or they may be spoofing the address with a slight change in text, such as name@example.com vs. narne@example.com. You can easily be tricked by the mere change of the letter “m” to “r” and “n”.

 

  • Phishing schemes thrive on people opening messages and clicking on hyperlinks. When in doubt, don’t use hyperlinks and go directly to the source’s main web page. Remember, rarely will a legitimate business or organization ask for sensitive financial information via email.

 

  • If you receive an unsolicited email requesting you to share change sensitive data or make changes to bank account information, pick up the telephone, dial the number that you have for the purported sender (do not simply call the phone number listed in the email) and confirm that the request is legitimate before you take any action.

 

  • Remember that the IRS does not initiate spontaneous contact with taxpayers by phone or email to request personal or financial information. In addition, IRS will not call taxpayers with aggressive threats of lawsuits or arrests.

 

  • Use security software to protect against malware and viruses found in phishing emails. Some security software can help identify suspicious websites used by criminals.

 

  • Use strong and unique passwords to protect each of your online accounts. If necessary, use a password manager to help you remember your login credentials for each account. Criminals count on the fact that most people use the same password repeatedly, giving crooks access to multiple accounts if they steal a password. Experts recommend using a passphrase, instead of a password, with a minimum of 10 digits, including letters, numbers and special characters. Longer is better.

 

  • Use multi-factor authentication when offered. Two-factor authentication means that in addition to entering your username and password, you must also enter a security code, often sent to you as a text to your mobile phone. Even if thieves manage to steal your usernames and passwords, it is unlikely they will also have your phone.

 

  • Engage audit professionals to conduct check-ups of your organization’s internal controls. The effectiveness of your business’s efforts to protect sensitive data is dependent on the policies and procedures you have in place.

 

About the Author: Anya Stasenko, CPA, is a senior manager with the Audit and Attest Services practice of Berkowitz Pollack Brandt, where she provides business consulting services, audits of financial statements and agreed upon procedures as well as pre-immigration tax planning for foreign persons and owners of foreign and domestic 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.

 

IRS Increases Retirement Plan Contribution Limits for 2019 by Jack Winter, CPA/PFS, CFP

Posted on December 19, 2018 by Jack Winter

Taxpayers can save more in 2019 for their future retirement thanks to new contribution limits announced by the IRS.

Workers who participate in their employers’ 401(k) or 403(b) retirement savings plans can contribute a maximum of $19,000 to those plans via salary deferral in 2019, up from $18,500 in 2018. Workers age 50 or older can contribute an additional $6,000 per year.

For qualifying taxpayers with Individual Retirement Accounts (IRAs), the IRS increased for the first time since 2013 the annual contribution limit from $5,500 to $6,000 in 2019, or up to $7,000 when taxpayers are age 50 and older. In addition, the IRS increased the income ranges for determining taxpayers’ eligibility to make deductible contributions to IRAs and/or to contribute to a Roth IRA.

Contributions to IRAs are deductible when the taxpayer or his or her spouse is covered by a retirement savings plan at work. Depending on the taxpayer’s filing status and income, the amount of the deduction may be reduced or phased out completely based on the following:

  • The phase-our range for single taxpayers covered by a workplace retirement plan is $64,000 to $74,000, up from $63,000 to $73,000.
  • For married couples filing jointly in which the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
  • When the spouse making the contribution is not covered by a workplace retirement plan, the deduction phases out when the couple’s income is between $193,000 and $203,000.
  • The income phase-out range for single and heads of household taxpayers making contributions to Roth IRAs is $122,000 to $137,000, or $193,000 to $203,000 for married taxpayers filing jointly.

About the Author: Jack Winter, CPA/PFS, CFP, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he provides estate planning, tax structuring and business advisory services to individuals, families and business owners. 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.

 

Revisiting C Corporations after Tax Reform and Potential Tax-Free Sales of Corporate Stock by Barry M. Brant, CPA

Posted on December 17, 2018 by Barry Brant

The permanent reduction of the corporate income tax rate from a maximum of 35 percent to a flat 21 percent has led many businesses to reevaluate their current tax positions and reconsider their entity choice. The decision to convert from a pass-through entity to a C corporation, however, should not be based solely on how the IRS will tax business earnings in the short-term. Instead, business owners should consider a broader range of short- and long-term factors unique to their specific circumstances, including, but not limited to, their stage of development, the industry in which they operate, the makeup of their investors, their plans for distributing earnings, and their exit strategies.

Over the last few decades, pass-through structures have been the entity of choice for most closely-held domestic businesses. Owners of S corporations, LLCs and partnerships, could avoid both the U.S.’s corporate tax rate, which was among the highest in the world, and the imposition of a second level of tax on dividends distributed to their owners or the sale of corporate stock. On the contrary, owners of these businesses pay taxes just once, at their individual income tax rates, on their share of the entities’ profits. With tax reform and the reduced corporate tax rate changes, C corporations are now a more attractive structure for tax purposes. This is especially true when entities meet the requirements for issuing qualified small business stock (QSBS) and there is a likelihood of selling those shares as part of an exit strategy five years or more down the road.

Under Section 1202 of the tax code, individuals who acquired stock after Sept. 27, 2010, in a qualifying small business structured as a C corporation may exclude up to 100 percent of the gain they incur from selling those shares after Dec. 31, 2017. The amount of the gain eligible for exclusion can be as much as the greater of $10 million or 10 times the shareholder’s basis in the stock, which could translate to hundreds of millions of dollars in tax savings for qualifying C corporation shareholders. In other words, business owners and investors can realize a 0 percent tax rate on the profits they reap from selling stock in qualified small business corporations, provided they meet a long list of requirements. For example, they must have acquired the stock directly from the issuing entity or by gift or inheritance and held onto it for a minimum of five years before the sale. Special care should be taken to document any tangible or intangible property shareholders contribute to the corporation in exchange for the QSBS.

Electing to be a C corporation that issues QSBS is especially beneficial to start-up businesses that seek to raise as much capital as possible, in as many rounds as needed, from private investors and/or the public equity markets. Unlike S corporations that are limited to a maximum of 100 shareholders, C corporations can issue stock to an unlimited number of investors, including private equity funds.

On the downside, C corporations will continue to pass a second level of tax at a rate of 23.8 percent onto their shareholders when they pay dividends to them. However, the slashing of the corporate rate to 21 percent lessens this blow as does a business’s ability to control the timing of the dividend distributions and related tax liabilities they pass on to their owners.

In general, businesses in start-up and early stages are more likely to retain and reinvest earnings, building up ample working capital to finance their operations and continuous growth, rather than distributing profits to shareholders. In fact, owners of C corporations may limit their tax burden to only 21 percent of corporate earnings and avoid additional tax exposure for many years as long as they plan carefully and refrain from paying out dividends or becoming subject to an accumulated earnings tax. Conversely, owners of S corporations will pay taxes on all of their businesses’ earnings at a rate as high as 37 percent as well as a potential 3.8 percent Net Investment Income Tax (NIIT) regardless of whether or not they receive dividend distributions. The only saving grace for these pass-through entities, if they qualify based on such factors as their lines of business, their income, the wages they pay to employees and the cost of their fixed assets, is a new deduction of up to 20 percent on certain items of business income. Yet, even with the full benefit of this qualified business income (QBI) deduction, S corporation owners will still be subject to a top effective income tax rate of 29.6 percent plus potential Net Investment Income Tax of 3.8%, as opposed to C corporations which can limit their tax liabilities to a flat 21 percent rate, plus state income taxes, if any.

In order for shareholders to be issued QSBS, entities must have gross assets of less than $50 million on the date they issue stock to investors and immediately thereafter, taking into account the amount they raised through the stock issuance. In addition, they must use at least 80 percent of their assets to actively conduct non-service-oriented business activities, which specifically excludes those businesses that provide services in the fields of banking, finance, insurance, investing, hospitality, farming, mining and owning, dealing in, or renting real estate. In fact, no more than 10 percent of the value of the issuing company’s net assets may consist of real estate or stock and securities of unrelated corporations.

While the reduction of the corporate income tax rate may increase interest in C corporation status, there is little doubt that such an election will yield even more favorable tax savings for owners of start-up, early stage and smaller companies that intend to go public or be sold for a profit in the future. QSBS investors can enjoy tax-free income from the sale of the corporation’s stock or even roll over their gains free of taxes into shares of another qualified small business corporation without losing the benefit of the gain exclusion upon the sale of the replacement QSBS. With the new tax law, businesses and their owners should plan even more carefully than ever with the guidance of experienced advisors and accountants in order to maximize the potential benefits of a C corporation.

About the Author: Barry M. Brant, CPA, is director of Tax, Consulting and International Services with Berkowitz Pollack Brant, where he leads the firm’s private client group and provides guidance on complex tax matters, including multi-national holdings, cross-border treaties and wealth preservation and protection. 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.

 

Exporters, Other Businesses May Combine Tax Incentives to Yield Substantial Savings by James W. Spencer. CPA

Posted on December 10, 2018 by James Spencer

Tax reform’s aim to protect the US tax base and prevent domestic companies from shifting jobs, manufacturing and profits to lower tax jurisdictions overseas resulted in a significant benefit to export businesses. Not only does the new law preserve the preferential tax treatment of Interest Charge-Domestic International Sales Corporation (IC-DISC), it also introduces a new tax incentive for C corporations that sell American-made goods or services to foreign customers for consumption outside of the U.S.

Interest Charge-Domestic International Sales Corporation (IC-DISC)

U.S. businesses that sell, lease or distribute goods made in the US to customers in foreign countries may realize significant tax benefits when they create an IC-DISC to act as their foreign sales agent to which they pay commission as high as 4 percent of gross receipts or 50 percent of taxable income from the sale of export property.

Essentially, a qualifying business forms the IC-DISC as a separate US-based “paper” company, typically with no offices, employees or tangible assets, to receive tax-free commissions that the business can claim as deductions that ultimately reduce its taxable income. The amount of the tax savings the business may reap for the commission it pays to the IC-DISC can be as high as 37 percent, depending on its structure (21 percent for C corporations beginning in 2018) and its source of income. Only when the IC-DISC distributes earnings to shareholders will there be a taxable event. At that time, the shareholders will be liable for paying taxes on the IC-DISC earnings at lower qualified dividend rates not to exceed 23.8 percent.

While businesses that make IC-DISC elections are most commonly exporters and distributors of U.S.-manufactured products or their components, software companies, architects, engineers and other contractors who provide certain limited types of services overseas may also qualify to take advantage of this permanent tax benefit.

Foreign Derived Intangible Income (FDII)

To encourage U.S. corporations to keep their exporting operations and profits in the country, the TCJA introduces a new tax-savings opportunity in the form of a deduction of as much as 37.5 percent on profits earned from Foreign Derived Intangible Income (FDII).

This new concept of FDII is defined as income C corporations earn from (1) sales or other dispositions of property to a foreign person for a foreign use; (2) an IP license granted to foreign person for a foreign use; and (3) services provided to a person located outside of the U.S. The types of services that qualify for FDII are not severely restricted, like they are for IC-DISC applications.

Under the law, FDII earned after Dec. 31, 2017, is subject to an effective tax rate of 13.125 percent until 2025, when the rate is scheduled to increase to 16.046 percent for a total FDII deduction of 21.87 percent. That’s quite an incentive for domestic businesses to use the U.S. as its export hub and distribute products made in the country to foreign parties located outside the country!

It is important to note that like most provisions of the tax code, the FDII deduction is subject to a number of restrictions and calculation challenges. For example, it applies only to domestic C corporations, which under the TCJA are subject to a permanent 21 percent income tax rate beginning in 2018, down from 35 percent before tax reform. In addition, the amount of the deduction is reduced annually by 10 percent of the corporation’s adjusted basis of depreciable tangible assets used to produce FDII.

Planning Opportunities

Corporate taxpayers that combine the benefits of an IC-DISC and the new FDII deduction may receive enhanced tax savings. However, every business entity is unique and not all businesses will qualify to apply the benefits of both export tax incentives. However, with proper planning under the guidance of experienced tax professionals, businesses can maximize the benefits that are available to them.

For example, an S corporation or LLC with an IC-DISC may not realize the added tax savings of the FDII deduction, which is only available to C corporations. While an S corporation may consider changing its entity structure to a C corporation to take advantage of the lower tax rate, it must first consider its unique business goals and weigh them in context against all of the new provisions of the new tax code, which will affect the tax liabilities of both the business and its shareholders.

Companies doing business across borders can successful plan around the new provisions of tax law with the strategic counsel and guidance of knowledgeable advisors and accountants with deep experience in these matters.

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 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

FAFSA App May Make it Easier for College Students to Apply for Financial Assistance by Joanie B. Stein, CPA

Posted on December 10, 2018 by Joanie Stein

Families with children preparing to attend college for the 2019-2020 academic year may have an easier time applying for loans, grants and scholarships from federal and state sources thanks to a redesigned Free Application for Federal Student Aid (FAFSA) website and the introduction of a new mobile app called MyStudentAid, which is available for Apple and Android phones.

The FAFSA application period for next fall officially began on Oct. 1, 2018. It is recommended that families begin the application process as soon as possible for two important reasons. First, some aid is awarded on a first-come-first-served basis, and the earlier families file the FAFSA, the more time they will have to review their Student Aid Reports, make corrections to their forms, if needed, and compare the offers for aid dollars that they receive. In addition, families should recognize that completing the FAFSA, whether online or on a mobile device, is no walk in the park. The form includes more than 100 questions, many of which applicants will not know the answers to without first doing some research into their finances and other personal information. The sooner families begin the process, the more time they will have to locate requested information and complete the form without significant delay.

Following are some of the steps that families can take to prepare in advance and make the FAFSA application process go as smoothly as possible:

 

  • Know the social security numbers, drivers’ license numbers and birthdates for the student and his or her parent(s);

 

  • Have a hard copy of the family’s tax returns from the most recent tax year and/or access the IRS’s Data Retrieval Tool on the FAFSA website or by visiting https://ww.irs.gov in order to have your tax information automatically transferred from the IRS to the FAFSA;

 

  • Gather the most recent statements of bank and brokerage accounts, 529 college savings plans and the current value of other assets (excluding the family home), and be prepared to identify whether the owner of those accounts are the parent(s) or the student; and

 

  • Be prepared to list at least one college that the student hopes to attend. Students can change this information or add the names of additional schools at a later date.

 

Finally, families should not assume that their students will not qualify for financial aid, perhaps because the parents’ income is too high. In fact, only a small portion of parents’ income and assets figures into a students’ potential aid calculation. Instead, a student’s eligibility for financial aid will be more affected by assets held in his or her own name. This is something that families should consider and plan for under the guidance of professional accountants and financial advisors far in advance of a child’s entry into a higher education institution.

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.

 

Real Estate Rehabilitation Tax Credit Changes under New Tax Law by Joshua P. Heberling

Posted on December 06, 2018 by Joshua Heberling

The rehabilitation tax credit that provides an incentive for real estate owners to renovate and restore old or historic buildings has been modified under the Tax Cuts and Jobs Act (TCJA) signed into law in December 2017.

Under the new law, taxpayers claiming a 20 percent credit for the qualifying costs they incur to substantially rehabilitate a building must spread out that credit over a five-year period beginning in the year they placed the building into service, which is the date on which construction is completed and all or a portion of the building can be occupied. Excluded from the credit are any expenses that taxpayers incurred to buy the structure.

In addition, the law specifically eliminates the availability of a reduced 10 percent rehabilitation credit for pre-1936 buildings. However, owners of certified historic structures or pre-1936 buildings may qualify for temporary relief under a transition rule when they meet the following conditions:

  • The taxpayer owned or leased the building on Jan. 1, 2018, and he or she continues to own or lease the building after that date.
  • The 24- or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.

Qualifying for and claiming the rehabilitation tax credit can be a complicated process for which taxpayers should seek the counsel of professional tax advisors and accountants.

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 Law Governing Admissibility of Expert Witness Testimony in Florida – It’s Frye Not Daubert! by Richard S. Fechter, JD, CAMS, CFE

Posted on December 05, 2018 by Richard Fechter

In a crucial 4-3 decision, the Florida Supreme Court in Delisle v. Crane, Case (No. SC16-2182) (Oct 15. 2018), clarified the law governing the admissibility of expert witness testimony in Florida, moving away from the strict Daubert standard used in federal courts to the less rigorous Frye standard. Previously, Florida trial courts that were unsure of which standard to apply when analyzing expert testimony and corresponding pretrial motions typically utilized the Daubert standards enumerated under Federal Rule of Evidence 702.

In 2013, the Florida Legislature passed a law modifying Florida Statute Section 90.702 to adopt the Daubert standard, despite the Florida Supreme Court’s repeated affirmations of Frye. The recent decision in Delisle held that the Legislature overstepped its authority when it adopted Daubert and enacted the 2013 legislation because the manner in which trials and litigation are to be conducted are “procedural” matters, which are entirely within the province of the Florida Supreme Court under Article V, Section 2(a) of the Florida Constitution. The new ruling invalidates Florida Statute Section 90.702 and rejects the Daubert standard for admitting expert testimony in Florida courts.

What are Frye and Daubert?

The Frye and Daubert tests are competing tests that courtroom judges use, prior to trial, to examine the reliability and admissibility of expert testimony that a party seeks to introduce into evidence once the trial begins. The assessment usually follows a request (or Motion) by one of the parties in the legal proceeding. However, that is where the similarities between these two competing standards for assessing the admissibility of expert testimony end.

First, Frye does not apply to all expert testimony. Rather, it applies narrowly to testimony that a judge determines to be “new or novel scientific evidence” that is not firmly well-established in the scientific community. Only after a Court makes such a determination will it then consider the substance of the admissibility of expert testimony.

The initial assessment required under Frye includes a determination that the expert testimony seeking to be admitted is generally accepted in the field. According to Frye, “in order to introduce expert testimony deduced from a scientific principle or discovery, the principle or discovery ‘must be sufficiently established to have gained general acceptance in the particular field in which it belongs.’”[1] Thus under Frye, the experts’ methods and techniques must be “generally accepted” in the scientific community.[2] In practice, it means a judge should evaluate evidence whether a testifying expert forms their opinion from generally accepted principles. This might require a judge to review the expert testimony, scientific and legal publications, and judicial opinions to assess general acceptance of the principles underlying an expert’s opinion.

In comparison, Daubert applies to ALL expert opinions, not just those opinions determined to be new or scientifically novel. Under Daubert, the initial assessment performed by the Court includes an evaluation of the expert’s methods and requires the expert testimony to be not only generally accepted (Frye) but also, “scientifically reliable” and relevant to assist the trier of fact in determining pertinent issues in the case at hand. The Court makes these determinations after a Daubert motion is made and a hearing is conducted. Court hearings to assess the admissibility expert testimony under the Daubert test are often lengthy, technical, and costly; more costly, on average, than hearings under the Frye test. The hearings performed under Daubert to determine admissibility are sometimes referred to as “mini trials,” in which a judge might hear evidence and arguments and before ruling that all or some portion of an expert’s opinions are admissible or inadmissible. These mini trials, also known as Daubert hearings, address many of the substantive issues that are expected to be litigated at trial.

The Florida Supreme Court in Delisle summarized these two competing tests as follows:

“Frye relies on the scientific community to determine reliability, whereas Daubert relies on the scientific savvy of trial judges to determine the significance of the methodology used.” Moreover, Daubert covers more subject areas and involves a multi-factorial analysis to determine admissibility. In contrast, Frye is simply general acceptance inquiry.

The Delisle Opinion and Its Effect on Forensic Accounting Expert Witnesses

Delisle will have a profound impact on litigation in Florida. It ensures that the Frye standard will remain in Florida courts,[3] and, in turn, make it more difficult to strike or exclude expert testimony. This, according to most scholars, is because Daubert involves a much more vigorous threshold for admitting scientific evidence. Without the Daubert requirements of an evidentiary hearing or the scientific reliability and relevancy of expert testimony, there likely will be less barriers to the introduction of expert opinions.

By reverting to the Frye standard, Florida courts will likely raise fewer challenges to litigation involving testimony from forensic accountants and valuation analysts. This is not only because Frye applies only to expert opinions relating to new scientific principles (which arguably does not include many areas of forensic accounting), but also because Frye (unlike Daubert) allows experts to provide testimony that relies solely on their experience and training without regard for scientific fact. This exception is so inclusive that Florida state courts infrequently hear challenges to the admissibility of expert testimony.

Testifying experts are now clearly under one evidential standard for admissibility in Florida courts (Frye) and a different one in Federal courts in the US (Daubert). For forensic accounting expert witnesses, this likely means there will be fewer challenges to exclude expert testimony in Florida cases.

About the Author: Richard S. Fechter, JD, CAMS, CFE,  is associate director of Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice, where he has extensive experience conducting forensic accounting investigations and providing expert analysis on the economic, finance, and accounting issues pertaining to economic damages and other business matters in complex commercial disputes. He can be reached in the firm’s Miami CPA office at (305) 379-7000 or via email at info@bpbcpa.com.

Daubert vs. Frye – Key Differences

 

 

Daubert[4]

 

Frye

Applies to all expert opinions, whether they are consider new or not. Applies only to expert opinions considered to relate to a “new or novel” scientific issue.

 

State statute and the courts determine admissibility of expert testimony.

 

Experts’ opinions must be generally accepted in the scientific community to be admissible in Court.
Expert’s testimony must be based upon sufficient facts or data.

 

No sufficient facts or data requirement
Expert’s testimony must be the product of reliable principles and methods (i.e., scientifically reliable).

 

No reliability requirement
Expert’s testimony must be relevant to the case at issue.

 

No relevancy requirement
The expert must apply the foregoing principles and methods reliably to the specific facts of the case.

 

No reliability requirement

 

Determination of whether the principles and methodologies of the offered expert testimony are reliable by considering:

 

·         Whether the expert’s theory or technique can, or has been, tested;

·         Whether the theory or technique has been subject to peer review and publication;

·         Whether there is a known or potential rate of error of the technique or theory for a particular scientific technique; and

·         Whether the theory or technique is generally accepted in the relevant scientific community.[5]

 

No review of principles and methodologies used or how those principles and methodologies were applied to facts of case at issue
Judges act as “gatekeepers” who regulate the admissibility of expert testimony based on relevant factors.

 

Admissibility of expert testimony depends on the standards set by the expert’s scientific community.

[1] Frye v. United States, 293 F. 1013 (D.C. Cir. 1923)

[2] The Frye standard was originally codified under Florida Statute Section 90.702,

“If scientific, technical, or other specialized knowledge will assist the trier of fact in understanding the evidence or, in determining a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify about it in the form of an opinion; however, the opinion is admissible only if it can be applied to evidence at trial.”

The language from this original statute is expected to be reinstated at the next legislative session.

[3] See Bundy v. State, 471 So. 2d 9 (Fla. 1985); Hadden v. State, 690 So. 2d 573 (Fla. 1997).

[4] Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 593-94 (1993).

[5] See, Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) (applying Daubert standard to non-scientists).

There’s Still Time to Secure Health Insurance for 2019

Posted on November 29, 2018 by Adam Cohen

The open-enrollment period for U.S. taxpayers to secure medical health insurance for 2019 via the Health Insurance Marketplace runs from Nov. 1, 2018, through Dec. 15, 2019. While the new tax law introduced on Jan. 1, 2018, does eliminate the Obamacare individual shared responsibility penalty for individuals who go without insurance in 2019, there are other reasons taxpayers should consider enrolling in a marketplace plan for 2019.

Some states, such as the District of Columbia, Massachusetts and New Jersey, have implemented their own individual mandates that will assess penalties on residents who do not have minimum essential health care coverage in 2019 and who do not qualify for an exemption.

In addition, by enrolling in a marketplace health care plan, you will continue to receive many of the benefits and incentives that the Affordable Care Act (ACA) introduced, such as guaranteed coverage for pre-existing conditions and free annual physical exams and preventive care immunizations, screenings and counseling. Without a marketplace plan, you may be denied coverage from a private insurer, or you may be unable to afford care and treatment for an unexpected illness or injury to you or your family members.

Due in part to the elimination of the individual mandate, most families should expect to pay higher premiums for plans in 2019 than they did in prior years. However, the premium tax credit has also increased for 2019, helping qualifying taxpayers to subsidize their costs for coverage. High-income families that do not qualify for the premium subsidy may want to consider setting aside pre-tax dollars into health savings accounts (HSAs) to help them pay healthcare costs, including marketplace plan premiums.

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.

IRS Introduces Per Diem Rates Effective October 2018 by Dustin Grizzle

Posted on November 27, 2018 by Dustin Grizzle

The IRS issued its annual update to the daily rates that employers may use to reimburse employees for lodging, meals and other incidental expenses that workers incur while traveling for business purposes.

The per diem rates are fixed amounts that employers may use to more easily reimburse workers for ordinary and necessary business travel expenses without requiring the collection and calculation of actual costs incurred. These payments are not considered taxable income to employees as long as workers substantiate their claims with detailed expenses reports. However, should a business reimburse an employee for more than the per diem rate, the employee is responsible for paying taxes on that amount.

Effective Oct. 1, 2018, the per diem meal and incidental allowances for taxpayers in the transportation industry are $66 within the continental U.S. and $71 for travel outside of the region. These expenses include all meals, laundry and dry cleaning services, and tips provided to food servers, porters, baggage handlers and other hotel employees.

For purposes of the high-low substantiation method, the per diem rates are $287 for travel to a high-cost locality and $195 for travel to any other locality within the continental U.S. The per diem rates for solely meals and incidental expenses is $71 for travel to high-cost localities and $60 for any other area within the continental U.S. In addition, the IRS updated its list of localities, including New York City, San Francisco and Aspen, Colo., which have a high cost of living during all or a portion of the year and therefore have a federal per diem rate of $241 or more.

The per diem rates are especially important to workers in 2018 because the Tax Cuts and Jobs Act eliminates their ability to deduct unreimbursed job expenses and miscellaneous itemized deductions through 2025. Therefore, it behooves workers to speak with their employers and request reimbursements for those business-travel expenses in order to recoup even a portion of the money they personally lay out to pay for costs that are necessary for their jobs.

About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides corporate structuring, tax-planning and compliance services to real estate developers, management firms and investment companies; manufacturing businesses with large inventories; and high-net-worth families. 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.

 

 

Are you Ready to meet the January Tax Filing Deadline? by Laurence Bernstein, CPA

Posted on November 26, 2018

With the tax year coming to an end, it is critical that business owners remember they have obligations to report by Jan. 31, 2019, the compensation they paid to employees and to all independent contractors and service providers during the prior tax year. This leaves businesses with limited time after an often hectic holiday season to review their records and issue Forms 1099-MISC to each non-employee to whom they paid more than $600 during the year.

To help your business expedite this process and meet the filing deadline, consider working with Berkowitz Pollack Brant’s Accounting Intelligence team. Our advisors can help you identify and gather information about contactors and vendors to whom who have a reporting obligation. Subsequently, we will prepare the required IRS forms and submit them on your behalf to both the government and each vendor who receives compensation from you. If you are required to file more than 250 information returns, which include W-2s and 1099s, you must file electronically or you will be subject to significant IRS penalties.

In addition, with the prospect of the New Year, it is a good time to review your accounting records and ensure that you have on file Forms W-9 for each and every vendor you pay. This will help enable you to more easily determine which vendors should receive Form 1099-MISC from you next year.

To learn more about how we can help you to ease the administrative burden of your information reporting requirements, please contact one of our Accounting Intelligence team members at (954) 712-7066.

About the Author: Laurence Bernstein, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant and the leader of the firm’s Accounting Intelligence group.

He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

 

There’s still Time to Improve your Tax Position for 2018 by Jeffrey M. Mutnik, CPA/PFS

Posted on November 26, 2018 by Jeffrey Mutnik

The passage of tax reform at the end of 2017 leaves many individuals in a better tax position than they were one year ago. Nevertheless, understanding how to maximize the potential tax-savings opportunities contained is the provisions of the new law is not a simple endeavor. To help avoid an unwelcome tax liability in April of 2019, taxpayers should take the time now to implement some tried-and-true year-end strategies as well as some new planning tips around the changes brought about by the Tax Cuts and Jobs Act (TCJA).

Check your Withholding and Estimated Tax Payments

The new withholding tables combined with expanded tax brackets and the elimination of certain deductions means that you may not have been paying your fair share of taxes on income earned during the year through quarterly estimated tax payments and/or the amount employers withhold from paychecks. If you haven’t done so already, contact your tax advisors to do a withholding checkup and project an estimate of your tax liability for 2018. To avoid a potential penalty for tax underpayments, you may request your employer increase the withholding on your last paychecks for 2018 or your year-end bonus. Alternatively, you can make a fourth-quarter estimated-tax payment to the IRS before Jan. 15, 2019, but doing so will be subject you to a penalty for failing to pay taxes as-you-go during 2018.

A withholding checkup is equally important for retirees to ensure that the government withholds enough taxes from Social Security, and they are prepared to pay the tax liabilities on the distributions they receive from retirement accounts, including 401(k)s and traditional IRAs. It may make sense to withhold income tax on retirement account withdrawals. Such withholding can also be used to reduce or avoid a penalty for not paying enough estimated tax that was due earlier in the year. If the distribution is not otherwise required or needed, it can be rolled over into another retirement account within 60 days to avoid any additional, unwanted tax exposure, including funds to replace the amount of withholding.

Will you be Able to Itemize or will you take the Standard Deduction?

It is expected that far more taxpayers will claim the higher standard deduction in 2018 due to the elimination and/or limitation of many of the tax breaks that they previously itemized on their returns, including a $10,000 cap on property, state and local taxes, restrictions to the deduction for mortgage interest on new loans executed after Dec. 31, 2017, and the elimination of deductions for miscellaneous expenses, such as tax preparation and other professional service fees. However, high-net-worth taxpayers may still have an opportunity to maximize their itemized deductions before the end of the year by accelerating their charitable contributions into 2018 or making more visits to the doctor and scheduling last-minute procedures on order to exceed the standard deduction threshold of $12,000 for single taxpayers or $24,000 for those married filing jointly. Also, consideration should be given to bunching your charitable deductions in January and December of the same year to maximize the use of the standard and itemized deductions over a multi-year period.

Max Out Retirement Plan Contributions, Remember RMDs

One of the few deductions that survived tax reform are the contributions that taxpayers make to their retirement-saving plans. For 2018, you can contribute as much as $5,500 to a traditional IRA ($6,500 if you are age 50 or older) or $18,500 to a 401(k) plan ($24,500 if you are age 50 or older) and reduce your taxable income by that amount. If you are an employee, you have until Dec. 31, 2018, to increase your 2018 401(k) contribution through salary deferral. If you are a business owner, you have until April 15, 2019, to make a pre-tax contribution to your solo 401(k) and apply it to your 2018 tax return. The deadline for making contributions to IRAs, including ROTH IRAs, is April 15, 2019.

If you are 70 ½ years of age or older and you did not work in 2018, you must take a taxable required minimum distribution (RMD) from your 401(k) and/or IRA by Dec. 31, 2018. If you fail to take the RMD, you or risk a penalty of 50 percent of the undistributed amount. If you are still working, you may postpone the RMD until the year in which you actually retire. If you turned 70 ½ years old this year, you have a one-time option to defer your initial RMD until April 1, 2019. While this will allow you to effectively defer 2018 taxable income into next year, it will also require that you take two RMDs in 2019 and essential double your income for that year.

Make use of FSA Funds

Check on the balance in your flexible spending account (FSA) because you will lose any remaining funds that you do not use by the end of the year. If you have money left in your FSA, schedule doctors’ appointments, visit the dentist, refill subscriptions or buy new glasses before Dec. 31.

Harvest Capital Losses

To minimize your exposure to capital gains taxes, you should consider selling underperforming investments before the end of the year to generate a tax loss that can reduce your taxable income. Tax losses can be used to offset gains of matching holding periods (e.g. short-term losses can offset short-term gains and long-term losses to offset long-term gains) and allow investors to maximize the use of their personal tax attributes. However, investors should be careful to avoid the wash-sale rules that could disallow the use of a realized loss, as well as consider whether or not the sale of an asset makes sense in relation to their existing investment strategy. Disposing of an asset solely for a tax benefit may disrupt and derail your long-term financial goals.

Along the same lines, taxpayers who sold cryptocurrency, such as bitcoin, in 2018 should be prepared to pay taxes on any gains resulting from those transactions.

Defer Capital Gains

The tax code offers a few opportunities for taxpayers to defer or even eliminate capital gains from the sale of certain assets. For example, investors can defer taxes on the sale of real estate by completing a 1031 exchange and reinvesting those gains in similar like-kind real property. In addition, the new tax law’s Opportunity Zone program allows taxpayers to defer or even eliminate capital gains tax when they reinvest the proceeds from an asset sale into a business or property located in any of the nation’s more than 8,000 opportunity zones.

Give Gifts to Charity and Family

By making gifts of money or property, either to charities, family members or friends, you may be able to reduce the amount of your income that is subject to tax. For example, donations to qualified charitable organizations are fully deductible (up to certain income thresholds) against both income taxes and the alternative minimum tax (AMT), as long as you mail or charge the donation to your credit card before Dec. 31, 2018. Furthermore, you may donate up to $100,000 of your 2018 RMD directly to a charity by December 31 to avoid including that amount in your taxable income.

In addition, you may have an opportunity to reduce your future taxable income and protect your assets from exposure to estate and gift taxes if you give gifts of $15,000 or less to as many people as you wish before Dec. 31, 2018. For married couples, the maximum amount that may be excluded from taxes in 2018 is $30,000. It is important to remember that there is no annual limit on the amount you may gift tax-free to your spouse unless he or she is not a U.S. citizen.  Similarly, you may pay as much as you like directly to an educational or medical institution to cover the costs of tuition or medical expenses for another person without gift tax implications. Gifts above the statutory threshold will require you to file a gift tax return, but they will not cause taxation until you have exhausted the enhanced individual lifetime exclusion of $11.18 million, $22.36 million for married couples.

Look for Opportunities to Minimize Business Tax Liabilities

The TCJA reduced the corporate tax rate to 21 percent and introduced a potential deduction for qualifying pass-through business entities. To be eligible for the full benefit of the 20 percent pass-through deduction, businesses should assess their lines of business, the ways in which they pay wages to workers and whether they own or lease the property they use to generate business or trade income. In addition, business owners may consider purchasing expensive equipment before the end of the year in order to claim a full deduction for those costs in 2018 and/or make improvements to nonresidential property to qualify for an additional deduction of up to $1 million.

Protect your Assets

The entity you select to hold your personal and business assets will have far-reaching effects on your exposure to income, estate and gift taxes; privacy; protection from creditors; and control over distributions of assets. The end of the year is a good time to meet with professional advisors to review the assets holding structures you currently have in place and make adjustments, as needed, to align with changing life circumstances.

The advisors and accountants with Berkowitz Pollack Brant and its affiliate Provenance Wealth Advisors work with U.S. and foreign citizens and businesses to develop tax-efficient solutions that meet regulatory compliance and evolving financial needs.

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.

Not Sure of your Tax Filing Status? Ask a CPA by Adam Slavin, CPA

Posted on November 21, 2018 by Adam Slavin

When taxpayers prepare their annual returns, they must select a filing status, which determines their eligibility for certain credits and deductions and ultimately influences the amount of federal income tax they owe. For some individuals, the selection is decided for them based on whether or not they are married on the last day of the calendar year. However, under certain circumstances, taxpayers may qualify for more than one filing status. When this occurs, taxpayers may choose the one that results in the lowest tax liabilities they owe to the federal government. Making this determination may require the guidance of professional accountants who can calculate taxpayers’ obligations under each qualifying filing status.

Following are descriptions of the five filing statuses available to taxpayers:

  • Single. Taxpayers are not married or they are divorced or legally separated under state law.
  • Married Filing Jointly. Taxpayers are married couples who file a joint federal tax return.  This filing status also applies to widows whose spouses passed away in the tax year covered for a filed return.
  • Married Filing Separately. Married couples can choose to file two separate tax returns when each spouse wishes to be responsible solely for his or her own tax liabilities. In addition, married couples may choose to file separately when doing so will result in less tax owed than if they file a joint tax return.
  • Head of Household. This status applies to unmarried taxpayers who meet certain rules, such as having paid more than half the cost of keeping up a home for themselves and for another qualifying person. It is important for taxpayers to review the rules and make sure they qualify to use this status.
  • Qualifying Widow(er) with Dependent Child. A taxpayer who has a spouse that died during one of the previous two years, and they have a dependent child may qualify for this filing status.

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

 

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 Building Blocks of a Strong and Resilient Organizational Culture by Richard A. Berkowitz, JD, CPA

Posted on November 16, 2018 by Richard Berkowitz, JD, CPA

Businesses today are challenged by what may be considered the most rapid pace of change in history. New technological advancements and accelerated economic swings are creating a perfect storm for which organizations have little time to prepare and adapt for survival, let alone for success. However, the one beacon of light that an organization can rely on to guide it through these treacherous waters and protect it from irreparable damage is its organizational culture. The question then becomes, what is an organizational culture and how can an entity develop and hone it to serve as its lighthouse in a storm.

Organizational culture can be defined as the collective norms, values, attitudes and work habits that the members of an organization share and agree to uphold. To put it another way, if a company’s brand is its face, its organizational culture is its soul. It reflects the formal and informal behaviors, interactions and underlying traditions, beliefs and processes that tie individuals to an organization and keep them there, whether they be loyal employees, clients, business partners or even donors. It is how individuals would describe the organization, its structure, unique attributes and vision, under oath, using both tangible and intangible concepts. In this sense, an organization’s culture must align with its vision and subsequently be woven into its strategy.

Yet, unlike the fact-based economic and contractual nature of business, corporate culture is both subjective and objective, and therefore much more difficult for an organization to standardize. While a culture can change based on the influence of internal and external sources, including the behaviors of an organization’s leadership, a CEO or business owner cannot dictate or will a cultural change without backing up his or her words with action.

Following are eight strategies that organizations can rely on to build and strengthen organizational trust and a cohesive culture that becomes the motivation and rallying cry for its success and the success of its individual employees.

Create a Compelling and Shared Vision

A vision helps an organization identify what it hopes to be famous for and connects workers to that shared goal. Not only does it encourage employees to work together, but it also centers them around a common purpose that inspires them to learn, grow and give their best efforts every day. When you involve employees in the vision-planning process, you allow them to have a voice and contribute to creating something special and meaningful. Consequently, they are more likely to be engaged in their jobs and loyal to their employers.

Define the Culture to Support Business Strategies

Businesses must invest in policies and practices that facilitate employees’ efforts to integrate the demands of their professional work with the obligations of their personal lives. Special care should be taken to help employees avoid a tug of war between work and family, which will ultimately undermine the goals of the organization and lead to higher incidence of employee burnout and turnover. Instead, select a set of guiding behaviors to define the desired culture and reinforce them through a variety of measurable team-building and team-training programs.

Spend Quality Time Together.

Most working professionals spend the majority of their time on the job, whether that be in an office or out in the field with coworkers, clients or business partners. While this requires workers to get along, it does not always translate to lasting friendships, which ultimately affect loyalty and culture. Instead, organizations should look for opportunities to gather together employees and their family members outside of the work environment, where they can interact on a more social level and create strong emotional connections that tie workers to each other and to the organizations themselves.

Create Quality Traditions

Organizations can strengthen genuine connections and reinforce loyalty by developing high-quality and consistent traditions, practices and other experiences that members of an organization share on a regular basis. For example, a business may employ a policy of dress-down Fridays, host an annual bring-your-child to work day or encourage workers to bring their pets to the office. Similarly, organizations can help workers build deep connections in their communities by organizing teams to participate in charitable fundraising events or volunteering their time to help others in need. The more these traditions involve family members, the more fun workers will have and the more emotional their connections will be to the organization.

Improve Organizational CommunicationA strong and resilient culture cannot develop in a vacuum. Organizations must work diligently to create a two-way street of open, honest and transparent communication between all of its members. Moreover, they must recognize when there are weaknesses in this open flow of information and take steps to repair them. Not only should organizations create open discussion forums for their CEOs or presidents, but they should also expect and even encourage workers to ask questions and receive answers.

Help Employees Build Their SkillsPeople want to be a part of organizations that are interested in their development as individuals. A healthy organizational culture provides a stimulating environment that emphasizes and encourages employees’ professional and personal growth. This may involve investment in employee training and education, mentoring and other leadership-development programs as well as annual reviews of worker performance.

Monitor Employee Satisfaction

To gauge the effectiveness of their culture-building strategies, organizations need to look no further than its front-line employees. Are workers satisfied? The only way to answer this question is to ask. By monitoring employee satisfaction on a frequent and consistent basis, organizations can more quickly identify and respond to areas that need improvement.

Make Culture an Ongoing Organizational Commitment

Because an organization’s culture will radiate outside of its workforce to its clients and its bottom line, it is critical that culture programs receive high priority. In fact, a half-hearted commitment to developing and cultivate culture can be far worse than no commitment at all. The goal should be to inspire employee engagement and build genuine connections based on trust, rather than requiring employees to grudgingly comply with a laundry list of top-down rules and regulations.

Creating the right organizational culture is crucial to an entity’s long-term success and profitability. It is the only distinctive and sustainable long-term competitive advantage available to businesses. It starts at the level of internal policies and procedures and extends to how leaders interact with employees and demonstrate their commitment to workers’ individual successes. From there it radiates outside of the organization’s physical walls, affecting the level of services it provides and the reputation that it needs to project to attract and retain quality workers and develop trusted relationships with clients.

About the Author: Richard A. Berkowitz, JD, CPA, is founding and executive chairman of Berkowitz Pollack Brant and Provenance Wealth Advisors (PWA), where he provides business consulting, growth strategies and succession-planning consulting to entrepreneurs and companies. He can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

 

IRS Clarifies Deductibility of Business Meals in 2018 and Beyond by Jeffrey M. Mutnik, CPA/PFS

Posted on November 14, 2018 by Jeffrey Mutnik

The Internal Revenue Code allows a deduction for 50 percent of the cost of a meal at which business is discussed. The language contained in the 2017 Tax and Cuts and Jobs Act reforming the U.S. tax code appeared to imply that businesses could no longer deduct expenses for client meals enjoyed at entertainment events, such as sporting events, concerts, theatrical performances, golf and fishing outings, and cruises. According to the IRS, however, businesses can continue to take advantage of this valuable tax break in 2018, even when they cannot write off the costs of the entertainment activities.

In its most recently issued guidance, the IRS said that companies can continue to deduct 50 percent of the costs they incur for meals with clients at entertainment events, as long as those meals are not lavish, and they are considered ordinary and necessary for the active conduct of the taxpayer’s trade or business. The only other criteria businesses must meet to qualify for the 50 percent meal deduction is to have a receipt demonstrating that they paid for the meal separately from all other entertainment-related expenses, which, in and of themselves, are no longer deductible under the new law.

For example, if a businesswoman treats a client to tickets to a baseball game where she also buys the client a hot dog and drinks, she may not deduct the entertainment expenses of the tickets. However, she can deduct 50 percent of the costs for the food and drinks purchased separately. Yet, if a businessman invites a prospective client to join him at a suite at a basketball game where food and drinks are provided, both the tickets and the food are considered entertainment expenses that are not deductible under the law. The only way the taxpayer can deduct half of the food and beverage expenses is if he has an invoice separating out those costs from the non-deductible entertainment costs of tickets.

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.

 

 

Tax Reform Expands the Definition of “Small” Businesses and their Accounting Method Options by Richard E. Cabrera, JD CPA

Posted on November 13, 2018 by Richard Cabrera

The tax reform law that went into effect beginning in 2018 expands the definition of small businesses that can now qualify to use the cash method of accounting and ultimately defer the recognition of income and payments of tax liabilities to later years. Unlike other changes contained in the Tax Cuts and Jobs Act (TCJA) that are set to expire in future years, these changes are permanent. As a result, more businesses will be able to ease their record-keeping burdens and potentially receive tax benefits from adjustments in when and how they account for income and expenses.

 Accounting for Income and Expenses

How a business will account for gross income and expenses is typically among the first decisions an entrepreneur will make when setting up a new company. However, in many instances, the decision is determined for the business owner by the tax code, such as when a business produces inventory, when the taxpayer enters into long-term contracts, or when the company is in a particular industry.

Under the cash method of accounting, a business recognizes income at the point in time that it physically receives payment, and it deducts expenses when it pays money out to cover those costs. Conversely, a business using the accrual method of accounting will record income and expenses when a transaction occurs, such as when it sends out an invoice or ships a product, regardless of whether or not the business actually receives or makes a payment at the time the transaction occurs. The business will adjust the income and expenses in the future when payment is made or performance is complete in full or in part.

Traditionally, the cash method of accounting is preferable for businesses with receivables that exceed their payables, such as professional services firms, because it allows them to recognize income when they actually have payment in hand rather than before they receive payment. Conversely, the accrual method of accounting is more suitable for businesses that buy goods or services on credit from suppliers or that receive payments up front from customers before performing services or delivering goods and, therefore, will most likely have payables that are greater than their receivables.

Changes under Tax Reform

For tax years prior to Dec. 31, 2017, businesses with average annual gross revenue of $5 million or less during the prior three-year period qualified to use the cash method of accounting. However, the TCJA increases this gross receipt threshold to $25 million or less, beginning in 2018, while also carving out exceptions for taxpayers who were previously required to use certain accounting rules related to how to account for inventories, how to capitalize costs and how to treat certain long-term contracts.

In addition, as long as a business falls below the $25 million or less gross receipts test, it may treat inventories as non-incidental materials and supplies or move to a method of accounting that conforms to its “applicable financial statement” method, rather than being required under prior law to follow uniform capitalization rules (UNICAP) and capitalize expenses as part of their inventory costs for tax purposes. As a result, taxpayers that produce real or tangible personal property as inventory for resale may ultimately expense items of inventory in the year of acquisition rather than waiting for it to be sold. When taxpayers qualify, they may deduct non-incidental materials and supplies in the year in which they first use or consume those materials in their operations. In addition to exempting the UNICAP rules to inventory, the new law provides taxpayers with gross revenue below at or below the new $25 million threshold with relief from the other aspects of Section 263A, including with respect to self-constructed assets.

The TCJA’s provisions relating to a change in accounting method also have a significant impact on real estate businesses that now meet the larger gross receipts test of $25 million or less. More specifically, the law expands the universe of developers and home construction businesses that are considered “small contractors” and that are now exempt from using the percentage-of-completion method for accounting for construction contracts that they expect to complete within a two-year period. This change in accounting method provides real estate businesses with the ability to defer income until the point in time that they complete the contract, rather than requiring them to recognize income before construction is finished.

Requesting an Automatic Accounting Change

In an effort to reduce paperwork and ease administrative burdens, the IRS has a streamlined process for eligible taxpayers to request an “automatic” change in the timing of when they may recognize items of income and when they may take deductions. All taxpayers need to do is to complete an application using IRS Form 3115 by the September extended tax-filing deadline for partnerships and S Corporations, or the October extended deadline for C Corporations. There is no fee required for requesting an automatic change from the IRS, and by filing an automatic change in accounting method, taxpayers who meet the income limits do not need to wait for written approval from the IRS.

The expansion of the gross revenue test under the TCJA opens the door for a greater number of businesses to ease their recordkeeping requirements and qualify for an automatic change to the cash method of accounting for federal income tax purposes. The benefits of deferring income, coupled with the tax law’s reduced corporate and individual tax rates, amplify the time value of money that qualifying taxpayers will receive under the new law. However, this provision of the tax reform is not without complexity. As a result, taxpayers should meet with qualified tax advisors and accountants to understand and realize the benefits and potential tax savings they may reap from the new law.

 

About the Author: Richard E. Cabrera, JD, 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.

 

 

States Seeking to Fill their Coffers Quickly Adopt New Economic Nexus Laws by Michael Hirsch, JD, LLM

Posted on November 08, 2018 by Michael Hirsch,

Several U.S. states have officially adopted new economic nexus laws in response to the Supreme Court’s June ruling in South Dakota v. Wayfair, which eliminated the physical presence test for determining when states could impose sales tax collection obligations on remote and online sellers located outside their borders.

Effective Oct. 1, 2018, the following 10 states now require online and out-of-state retailers to collect and remit sales tax when their sales of goods or services into those jurisdictions exceed specific sales volume thresholds: Alabama, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, North Dakota, Washington and Wisconsin. Other states will roll out their own post-Wayfair economic nexus sales tax laws over the next 12 months if they have not done so already.

All businesses that conduct sales across state lines, including, but not limited to, online retailers, should review their annual sales histories on a state-by-state basis to determine if the dollar volume and number of transactions they complete in each state exceed the new economic nexus thresholds. Complicating this process is the fact that the annual sales caps that would require sellers to collect tax vary from one state to the next. For example, the lowest transaction threshold is $10,000 per year for out-of-state retail sales into Minnesota, whereas the highest gross receipts/ transaction volume threshold of $100,000 / 200 separate transactions is in effect in states including Illinois, Indiana and South Dakota.

Should retailers identify that they do in fact have sales tax collection obligations in a number of states, they must first register separately with the Department of Revenue in each state and receive sales tax licenses in order to collect, file and pay sales tax in those jurisdictions. It is recommended that taxpayers work with their advisors and accountants to guide them through this potentially complex and time-consuming process. As more states adopt the new sales thresholds for establishing economic nexus, businesses that can get a head start will be better prepared to meet the challenge of compliance in the long run.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort 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.

 

IRS Updates Federal Income Tax Return Form for 2018 by Angie Adames, CPA

Posted on November 06, 2018 by Angie Adames

The IRS recently released a revised draft of Form 1040 that it expects taxpayers to use in 2019 to file their federal income tax returns for the 2018 tax year. The most significant change taxpayers will notice is the smaller size of the form. However, despite the new postcard-size 1040, taxpayers will need to attach to their annual filings six new schedules in addition to the existing Schedule A for itemized deductions, Schedule B for interest and dividends, Schedule C for business profit and loss, Schedule D for capital gains and losses and other forms. These new schedules, many of which, require additional worksheets for taxpayers to attach to their returns, include the following:

Schedule 1 – Additional Income and Adjustments to Income

Schedule 2 – Tax

Schedule 3 – Non-Refundable Credits

Schedule 4 – Other Taxes

Schedule 5 – Other Payments and Refundable Credits

Schedule 6 – Foreign Address and Third-Party Designee

It is true that certain provisions of the Tax Cuts and Jobs Act will make it easier for millions of taxpayers to figure out their income taxes and reduce the amount of income subject to tax by simply taking advantage of the expanded standard deduction of $12,000 for individuals or $24,000 for married taxpayers filing jointly in 2018. This will save many taxpayers a considerable amount of time that they previously spent itemizing deductions, many of which disappear under the new tax law or have reduced benefits.

As a result of the tax-return revamp, taxpayers may spend less time completing their 1040s. However, the time they save, likely, will instead be spent completing the additional forms. In light of tax reform and the changes to tax reporting and filing requirements, taxpayers should engage the counsel of experienced accountants and tax advisors to ensure they remain tax compliant and maximize the opportunities the new law provides.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

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

 

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.

 

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

Posted on September 27, 2018 by Jeffrey Mutnik

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

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

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

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

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

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

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

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

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

 

Taxpayers Receive Guidance on Deductions for Pass-Through Businesses

Posted on September 24, 2018 by Laurence Bernstein

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

What is QBI?

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

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

How is the QBI Deduction Calculated?

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

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

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

 Are there QBI Deduction Limitations?

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

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

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

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

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

Are there Additional Limitations?

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

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

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

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

 How Can I Maximize Tax Savings from the QBI Deduction?

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

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

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

 

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

 

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

Posted on September 21, 2018 by Karen Lake

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

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

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

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

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

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

About the Author: Karen A. Lake, CPA, is state and local tax (SALT) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

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

 

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

Posted on September 18, 2018 by Adam Cohen

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

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

 

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

Do all Small Business Qualify for a QSEHRA?

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

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

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

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

How Can Employers Set up QSEHRAs?

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

About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.com.

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

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

Posted on September 17, 2018 by Adam Slavin

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

 

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

 

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

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

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

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

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

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

 

 

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

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

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

What is a REIT?

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

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

 

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

What are the Tax Benefits of REITs?

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

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

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

 

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

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

Organizational Requirements

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

Quarterly Asset Tests

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

 

Income Tests

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

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

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

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

 

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

Distributions

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

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

Conclusion

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

 

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

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

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

Posted on September 12, 2018 by Hector Aguililla

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

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

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

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

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

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

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

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

Posted on September 06, 2018 by Adam Slavin

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

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

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

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

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

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

Posted on September 01, 2018 by Andrè Benayoun, JD

In an effort to prevent U.S. businesses from shifting profits offshore to low-tax countries, the Tax Cuts and Jobs Act imposes an annual tax on foreign income that exceeds 10 percent of a taxpayer’s return on all foreign depreciable assets, including plants, equipment and real estate. However, under this Global Intangible Low Taxed Income (GILTI) regime, U.S. owners of foreign corporations may exclude from this calculation some items of income, including income that is considered “high-taxed” (i.e., income subject to a local tax rate above 18.9 percent). While this can be a very powerful tool to avoid GILTI, the language used in the current version of the law does not exempt all income subject to high-tax. Rather, the exemption applies only to income subject to high-tax that would have otherwise been picked up on a pre-existing anti-deferral regime known as Subpart F.

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

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

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

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

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

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

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

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

About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for repatriation of profits; treaty analysis; tax-efficient debt financing; and pre-immigration tax planning. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

 

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

 

 

 

 

 

 

Tax Reform Allows Disabled Persons to Save More Money in ABLE Accounts by Jack Winter, CPA/PFS, CFP

Posted on August 29, 2018 by Jack Winter

The Tax Cuts and Jobs Act includes a provision that allows people with disabilities to put more money into their Achieving a Better Life Experience (ABLE) accounts and qualify for a Saver’s Credit that is available to low- and moderate-income workers.

The U.S. government introduced ABLE accounts in 2015 to help disabled individuals and their families save money to pay for disability-related expenses without any risk of losing public assistance, in the form of Medicaid and Supplemental Security Income. While contributions made to these accounts are not deductible, the distributions and earnings paid to beneficiaries are tax-free when used to pay for housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and other disability-related expenses.

Beginning in 2018, individuals may contribute up to $15,000 for the year into an ABLE account for a disabled beneficiary, who, for the first time, may also contribute to the account a portion or all of the money he or she earns from employment. The maximum amount working beneficiaries may contribute is limited to the poverty line amount for a single person household. For 2018, this amount is $12,140 for qualifying beneficiaries who live in the continental U.S., $13,960 in Hawaii and $15,180 in Alaska. However, beneficiaries will not be eligible to make these additional contributions to their ABLE account when their employers contribute to workplace 401(k) retirement plans on behalf of the disabled beneficiaries.

When qualifying beneficiaries do contribute to their ABLE accounts starting in 2018, they may also be eligible to receive up to $2,000 in the form of a Saver’s Credit. Under the Tax Code, individuals may use credits to reduce the amount of tax they owe or increase the refund that they can expect to receive back from the government in a given year. If beneficiaries do not work, they may still maximize their savings by rolling over into their ABLE accounts any money they have in their own 529 qualified tuition savings plan or that of another family member.

With the recent changes to the tax laws, individuals with disabilities and their family members should seek the counsel of experienced advisors to ensure they are maximizing savings and tax efficiency under the new regime.

About the Author: Jack Winter, CPA/PFS, CFP, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he provides estate planning, tax structuring and business advisory services to individuals, families and business owners. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

12 Ways to Reduce the Increased Threat of Expense Report Fraud under Tax Reform by Richard A. Pollack, CPA

Posted on August 27, 2018 by Richard Pollack

Entertaining clients, referral sources and employees with tickets to sporting events, country club outings, fishing trips or other forms of business promotion are common business practices. No matter how significant these costs, businesses have had the reassurance that the IRS would permit them to deduct all or a portion of these meals and entertainment (M&E) expenses from their taxable income. This benefit changes in 2018 with the passage of the Tax Cuts and Jobs Act (TCJA), which limits or, in some instances, eliminates the deductibility of M&E expenses and potentially puts businesses at greater risk of falling victim to expense report fraud.

While taxpayers are accustomed to keeping track of the costs they incur for activities that are “ordinary, necessary and directly related to the active conduct of a trade or business or for the production or collection of income,” the language of the new tax law complicates the rules regarding the deductibility of these expenses beginning in 2018. Gone are deductions for entertainment expenses, while certain meals enjoyed outside of entertainment activities may be 50 percent deductible when they meet certain criteria. As a result, businesses and workers that frequently entertain clients or referral sources will likely feel the loss of the tax savings that they once enjoyed. This, in turn, may create an environment in which employees seek out ways to get around the new rules and manipulate their expense reporting.

 What is Expense Reimbursement Fraud?

According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations, expense reimbursement fraud is one of the most common types of occupation fraud. While it can be easy to identify, once detected, it often indicates just the tip of the iceberg in a larger scheme that can cost businesses millions of dollars. Therefore, it is critical that businesses understand the following forms of expense report fraud that employees commonly commit, and be vigilant in recognizing early warning signs:

  1. Mischaracterizing expenses by falsely claiming purchases for personal use are business expenses;
  2. Creating fictitious expenses by producing bogus receipts for expenses that they never incurred;
  3. Padding expense reports by overstating or inflating legitimate expenses;
  4. Remitting the same receipt more than once in an effort to yield multiple reimbursements for one expense.

Importantly, businesses must recognize that even a minor embellishment, such as rounding up the costs of a business lunch, can quickly turn into a more elaborate scheme that can go unnoticed for years. To avoid falling victim to fraudulent schemes and exposing themselves to millions in losses, businesses should have in place appropriate controls to prevent deceptive business practices and/or to monitor and detect misuse and abuse.

Preventing Expenses Report Fraud

While the TCJA represents some of the most significant changes to the U.S. Tax Code, its rapid enactment into law leaves taxpayers with numerous uncertainties in how they should interpret many of its provisions. However, there are certain steps that businesses can and should take to reduce their exposure to fraud and the economic and reputational losses that they will incur because of these schemes.

  1. Establish and educate employees about changes to written corporate expense policies, for which non-deductible entertainment expenses should be separate from potentially deductible meal expenses;
  2. Assess membership and other fees associated with professional trade organizations (deductible), entertainment venues (nondeductible) and event sponsorships (for which the fair market value of the sponsorship may be deductible);
  3. Require employees to submit original receipts that describe the expense, the names of the attendees/participants, the business purpose of meetings/meals, and the topics of business discussed;
  4. Require employees to attach to receipts additional proof that an expense is work-related (i.e. conference brochure) and not a form of entertainment;
  5. Establish a policy that requires supervisors/managers, payroll or HR personnel to review/approve every one of workers’ expense reports prior to reimbursements;
  6. Compare workers’ expenses to their work schedules, prior month and prior year expenses;
  7. Avoid reimbursing workers in cash;
  8. Consider using the IRS-recommended per diem rates for meals and mileage;
  9. Consider the use of corporate credit cards to track employee’s expense activities and compare them to expense reports;
  10. Verify mileage claims and require employees to detail claims of miles traveled by including exact addresses of locations;
  11. Conduct spot audits to detect anomalies or flag unverified expenses; and
  12. Strictly enforce expense-reporting policies, investigate suspicious claims and establish a formal system for managing the process and prosecuting fraudsters.

Businesses should not overlook the potential impact expense reimbursement fraud can have on their operations, their corporate reputation and their net income.

About the Author: Richard A. Pollack, CPA/ABV/CFF/PFS, 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 rpollack@bpbcpa.com.

 

 

IRS Clarifies Assets Eligible for First-Year Bonus Depreciation Deductions for Real Estate Businesses by Angie Adames, CPA

Posted on August 23, 2018 by Angie Adames

The Tax Cuts and Jobs Act (TCJA) that went into effect on Jan. 1, 2018, provides an opportunity for taxpayers to accelerate generous depreciation deductions for “qualified property” acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. However, because lawmakers drafted and passed the Act in haste, many taxpayers are left confused by certain provisions of the new law, including the type of assets that qualify for first-year bonus depreciation. Following is the IRS’s recently issued guidance intended to answer taxpayers’ questions and help them to obtain the full benefit of immediately writing off the costs of certain business assets.

Confusion Created By Tax Reform

In general, the TCJA increases first-year bonus depreciation deductions from 50 percent to 100 percent for an expanded universe of qualified property, new and used, with a recovery period of 20 years or less, as long as the taxpayer acquired the property from an unrelated party after Sept. 27, 2017, and before Jan. 1, 2023. In 2023, these depreciation deductions phase down to 80 percent, followed by 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. Taxpayers that build or acquire improvements can realize enhanced benefits from this provision of the new law when they conduct cost segregation studies that identify qualified property they can fully expense.

The language of the TCJA eliminates the availability of bonus depreciation to qualified leasehold improvement property, qualified restaurant improvement property, and qualified retail improvement property placed in service on or after Jan. 1, 2018. Instead, it consolidates these types of property into a new category of Qualified Improvement Property (QIP), defined as improvements to interior portions of non-residential buildings placed in service before the placed-in-service date of the improvements with a few exceptions.

IRS Clarification

While, the IRS does not specifically address QIP as qualified property for bonus depreciation for tax years 2018 and beyond, it does provide confirmation that taxpayers can fully expense QIP on their 2017 tax returns when they acquire and begin construction on QIP after Sept. 27, 2017, and before Jan. 1, 2018.

The IRS’s recently issued guidance also provides taxpayers with some clarity on what constitutes used property for purposes of qualifying for bonus depreciation. For example, used property will qualify for bonus depreciation as long as taxpayers meet the following criteria:

  • They had no depreciable interest in the property prior to or at the time of acquisition;
  • They acquired the property from an unrelated third party in an arm’s length transaction; and
  • They entered into a legally binding contract to acquire the property after Sept. 27, 2017.

With this in mind, it is important for taxpayers to understand that property they previously leased could qualify for bonus depreciation when acquired after Sept. 27, 2017. In addition, they may apply bonus depreciation to basis step-ups that result from a sale or exchange or a partnership interest. This preferential treatment of certain basis step-ups should be considered when planning a full or a partial buy-out of a partner and, in many situations, could make sales of partnership interests more attractive than partnership redemptions. Furthermore, the proposed guidance clarifies that when a taxpayer acquires used property in a like-kind exchange, only the “new funds” basis (and not the carryover basis) may qualify for bonus depreciation.

To help taxpayers maximize tax savings opportunities under tax reform, they should meet with qualified accountants and advisors who understand all of the nuances of the law and how to apply subsequent guidance to taxpayers’ specific and unique circumstances.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

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

Tax Attributes Prove to be a Valuable Tool in Post-Mortem Income Tax Planning for Decedents and Survivors by Jeffrey M. Mutnik, CPA/PFS

Posted on August 21, 2018 by Jeffrey Mutnik

Under U.S. tax laws, the losses, credits and adjustments that a taxpayer is entitled to claim on his or her tax returns are unique to that specific individual, regardless of whether or not he or she is married and/or annually files joint tax returns with his or her spouse. Therefore, the tax attributes that an individual may use to reduce gross income and federal tax liabilities will not automatically transfer to a surviving spouse or the beneficiary of a decedent’s estate. One example of this concerns business losses.

The services that a business owner performs on a daily basis ultimately influence the overall success and profitability of that company. If the owner is unable to work due to illness, injury or death, it is likely that the business will suffer and generate losses. When businesses are structured as sole proprietorships or pass-through entities, such as partnerships or S Corporations, the owners, or partners, will report these losses on their federal tax returns.

When a business’s losses exceeded taxpayers’ income in 2017 or prior, taxpayers created Net Operating Losses (NOLs) that they could carry backwards to claim refunds on taxes already paid during the two preceding tax years. If a taxpayer died in the year of the NOL, he or she was able to transfer the carryback refunds to his or her estate. This is no longer the case, as the Tax Cuts and Jobs Act that went into effect in 2018 eliminates NOL carrybacks.

While the new tax laws do preserve taxpayers’ ability to carry forward NOLs to offset income in future years, this benefit does not typically apply to taxpayers who pass away in 2018 or later, as they will not file any additional tax returns in the years following their deaths. Moreover, because those losses are unique to the deceased taxpayer, they are not transferrable to the decedent’s estate or to his or her surviving spouse to use in the future. However, all is not lost. In fact, there are a few opportunities for taxpayers to absorb some or all of their spouses’ NOLs in the year of their spouses’ deaths, which could essentially create tax-free income for their heirs.

To take advantage of such losses, a surviving spouse should choose to file federal income tax returns as “married filing jointly” for the year in which his or her spouse passes away. Doing so will allow the survivor to use the decedent’s unused NOL (either from current or prior years) to offset the couple’s combined reportable income for the year. After December 31 in the year of the decedent’s death, however, those losses will disappear and no longer be available to the decedent’s heirs. Therefore, it behooves a surviving spouse to meet with tax advisors as soon as possible after the death of a husband or wife in order to project taxable income for the year and analyze the efficacy of recognizing income by year-end.

One way that a surviving spouse may make use of the NOL of a late husband or wife is to create income by withdrawing money from a retirement account. If the surviving spouse does not need the cash from a retirement plan distribution, he or she can roll over the distribution into a Roth account. It even makes sense for a surviving spouse to take a retirement plan distribution that exceeds the amount of the decedent’s NOL for three reasons:

  1. The NOL will eliminate the surviving spouse’s tax liability on the bulk of the income generated by the distribution, leaving the remaining amount subject to tax at the lowest level(s) of the graduated tax rates;
  2. An individual can avoid tax on a voluntary retirement plan withdrawal that is not a required minimum distribution (RMD) when they return the withdrawn amount to his or her retirement account within 60 days; and
  3. Withdrawing cash from a retirement account will lower the asset base of the survivor’s deferred income, thereby lowering the amount of future RMDs.

Another way that individuals may use deceased spouses’ NOLs is to create income in the year that their husbands or wives pass away by selling appreciated assets that the decedents did not own. The NOL would essentially eliminate the taxable gain that such a sale typically would trigger. Nonetheless, it is important for survivors to know that the wash-sale rules do not apply to assets sold for a gain. As a result, they can repurchase the sold asset(s) immediately and receive the benefit of new, stepped-up tax basis.

As a final option, taxpayers may rely on the tried-and-true methods of accelerating income and/or deferring deductions to absorb a decedent’s loss that would otherwise go unused.

It is common for individuals to overlook the importance of tax attributes during a chaotic year in which a loved one passes away. Working with advisors who have the knowledge and experience in these matters can yield significant tax benefits.

 

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.

 

 

The Real Way to Plan a Wedding: Keep Yours, Mine and Ours in Mind by Sandra Perez, CPA/ABV/CFF, CFE

Posted on August 21, 2018 by Sandra Perez

Wedding planning can be an exciting time. However, the anticipation of preparing for one’s big day should not be overshadowed by the fact that marriage is a contract involving a broad range of legal and financial obligations defined by the state where you live. In addition to shopping for a dress, selecting floral arrangements and creating seating charts, spouses-to-be should recognize that they and their future spouses have a right upon divorce to an equitable distribution of property and financial support. While it is difficult to think about the potential end to a marriage that has not yet begun, failing to plan properly for this can spell disaster for your future financial well-being.

When you say “I do,” you not only vow to join lives with another person for better or for worse, you are also promising that you will share the assets you and your spouse acquire during the marriage, and you will give up your rights to half of those marital assets in the event of a future divorce. All too often, couples do not recognize that the non-marital assets they bring with them into a legal union can later become marital property, which the courts can and will divide in divorce proceedings.

For example, if you own a business or a home before saying your marriage vows, those assets and the income they generate can become marital property subject to equitable distribution in the future. Similarly, if you are the recipient of a significant inheritance or gift during your marriage, your spouse may have a right to claim half of the value of those assets, including any appreciation in value, when the marriage ends. Avoiding these challenging issues requires couples to understand the concept of comingling non-marital and marital assets.

 Comingling Marital and Non-Marital Property

Under Florida law, non-marital assets are not subject to equitable division upon divorce. You may leave the marriage with the property you brought with you, along with any appreciation in the value of those personal possessions. However, if you “comingle,” or combine, your non-marital property with that of your spouse, or with property you both acquired together during marriage, it can become a marital asset subject to equitable division for which your spouse is entitled one half of the value.

Unfortunately, a very thin and easy-to-cross line exists when trying to distinguish between marital and non-marital assets. At the most basic level, once you withdraw money from your individual, premarital savings account and deposit it into your joint marital account, you are comingling funds. Consider what would happen if you owned a condominium prior to your wedding day. If you sold that premarital apartment during your marriage and used the sale proceeds towards a new home for you and your spouse, you essentially comingled the value of that premarital condo and turned into a marital asset. Likewise, if, during your marriage, you receive a gift of interest in a family business that you help grow during the marriage, the increase in the value of that gift will be subject to division upon divorce.

 How to Protect Pre-Marital Assets

While no one wants to begin a marriage with thoughts of it terminating, the unfortunate realty is that half of all marriages end in divorce. Pretending otherwise can have damaging financial consequences. The best way to protect yourself and your assets before getting married is to consider a prenuptial agreement that details what will happen to you and your spouse financially in the event of a divorce.

Prenups are no longer reserved just for the uber-wealthy. In recent years, they have gained in popularity across all income levels, especially as both spouses increasingly share in the responsibilities as family breadwinners. In fact, couples can agree in a prenup how they will use their respective incomes earned during their marriage. Moreover, with the high rate of divorce, many well-established individuals are entering into second and third marriages, blending families and bringing with them significant assets, including established businesses and retirement savings as well as the financial care for minor children. Therefore, a prenup would be important to protect your premarital assets for the benefit of your children from a previous marriage.

Prenuptial contracts open the door for couples to share detailed information about the income, assets and debts they bring individually into a marriage. The prenup helps to ensure that neither party enters into a marriage financially blind. It creates a dialogue between the spouses-to-be to share their financial goals, values and expectations. This is especially important when considering that financial issues are one of the leading causes of divorce.

Couples should remember that people and circumstances could change over the course of a marriage, whether it be a few years or many decades. The decisions they make permanent today, before they marry, will undoubtedly affect their future – together or separately. Therefore, when preparing a prenuptial agreement, couples should look down the road and consider if the decisions they agree to today, under current circumstances, will still make sense and be considered fair to them in five, 10 or 25 years, after they have children and their assets appreciate in value. A well-drafted prenup with the benefit of experienced legal and financial counsel can include language that anticipates these factors and can even feature a “sunset provision” that voids the agreement automatically after a certain period of time. These advisors, which may include CPAs, should also have experience in family law and be able to run the numbers to help you understand the current and future financial implications and tax consequences of the decisions you agree upon in a prenup you sign today.

In the current legal environment, it is not easy to challenge or break a prenuptial agreement, especially if there was full financial disclosure and both parties had separate legal representation. However, couples may agree, at some point during their marriage to terminate a prenuptial contract. This should be done formally, with caution, under the guidance of legal and financial counsel.

While even the idea of a prenuptial agreement can be uncomfortable to bring up during an engagement, the truth is that by being proactive and addressing the ugly side of marriage statistics up front, couples can protect themselves and their ability to maintain their financial independence – whether together or apart – throughout the remainder of their lives.

 

About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensics practice with Berkowitz Pollack Brant, where she works with attorneys and individuals with complex assets and income to provide expert witness testimony and assistance with settlements. Her expertise includes valuing business interests, analyzing income, determining net-worth, preparing financial affidavits, and calculating alimony and child support obligations and litigation support in all areas of divorce proceedings. She practices in the tri-county area of South Florida and can be reached at (954) 712-7000 or via email info@bpbcpa.com.

Tax Reform Can Mean Bigger Depreciation Deductions for Businesses by Cherry Laufenberg, CPA

Posted on August 16, 2018 by Cherry Laufenberg

Small businesses that are considering capital investments in new or used equipment, machinery, vehicles, furniture, or even buildings, can start shopping in 2018 to take advantage of temporary tax saving opportunities contained in the Tax Cuts and Jobs Act (TCJA).

Bonus Depreciation

The new law allows businesses to immediately write-off more of the costs they incur for an expanded list of qualifying tangible personal equipment and software that they purchased or financed during the tax year.

For example, both new and used assets purchased after Sept. 27, 2017, are eligible for 100 percent bonus depreciation in the first year that they are ready and available for a taxpayer’s business purposes. Prior to the TCJA, bonus depreciation was limited to 50 percent and was applicable only to new property. Essentially, businesses may now immediately recover the full costs of the investments they make to grow their operations.

This benefit will remain in place until 2023, when the deduction is set to begin decreasing until it completely phases out in 2026.

Section 179 Property

To further encourage businesses to invest in themselves and flex their purchasing power, the TCJA also increases the amount that businesses, including developers and owners of commercial real estate, may elect to deduct in a year in which they purchase and put into service new and used Section 179 property, which include:

  • tangible assets used in a trade of business, including furniture, computers, machinery and other equipment,
  • off-the-shelf software,
  • property attached to but not a structural component of a building, and
  • improvements, such as roofing, air conditioning/heating, fire protection and security systems, made to existing non-residential buildings that were first placed in service prior to Dec. 31, 2017.

Beginning in 2018, the maximum allowable deduction doubles to $1 million, up from $500,000 the prior year, on new and used equipment purchased and placed into service after Dec. 31, 2017. When total equipment costs exceed $2.5 million, the deduction will decrease on a dollar-for-dollar basis. Both the spending cap and the amount of the deduction

Tax Planning Opportunities

With an even greater number of assets qualifying for an even larger deduction under both bonus depreciation and Section 179 expensing, businesses will be able to write off more of their operational costs up front and free up more of their capital to expand and improving earnings potential for the future. Under some circumstances, a business asset will qualify for both tax incentives, which will allow businesses to deduct the full purchase price of those assets from their gross income. In other situations, taxpayers will need to determine which provides them with greater value in the current year and far into the future.

It is important that business owners not only identify and leverage the cost savings they may reap by investing in qualifying property beginning in 2018, they must also understand how these provisions will affect their other tax liabilities under the new law. The best way to accomplish this is to engage in advanced planning under the guidance of experienced financial advisors and tax accountants.

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.

Tax Reform Exempts More High-Net-Worth Families from the Dreaded Estate Tax by Rick Bazzani, CPA

Posted on August 15, 2018 by Rick Bazzani

While the Tax Cuts and Jobs Act (TCJA) signed into law in December of 2017 did not make many adjustments to the existing gift, estate and generation-skipping transfer tax regimes, what it did do beginning on Jan. 1, 2018, is significant.

Doubles the Estate and Generation-Skipping Transfer Tax Exemption

Under the new law, fewer taxpayers will need to worry about paying federal estate tax. In 2018, the exemption doubles from $5.6 million in 2017, to $11.18 million for single-filing taxpayers, and $22.36 million for married couples filing joint tax returns. The amount of the exemption will be indexed for inflation until 2026, when it is set to return to its 2017 pre-tax reform limit.

What this means is that individual taxpayers may transfer up to $11.18 million in assets to their heirs in 2018 (or up to $22.36 million for married couples filing jointly), either during life or at death, without incurring federal estate taxes. Anything above the excluded amounts is subject to the same 40 percent flat tax rate that has been in effect since 2013.

Retains Step-Up Basis for Assets Transferred at Death

Beneficiaries who inherit the assets of a deceased taxpayer between 2018 and 2026, when the estate tax provisions of the TCJA are set to expire, will continue to receive a step-up in the value of those assets. Therefore, a beneficiary’s costs basis in an inherited asset will be readjusted upward to the asset’s fair market value at the time of the benefactor’s death. This allows beneficiaries to minimize or even eliminate their exposure to capital gains tax when they sell inherited assets in the future.

Maintains Annual Gift Tax Exclusion

Giving gifts allows taxpayer to shield their wealth from future estate tax liabilities by removing assets and their future appreciation value from their taxable estates. Under the new tax laws, taxpayers may annually gift up to $15,000 in cash or assets to as many people as they choose free of transfer taxes as well as an unlimited amount of gifts in the form of tuition and medical expenses paid directly to a qualifying institution on behalf of another individual. For married couples, the gift tax exclusion in 2018 is $30,000. Any gifts above these amounts will be subject to 40 percent tax rate.

 Reduces Income Tax Brackets for Trusts and Estates

In addition to lowering the existing seven income tax brackets, the TCJA also reduces the top bracket for estates and trusts to 37 percent on taxable income in excess of $12,500.

Warnings and Planning Opportunities

Despite the generous provision relating to the estate tax, the new law currently calls for the increased exemptions to expire on Dec. 31, 2025, and revert to their 2017 limits in 2026.

Without the ability to look into a crystal ball and know what Congress will do over the next eight years, high-net-worth families must plan appropriately under the guidance of experienced financial advisors and tax accounts. This may include establishing trusts, if none already exists, and maximizing gifts to these estate planning vehicles. These gifts effectively transfer assets out of an individual’s taxable estate to family members or other named beneficiaries and allow grantors to use trust assets to fund life insurance policies or, in some instances, pay income tax liabilities while they are alive.

 

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 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

Tax Reform Provides Senior Citizens with Opportunities to Maximize Tax Benefits of Charitable Giving by Adam Cohen, CPA

Posted on August 08, 2018 by Adam Cohen

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.

It’s Not too Late for Businesses to Plan Ahead for Hurricanes and Other Disasters by Daniel Hughes, CPA

Posted on August 07, 2018 by Daniel Hughes

We are getting to the peak of hurricane season but it is not too late for businesses to prepare for the threat of a potential disaster that can interrupt normal businesses operations and cause millions of dollars in damages and lost revenue. In fact, by taking action now, businesses cannot only avoid the avalanche of storm-prep stress that descends on Floridians as soon as high winds threaten our shores, they can also be better prepared to recover and rebuild after a storm passes.

Following are just a few things that businesses should consider as part of a well-thought-out disaster-preparedness and business-continuity plan.

  • Develop an emergency plan or review and update last year’s plan based on changes in circumstances, personnel, etc.;
  • Review your property insurance and business interruption policy, and understand the terms, policy limitations, exclusions and other loss considerations. Up-front preparations can help you to mitigate losses and more quickly recover lost revenue;
  • Update contact information to help you communicate with employees, vendors, customers and any other people your business relies on for maintaining and sustaining normal operations;
  • Ensure records of inventory, orders and events are up-to-date;
  • Confirm accuracy of historic, current and projected financial data, including balance sheets, profit and loss statements, budgets;
  • Document valuables, including taking photographs and video of business assets, such as real estate, equipment, machinery;
  • Create and store in a safe place (such as the cloud) electronic copies of important business documentation and inventory of assets; and
  • Have data duplication, backup and recovery systems in place to help you access files and restore data as quickly as possible.

 

The forensic accountants with Berkowitz Pollack Brant have extensive experience helping businesses prepare for, document and defend commercial insurance claims that result from natural or man-made crises.

 

About the Author: Daniel S. Hughes, CPA/CFF/CGMA, CVA, is a director with Berkowitz Pollack Brant’s Forensics and Business Valuation Services practice, where he helps companies of all sizes assess economic damages, lost profits and the quantification of business interruption insurance claims. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

New York City Businesses May Begin Receiving Tax Credits against Commercial Rent Liabilities by Michael Hirsch, JD, LLM

Posted on August 02, 2018 by Michael Hirsch,

Beginning on July 1, certain small businesses renting commercial real estate in New York City may qualify for a tax credit that can potentially exempt them from paying any commercial rent tax (CRT) liabilities for the 2018 tax year. Business owners should meet with state and local tax (SALT) advisors to understand how they may qualify for the credit and what responsibilities they may still have to taxing authorities.

New York City imposes a 3.9 percent tax on the base rent that tenants pay for commercial real estate located south of 96th Street in Manhattan. Historically, the tax applied to all taxpayers with a minimum of $250,000 in annualized base rent, which includes the amount of lease payments, real estate taxes and other expenses paid to a landlord less any amount the tenant received from a subtenant. However, in December 2017, the mayor signed into law an exception for small businesses that meet the following criteria:

  1. Total business income reported on federal tax returns for the preceding year was less than $5 million, and
  2. Annual base rent for the current year is less than $500,000

A partial credit against the New York City CRT is available to taxpayers whose total income is between $5 million and $10 million and who have an annual base rent that does not exceed $550,000.

Despite the potential elimination of CRT tax liabilities, eligible taxpayers with at least $200,000 in annual base rent are still responsible for filing CRT returns. In addition, entities with common ownership must remain on the lookout for how the city will calculate the income of entities with common ownership for purposes of calculating the income threshold.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individuals and businesses to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

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

Taxpayers with expiring ITINs Should Renew Now to Avoid Rush Later by Andrew Leonard, CPA

Posted on July 26, 2018 by Andrew Leonard

This summer, more than 2 million U.S. taxpayers will receive notices advising them that the Individual Taxpayer Identification Numbers (ITINs) previously issued to them by the IRS will expire by the end of 2018. Affected taxpayers include those individuals whose ITINs have the middle digits 73, 74, 75, 76, 77, 81 or 82, as well as anyone who did not use an ITIN on a federal tax return at least once in the past three years.

The IRS issues ITINs to people who have U.S. tax-filing and/or income-reporting obligations but do not have or are not eligible to receive a Social Security Number (SSN). Once an individual qualifies for an SSN, he or she should contact the IRS to merge their ITIN tax account into the new account.

Notice CP-48 provides affected taxpayers with directions for renewing their ITINs in order for them to file U.S. tax returns in 2019 and avoid delays in receiving any potential tax refund. The first step in the process requires that taxpayers complete and submit to the IRS Form W-7, Application for IRS Individual Taxpayer Identification Number, along with supporting documentation that authenticates their identities. To expedite this process and saves taxpayers the hassle of mailing original documents to the IRS, consideration should be given to working with Certified Acceptance Agents (CAAs) throughout the country who are authorized by the IRS to verify ITIN applications.

The IRS recommends that taxpayers affected by this notice also renew the ITINs for their spouses and children during this time, even if the family member’s ITIN does not expire this year. However, because the U.S. new tax laws eliminate personal exemptions for tax years 2018 through 2025, spouses and dependents who reside outside the United States do not need to renew their ITINs unless they anticipate filing their own U.S. tax return in 2019.

Berkowitz Pollack Brant is a Certified Acceptance Agent (CAAs) authorized by the IRS to help foreign individuals apply for and renew ITINs. The CPA firm’s advisors and accountants have deep experience helping domestic and foreign individuals and businesses comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

About the Author: Andrew Leonard, CPA, is an associate director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

Florida Renews Annual Back-to-School Sales-Tax Holiday in 2018 with One Big Exception by Michael Hirsch, JD, LLM

Posted on July 24, 2018 by Michael Hirsch,

Florida families should mark their calendars for the first weekend in August when the state’s annual three-day back-to-school sales-tax holiday begins. Beginning on Friday, Aug. 3, through the end of Sunday, Aug. 5, families can reap significant savings and avoid paying state and local sales tax on in-store or online purchases of qualifying school supplies, including:

  • Clothing, footwear and certain accessories selling for $60 or less per item; and
  • Notebooks, pens, backpacks and other supplies selling for $15 or less per item.

Interestingly, printer paper, staplers, staples, masking tape and correction pens/fluids are taxable during the weekend. Also absent from the list of products qualifying for the sales-tax holiday in 2018 are personal computers, laptops, tablets and printer ink cartridges, which were exempt in 2017 up to $750. In addition, families may not exclude tax on books that are not otherwise exempt or the repair or alteration of eligible items. To see a detailed list of qualifying products, visit the Florida Department of Revenue’s website at http://floridarevenue.com.
In Broward County, where public school begins on Aug. 15, Florida sales tax is 6 percent. In Palm Beach and Miami-Dade counties, where the 2018-2019 school year begins on Aug. 13 and Aug. 20 respectively, sales tax is 7 percent.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individuals and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

Now is the Time to do Some Reverse Estate Planning by Jeffrey M. Mutnik, CPA/PFS

Posted on July 23, 2018 by Jeffrey Mutnik

For decades, families with moderate-to-high net worth have employed a variety of tried-and-true estate-planning techniques to protect assets, transfer wealth to future generations and minimize their income and estate tax liabilities. However, with the changes to the tax laws that went into effect beginning in 2018, a strategy that worked as recently as last year may not achieve the same intended goals and objectives in the future. For example, the recent doubling of the federal estate tax applicable exclusion amount to $11.18 million for an individual, or $22.36 million combined for married couples, provides families with a window of opportunity to reconsider the current and future application of their existing estate-planning tools.

The use of family limited partnerships (FLPs) as a viable estate-planning tool has become ubiquitous as older generations live longer, the stock markets surge forward, and the equity taxpayers have built up in their homes has turned into substantial real estate investment assets. FLPs are legal structures in which families typically hold appreciated assets, including, but not limited to, portfolio investments and real estate. The FLP itself is not subject to tax on the assets it holds. Rather, the FPL’s partners report on their income tax returns their annual share of the entity’s income and deductions in proportion to the interest they hold. Whereas general partners (GPs) have complete control over how an entity manages and invests its assets, limited partners (LPs) hold a minority, non-controlling stake in the partnership and therefore qualify to receive a discount on their interest in the pro-rata value of the partnership’s underlying assets. Taxpayers may leverage this lack of marketability and control over FLP interests by conducting one or more transactions to convert direct ownership of select assets into indirect ownership of those assets through LP interests or non-managing limited liability company (LLC) interests. Depending on the structure, this reduction in the value of the limited partners’ interests could even eliminate their gift and/or estate tax liabilities.

The transfer of assets to a limited partnership also allows for centralized management of those assets and provides LPs with the benefit of asset-protection from potential future creditors, both of which become more important as the elder family members continue to live longer. Despite these benefits, the transformation of ownership interest does have one significant income tax-related drawback: lower tax basis of the inherited LP interest. When LP die, instead of passing their original assets at their full date-of-death value, they pass their discounted LP interest to named beneficiaries, whose tax basis will be the discounted date-of-death value of such interest. Consequently, beneficiaries will most likely not be able to liquidate a decedent’s assets without an income tax consequence.

Before the tax code allowed decedents to pass their unused estate tax exemption to a surviving spouse, most families were more concerned with receiving a discount to reduce the value of their taxable estates than a lower basis of those inherited assets. However, this concept of portability combined with the increase in the estate tax exemption between 2018 and 2025 should persuade families to review, rethink and even reverse some, or all, aspects of their existing estate plans.

As an example, consider what would happen if the LP interest became a GP interest. Could the risk of potentially losing asset protection be outweighed by the potential increase of the basis inherited without a discount? Individuals must consider a myriad of factors when reviewing their estate plans under the new tax laws, including, but not limited to federal and state-level estate tax, income tax and other taxes to which individuals may be exposed. If a family has enough assets they want to preserve, but not enough to trigger a federal estate tax liability, it is appropriate that they question whether their current estate plans continue to achieve their short- and long-term goals.

The advisors and accountant with Berkowitz Pollack Brant have deep experience navigating treacherous tax laws and developing comprehensive estate plans tailored to meet the unique challenges and needs of U.S. and multinational families.

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.

When was the Last Time you Assessed your Business’s Cyber-Security Risk? Now is the Time to Get Started by Steve Nouss, CPA, CGMA

Posted on July 20, 2018 by Steve Nouss

The frequency and sophistication of cybersecurity attacks continue to intensify leaving businesses, governments and not-for-profits with an ever-present risk of falling victim to data breaches. Cyberattacks not only disrupt normal business operations, they also erode public trust and can lead to irreparable reputational damage, loss of customers and intellectual property, litigation, and significant fines and penalties. Even as businesses race to invest in the latest technologies to improve operational efficiencies and protect critical information assets, many are woefully lacking formal programs to communicate with and reassure stakeholders of the effectiveness of their cybersecurity risk-management activities. To change this, the American Institute of Certified Public Accountants (AICPA) has developed a standard cybersecurity risk-management reporting framework for entities in all industries across the globe to use in the future.

Cybersecurity Risk Management Reporting Framework
The new AICPA Cybersecurity Risk Management Reporting Framework focuses on 19 criteria categories that businesses must address to demonstrate that they are effectively managing cybersecurity threats and have in place suitable policies, processes and controls to protect data and to detect, respond to, mitigate and recover from a security breach. It builds upon the globally accepted internal control framework established by the Committee of Sponsoring Organizations (COSO) and is incorporated into the new system and organization controls (SOC) reporting guidance that helps entities build trust with their constituents, and document their efforts to protect and secure information and technology. Its intent is to help businesses ensure that all of their stakeholders, including senior management, members of the board of directors, business partners and customers, have documentation to help them understand and make informed decisions based on how an organization manages its cybersecurity risks. Investors and analysts may also benefit from receiving this insight into the potential threats to an organization’s operational, reporting and/or compliance objectives, which, subsequently, can affect the business’s value.

SOC cybersecurity exam reports, which must be prepared by certified public accountants (CPAs) to provide independent and unbiased assessments of a risk management program’s effectiveness, include three sections:

  1. Assertion of Management, which describes an entity’s cybersecurity risk-management program and its inherent limitations;
  2. Independent Accountant’s Report detailing the entity’s risk-management responsibilities, the responsibilities of the accountant preparing the report, and his or her opinion on the entity’s program;
  3. Management’s Description of an entity’s cybersecurity risk-management program, including details about how the entity “identifies its information assets, the ways in which it manages the cybersecurity risks that threaten it, and the key security policies and processes implemented and operated to protect the entity’s information assets against those risks.” The report can focus on “a point in time” initially and subsequently cover a longer 12-month “period of time.”

Readiness Review Provide Short-Term Cybersecurity Risk Assessment
SOC reports should reduce entities’ communication and compliance burdens, minimize their risk of vulnerabilities and provide a vehicle for sharing this information with a broad range of stakeholders. Nonetheless, businesses that do not want to invest the time or dollars into a thorough audit or SOC report have a short-term option to evaluate their existing cybersecurity processes and consider steps they may need to take to enhance and bolster those controls.

A “readiness review” is more of a cursory check-up of the security, availability and confidentiality of an entity’s existing information and technology based on more than 230 “points of focus” identified by the AICPA to measure the effectiveness of an organization’s internal controls. The informal evaluation aims to detect potential weaknesses and recognize opportunities to enhance security by employing a broad range of best practices when designing, implementing and initiating an effective cybersecurity risk-management program that meets their unique needs, objectives and business structure.

No longer can the responsibility to protect confidential business data be relegated solely to an information technology expert or a single team. Cybersecurity must be an enterprise-wide priority involving every level of an organization, including senior management, members of the board of directors and even individual employees who regularly connect to the network and have access to an organization’s knowledge base. While it is nearly impossible to eliminate the threat of a cyberattack, businesses can be proactive and take steps to minimize their risk of falling victim to these security breaches and putting their brands and reputations in danger. Time is of the essence.

The professionals with Berkowitz Pollack Brant’s Business Consulting Group have deep experience working with businesses to address the rising challenges of cybersecurity risks and help them to instill confidence and security among their vendors, customers and business partners. The firm holds certification on completion of cybersecurity training and is registered with the AICPA to provide service businesses with SOC audits and reports that help improve transparency and build trust among service organization’s current and prospective customers.

About the Author: Steve Nouss, CPA, CGMA, is a director with Berkowitz Pollack Brant’s Consulting Services practice, where he provides profit-enhancing CFO services, operational reviews, enterprise risk management, internal audit and anti-fraud services for businesses of all sizes. In addition, Nouss is a System and Organization Controls (SOC) specialist who holds AICPA certification in cybersecurity. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

Tax Reform Makes Cost Segregation Studies more Important than Ever for Real Estate Businesses by Joshua P. Heberling

Posted on July 19, 2018 by Joshua Heberling

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.

New Tax Credit for Employers Offering Family and Medical Leave Benefits to Workers by Adam Cohen, CPA

Posted on July 17, 2018 by Adam Cohen

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.

New Rules for Tax Treatment of Motor Vehicle Use in 2018 by Flor Escudero, CPA

Posted on July 11, 2018 by

The use of a motor vehicle can sometimes provide individuals and businesses with tax benefits. Here is what taxpayers need to know for 2018.

Increased Standard Mileage Rates

Taxpayers have the option to deduct the actual use of their cars, vans, pickups and panel trucks for multiple purposes or, they may simply apply the standard mileage rates, which the IRS resets annually. Following are the standard mileage rates for 2018:

  • 54.5 cents for every mile driven for business purposes,
  • 18 cents per mile driven for medical purposes, and
  • 14 cents per mile driven in service of a charitable organization, including travel to and from volunteer work

Taxpayers may not use these rates for more than four motor vehicles they use simultaneously. Nor may they use the business travel rate if they previously used a depreciation method under the Modified Accelerated Cost Recovery System or after they claimed a Section 179 deduction for that vehicle.

Temporary Elimination of Deductions Other Vehicle Expenses

Between Jan. 1, 2018, and Dec. 31, 2025, the IRS will not permit taxpayers to deduct job-related moving expenses, including the miles a taxpayer travels in his or her automobile as part of the move, unless the taxpayer is a member of the Armed Forces of the United States.

In addition, the Tax Cuts and Jobs Act temporarily eliminates all un-reimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel. Therefore, taxpayers may not apply the business standard mileage rate to claim an itemized deduction for un-reimbursed employee travel expenses.

Increased Depreciation Limits

The Tax Cuts and Jobs Act increases the depreciation limitations for passenger automobiles placed in service after Dec. 31, 2017, for purposes of computing the allowance under a fixed and variable rate plan. The maximum standard automobile cost may not exceed $50,000 for passenger automobiles, trucks and vans placed in service after Dec. 31, 2017. Previously, the maximum standard automobile cost was $27,300 for passenger automobiles and $31,000 for trucks and vans.

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.

Taxes Related to Selling a Home by Adam Slavin, CPA

Posted on July 10, 2018 by Adam Slavin

The sale of a family home comes with a long list of tax liabilities and some opportunities of which sellers should be aware.

Taxable Gains and Non-Deductible Losses

The IRS allows certain individuals who sell their homes for a profit to exclude up to $250,000 of that gain from their taxable income, or $500,000 when the homeowners are married filing joint tax returns. When the exclusion amount covers the entirety of a taxpayer’s gain, he or she does not need to report the sale on his or her federal income tax return unless he or she chooses not to claim the exclusion. Should a taxpayer involved in a real estate transaction receive IRS Form 1099-S, Proceeds from Real Estate Transactions, he or she must also report the sale on their tax return.

To qualify for this benefit, you must have owned the home you intend to sell and lived in it as a primary residence for at least two of the five years prior to the date of sale. If you own multiple homes, the exclusion may be applied only to the sale of the one property where you lived for the majority of your time, unless you have a disability or are a member of the U.S. military. Any realized gains from the sale of other vacation homes will be subject to tax. Only under certain circumstances, including divorce or death of a spouse, may you qualify for a partial exclusion on the gain from the sale of a home that does not meet the two-year ownership and use requirement.

However, if you sell your primary residence for less than the amount you paid for it, you may not deduct the loss from your taxable income.

Transfers of Ownership Between Spouses

Generally, if you transferred all or a share of your home to a spouse or ex-spouse as part of a divorce settlement, you have neither a reportable gain nor loss unless your spouse or ex-spouse is a nonresident alien.

Mortgage Debt

When home sales result from a foreclosure or when lenders rework, forgive or cancel a homeowner’s mortgage debt, the seller must report those amounts as income on their tax returns in the year of the home sale.

Report Address Changes

After selling your home, it is critical that you update your address with your insurance providers, professional advisors, accountants, banks and financial institutions. It is equally important that you take the time to alert the IRS and Social Security Administration of any changes to your mailing address. For assistance, please contact your tax advisor.

 

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

IRS Offers Filing, Penalty Relief to Multinational Businesses Subject to New Repatriation Tax by Andre Benayoun, JD

Posted on July 05, 2018 by Andrè Benayoun, JD

The Tax Cuts and Jobs Act introduces a one-time “deemed repatriation tax” on the previously untaxed profits that U.S. individuals, businesses and foreign corporations owned by U.. shareholders earned and left overseas. Under the law, foreign earnings held overseas in the form of cash and cash equivalents are taxed at a rate of 15.5 percent rate, whereas foreign earnings invested in illiquid, fixed assets, such as plants and equipment, are subject to an 8 percent tax rate.

While the law allows taxpayers to make a timely election to pay the transition tax over an eight-year period, the IRS has clarified some of the initial questions that arose following the enactment of the hastily drafted new law. Following are three key points that taxpayers should plan for under the guidance of experienced tax advisors and accountants:

  • Individuals who already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing an amended tax return by the extended filing deadline of Oct. 15, 2018.
  • In some instances, the IRS will waive an estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax as long as they make all required estimated tax payments by June 15, 2018.
  • Individuals with a transition tax liability of less than $1 million who missed the April 18, 2018, deadline for making the first of the eight annual installment payments may receive a waiver of the late-payment penalty if they pay the installment in full by April 15, 2019. A later deadlines applies to certain individuals who live and work outside the U.S. The language of the law previously led taxpayers to believe that if they missed the April 18, 2018, initial installment payment deadline, they would be required to pay the entire transition tax liability immediately, rather than over an eight-year period.

About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for profit repatriation; treaty analysis; tax-efficient debt financing; and pre-immigration tax planning. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

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

Avoiding the Tax Traps of Gifts from Foreign Sources by Lewis Kevelson, CPA

Posted on July 02, 2018 by Lewis Kevelson

A common planning challenge faced by multinational families is the U.S. taxation of gifts from foreign, non-U.S. family members to their relatives who are U.S. citizens and U.S. tax residents.  For example, if a husband is a non-U.S. citizen who lives and works in foreign country X, what is the best way for him to transfer money to his wife and family living in the U.S.? What does U.S. tax law require the wife to report to the IRS on an annual basis to prevent those cash gifts from becoming subject to U.S. income tax and/or penalties? What are the reporting requirements and how can a U.S. family member avoid penalties when he or she receives a large inheritance from a relative who was a non-U.S. person at the time of passing?

Reporting Requirements

The IRS requires U.S. taxpayers to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, to report receipts of large gifts and inheritances that meet the following thresholds:

Gifts or bequests valued at more than $100,000 received from non-US individuals or foreign estates, including non-US persons related to the non-US individual or foreign estate,

  •  Gifts valued at more than $16,111 in 2018 from foreign corporations or foreign partnerships, including foreign persons related to those foreign entities,
  • Gifts in the form of distributions of loans from a foreign trust, regardless of the amount.

The $100,000 threshold is based on the aggregate value of all gifts a U.S. taxpayer receives in a given year from a foreign estate or from a non-U.S. person and his or her family members. Therefore, if a U.S. citizen receives $50,000 from her non-U.S. mother and $60,000 from her non-U.S. father, she will have a requirement to file Form 3520 and report to the IRS the aggregate value ($110,000) of both gifts.

Form 3520 is due by April 15th following the year of the gift and can be extended to October 15th if additional time is needed. Failure to timely file and report a gift or inheritance from a foreign person will result in a penalty as high as 25 percent of the amount of the foreign gift or bequest. This penalty may also apply when the information contained on a taxpayer’s Form 3520 is inaccurate or incomplete. The IRS will waive penalties for late filing if there is reasonable cause.

Avoiding Penalties and Tax Traps

U.S. citizens who expect to receive gifts from foreign sources have an opportunity to minimize their U.S. tax liabilities when they take the time to plan under the guidance of experienced tax accountants and advisors. With some advance planning preparation, it is possible for U.S. persons to receive gifts or inheritance free of U.S. taxes.

For example, foreign family members should not make “gifts” to their U.S. family members from a foreign corporation, since the IRS will consider such transfers to be taxable corporate dividends that cannot qualify as tax-free gifts. There is a similar concern with distributions received from foreign partnerships, which the IRS would also presume to be taxable distributions.

Another potential tax trap can occur when U.S. persons receive as “gifts” shares in a foreign corporation that owns assets that produce passive income. This may include an offshore company that owns a portfolio of stocks and bonds or passively managed rental real estate. The primary tax concern is that these gifts of corporate shares could ultimately trigger a U.S. tax liability to the new U.S. owner, even if no actual cash was distributed. U.S. persons are also susceptible to taxation in connection with distributions or loans they receive from certain foreign trusts. For example, a U.S. beneficiary who receives a distribution from a foreign non-grantor trust could be subject to U.S. income tax and an interest charge on the distribution amount.  While beneficiaries of foreign trust distributions and loans cannot avoid the IRS’s reporting requirement (also on Form 3520) they may be able to minimize their income tax exposure on these transfers when they plan ahead and properly structure the trust and the distributions.

In each of these situations, multinational families have the opportunity, with advance planning, to restructure their holdings and/or develop appropriate gifting strategies to maximize tax efficiency for U.S. family members.

Similarly, U.S. persons should be careful of their susceptible to taxation in connection with distributions or loans they receive from certain foreign trusts. For example, a U.S. beneficiary of a foreign non-grantor trust who receives a distribution or loan from the trust could be subject to income tax and an interest charge on the distributed amount. While the U.S. beneficiary cannot avoid his or her IRS reporting requirement on Form 3520, he or she may minimize his or her income tax exposure on these transfers when the trust and distributions are properly structured far in advance.

Some Tax Relief for Married Couples

Under U.S. tax laws, special rules apply to gifts between U.S. citizens and their non-U.S. spouses. In general, married couples who are both U.S. citizens may make unlimited tax-free gifts to each other during life and at death. This is known as the marital deduction. Similarly, a U.S. citizen may receive from a non-U.S. spouse an unlimited amount of tax-free gifts.

However, the unlimited marital deduction does not apply when the spouse receiving a gift is not a U.S. citizen. Under these circumstances, a U.S. tax citizen spouse must report to the IRS any gift exceed $152,000 in 2018 that he or she makes to a nonresident alien spouse.

The advisors and accountants with Berkowitz Pollack Brant work with multinational families to comply with complex international tax laws and maximize tax efficiency across borders.

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 personal financial planning and wealth management decisions. He can be reached at the 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.

New Opportunity Zone Law can Improve Depressed Neighborhoods, Yield Investors Significant Tax Benefits by Ed Cooper, CPA

Posted on June 29, 2018 by Edward Cooper

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:

  1. Temporarily defer tax on reinvested capital gains until Dec. 31, 2026, or the date the opportunity zone fund sells the investment, whichever occurs sooner;
  2.  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;
  3.  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.

Does your Business Qualify for a Work Opportunity Tax Credit? by Michael Hirsch, JD, LLM

Posted on June 26, 2018 by Michael Hirsch,

According to the U.S. Department of Labor, the number of available job openings in April 2018 exceeded the number of unemployed individuals for the first time since 2000. In this robust labor market, businesses should not forget the Work Opportunity Tax Credit (WOTC) that is available to them when they hire veterans and other specific classifications of workers for whom significant barriers to employment may exist.

A business may qualify for the WOTC when they hire workers who fall into any of the following categories:

  • Unemployed veterans
  • Ex-felons
  • Recipients of qualified long-term unemployment benefits
  • Recipients of Supplemental Security Income (SSI)
  • Recipient of long-term family assistance
  • Recipients of Qualified IV-A Temporary Assistance for Needy Families (TANF)
  • Recipients of food stamps (SNAP)
  • Summer youth employees living in Empowerment Zones
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals

The actual amount of the credit is limited to the amount of the business income tax liability or social security tax owed. Calculating the credit is based on the worker’s classification and a percentage of the “qualified wages” the business paid to them during their first two years of employment. For example, a business may take into account up to $12,000 of the wages it pays in the first year to a qualified veteran who is entitled to compensation for a service-connected disability and who was released or discharged from the military less than one year prior to the hiring date. When the workers is a certified summer employee, the first-year wages for purposes of calculating the WOTC is limited to $3,000.

To qualify for the Work Opportunity Tax Credit, an employer must first request certification from the state workforce agency within 28 days after an eligible employee begins work. It is possible for tax-exempt organizations to qualify for WOTC when they hire veterans.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort 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.

Supreme Court Ruling Overturns Precedent on Internet Sales Tax by Karen A. Lake, CPA

Posted on June 25, 2018 by Karen Lake

On June 22, 2018, the U.S. Supreme Court issued its long-awaited decision in South Dakota v. Wayfair, eliminating physical presence as a requirement for creating economic nexus and opening the door for more states to force online and out-of-state businesses to collect and remit sales tax on sales they make to in-state residents.

The ruling overturns the court’s 1992 decision in Quill v. North Dakota, which established a physical presence test to establish economic nexus and limited a state’s power to impose sales-tax-collection obligations to only those businesses and online retailers that owned property or employed workers in that state. Since that time, e-commerce and online shopping have exploded and blurred the boundaries between state lines and the definition of physical presence. Many of the larger e-commerce companies, such as Amazon, have been collecting sales tax from remote sales all along due to their physical presence throughout most of the country. However, smaller e-retailers, including Wayfair, Overstock, New Egg and some of Amazon’s third-party sellers, have avoided sales tax requirements legally due to their lack of a physical presence in most states. This will change under the Wayfair decision, which does away with physical nexus and relies instead on economic nexus based on a sales threshold to establish a business’s meaningful and substantial presence in a state.

Going forward, states will have the power to impose sales-tax registration, reporting and collection obligations on businesses and service providers that conduct more than $100,000 in sales or more than 200 transactions in their jurisdiction in a given year. This reinforces the current economic-sales-tax-nexus standard that is already in place or pending in 20 states, including Alabama, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, North Dakota, Ohio, Pennsylvania,  Rhode Island, South Dakota, Tennessee, Vermont and Washington. Those states that have not yet enacted economic nexus laws will now have the authority to establish nexus based on low-sales thresholds, similar to that of the Wayfair decision, and compel more companies outside of their borders to begin filing sales tax returns in their states in the future. Similarly, few online and remote sellers, streaming services and web-based software providers will be able to ignore the wide range of nexus-creating laws, including affiliate nexus, click-through nexus, and marketplace nexus, that they may have previously been able to rely on to sidestep state-level sales-tax reporting responsibilities.

The biggest winners in the Wayfair decision are the states, which will be able to reach outside of their borders to impose sales tax obligations on a vast number of businesses and service providers that have sufficient sales to create economic nexus. The Government Accountability Office estimates that this will allow states to recapture approximately $30 billion in previously lost annual tax revenue that they may use to invest in infrastructure or even pass on as tax savings to its residents.

For the vast majority of brick-and-mortar and online retailers and service providers, the Wayfair decision brings a new administrative burden of complying with thousands of different tax codes that vary from state to state. It may require businesses to issue notices to customers describing their new sales tax requirements and/or invest in new software to calculate and remit tax to each jurisdiction. As a result, it is almost certain that companies will pass these compliance costs onto customers in the form of higher prices. Online sellers and streaming will no longer be able to market their ability to skirt sales-tax obligations as a competitive pricing advantage. While this may level the playing field for brick-and-mortar businesses that were previously unable to compete with online businesses on pricing, it does not make sales tax nexus any less complicated.

Berkowitz Pollack Brant State and Local Tax professionals work with individuals and businesses to understand tax policy and help companies with their sales tax compliance.

 

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.

Many Fiscal-Year Corporations will Pay a Blended Tax Rate for 2017 and 2018 by Cherry Laufenberg, CPA

Posted on June 22, 2018 by Cherry Laufenberg

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.

Tax Lessons for Students Starting Summer Jobs by Joanie B. Stein, CPA

Posted on June 20, 2018 by Joanie Stein

Summer jobs and internships often represent students’ first encounters with the Internal Revenue Service (IRS) and the U.S. tax system. In fact, first-time workers are often surprised to see how much money employers take from their pay to cover their tax liabilities.

Following are some of the important lessons students will learn, outside the classroom, about the reality of earnings, taxes, and savings.

Employed Summer Workers

A worker starting a new job will typically be required to complete IRS Form W-4, Employee’s Withholding Allowance Certificate, to help his or her employer calculate how much federal income tax to withhold from his or her paycheck and pay to the government on his or her behalf. The form asks workers to provide basic information and select their filing status, which, for most students, will be single. Things can get complicated when workers are asked to provide the “total number of allowances” they wish to claim.

Generally, the fewer allowances an individual claims, the greater the amount of income taxes withheld from his or her paycheck. Most young workers who can be claimed as dependents of their parents’ tax returns will select zero allowances on Form W-4.  However, student workers may instead claim themselves as one dependent to have their employers withhold more taxes withheld from their gross pay in order to minimize the risks that will have a tax liability come year-end.

In January, student workers will receive from their summer employers IRS Form W-2, which will summarize the gross amount they earned and the taxes they already paid. Whether or not a student will need to file a federal income tax return in April of 2019 will depend on various factors, including his or her gross earnings for the year, the amount of taxes they paid and the number of allowances they claimed. In some instances, a student may voluntarily elect to file an income tax return, especially if they are due a potential refund from the IRS.

Should a student’s summer earnings fail to meet the threshold for requiring federal income tax withholding, they will still be required to have payroll taxes withheld from their paychecks to pay into the federal Social Security and Medicare programs.

Self-Employed Students

The IRS considers students who earn cash babysitting or doing odd jobs, such as mowing lawns or cleaning pools, to be self-employed workers who, absent an employer, are responsible for paying their tax liabilities directly to the IRS. To meet their income and payroll tax liabilities self-employed students may make estimated quarterly tax payments directly to the IRS during the year.

Tip Income

Tips that students receive from working as waiters or camp counselors are considered taxable income subject to federal income taxes. Therefore, it is important that students keep an accurate log of the tips they earn and be prepared to report to the IRS cash tips of $20 or more they receive in any single month.

Saving and Budgeting

Along with the benefit of a regular paycheck is an opportunity for students to begin developing good budgeting, spending and savings habits that will serve them well far into the future. While it may be tempting for students to spend all of their summer earnings, they should consider how saving even a small portion of that money can grow in the future thanks to the magic of compounding interest. Alternatively, a student may put up to $5,500 of their summer wages into a Roth Individual Retirement Account (Roth IRA) and allow that investment to grow tax-deferred until he or she reaches retirement age, at which point he or she may withdraw the accrued savings free of taxes.

A Reminder about Tax Filing Obligations

Student workers should remember that they may have an obligation to file a federal income tax return in April regardless of the amount of their summer earnings. For example, if an employer withholds too much tax from a student’s pay, the student may qualify for a tax refund, which he or she may receive only when filing a federal income tax return. Similarly, students will need to file annual tax returns when the amount withheld from their wages was insufficient or when they earn non-wage income from sources that include investment gains or self-employment income. A student’s failure to meet a filing requirement may result in a tax bill along with an underpayment penalty and interest on the unpaid amount.

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.

Exercise Caution Planning Around New State and Local Tax Deduction Limits in 2018 by Karen A. Lake, CPA

Posted on June 14, 2018 by Karen Lake

Despite the reduction in individual federal income tax rates, tax reform dealt a significant blow to residents of high-tax states, such as New York, New Jersey and California. Beginning in 2018, taxpayers across the country are limited to a $10,000 cap on the amount of state and local taxes (SALT), including property taxes, they may deduct on their federal tax returns in a given year.

Prior to the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, high-income individuals who itemized their deductions could subtract from their gross income the full amount of state and local taxes they paid. In an effort to cushion the financial blow this cap will have on their residents, several high-tax states have been busy developing workaround legislation that would also help them keep their tax coffers full.

For example, New York passed legislation in April that introduces a new, 5 percent payroll tax on employees earning more than $40,000 per year in exchange for an employee income tax credit. While employers would be able to deduct the payroll tax, it would ultimately reduce the amount of money workers take home. According to the state, the tax credit against state and local taxes should offset any reduction in pay.

In addition, the New York law would provide its residents with the ability to satisfy their state tax liabilities and receive a fully deductible federal income tax charitable deduction when they make voluntary contributions to charitable trusts established and managed by the state and local municipalities to help fund public school education, health care and other social services. Similar strategies that would allow taxpayers to characterize state and local tax payments as charitable deductions for federal income tax purposes are in the works in other states as well.

A key issue with this type of legislation on the state level is that only federal law can control how taxpayers may characterize tax payments and deduction for federal income tax purposes. In fact, the IRS has issued warnings that it intends to ban laws that states enact to circumvent federal tax law. In response, several states have cautioned that they will continue to fight against challenges to any laws that preserve SALT deductions.

During this period of uncertainty, it is recommended that taxpayers wait for further guidance from the IRS before implementing any strategies that relate to the new limit on SALT deductions.

About the Author: Karen A. Lake, CPA, is SALT (state and local tax) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

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

New Laws Make Tax Withholding Check-Ups More Important than Ever by Nancy M. Valdes, CPA

Posted on June 13, 2018 by

Preventative care is critical to averting serious (and often costly) emergencies. Just as annual medical exams can help prevent disease, and proactive vehicle maintenance can protect against major automobile repairs, regular check-ups with accountants can help individuals avoid a surprise tax bill and penalties come the April tax-filing deadline.

One benefit of a mid-year tax check-up is to confirm that you are paying the government your fair share of taxes through estimated payments and/or withholding from paychecks in compliance with the U.S.’s pay-as-you-go system of taxation. This is more important than ever in light of the new tax laws that went into effect on Jan. 1, 2018. Some provisions of the Tax Cuts and Jobs Act (TCJA) that affect workers include a reduction in the federal tax rates, a substantial increase in the standard deduction and various modifications to many of the itemized deductions that qualifying taxpayers may have claimed in the past. In addition, the TCJA lowers the corporate tax rate and introduces a complex tax regime for sole proprietors and pass-through business entities.

Following are some considerations individuals should address with their advisors and accountants during a mid-year tax check-up.

I am a Salaried Employee who Receives a W-2

Salaried workers must complete IRS Form W-4 to help their employers calculate how much taxes to withhold from their wages and pay on their behalf directly to the government. The amount withheld will depend on various factors, including the employee’s taxable earnings, marital status, number of dependents, and the credits and deductions to which he or she may be entitled. While a W-4 is required for all new employees, workers can update these forms anytime during a year to reflect changes in their lives, such as a new marriage, a divorce or the birth of a child, which, in turn, may affect their withholding amount.

If you are a salaried employee who also has unearned income from investments, rental property, a second job or other non-wage sources, you may elect to have your employer withhold additional tax from your paycheck to reduce your risk of an unexpected tax bill. However, if your employer withholds too much tax from your paycheck, you may be entitled to a tax refund. As exciting as it may seem to receive money back from the government, you should remember that a refund is essentially a return of the money you willingly loaned to the government, interest-free, the prior year.

I am an Independent Contractor who Receives a 1099

Independent contractors, also called freelancers or gig workers, bear the responsibility for reporting and paying taxes on all income they earn, including earnings received in cash, less any deduction or credits to which they may be entitled.

Under most circumstances, if you qualify as an independent contractor, you should consider pre-paying your self-employment tax, income, Social Security and Medicare tax liabilities by making four quarterly estimated tax payments directly to the IRS in April, June, September and January. Alternatively, if you also have a salaried job, you may elect to update your Form W-4 to have your employer withhold additional tax from your paycheck to account for the untaxed income you earn as an independent contractor.

I am a Self-Employed Owner of a Pass-Through Business

Income earned by pass-through businesses organized as S Corporations, partnerships, LLCs and sole proprietorships typically flows directly from the businesses to their individual owners, who pay the resulting income tax liabilities and self-employment taxes, at their individual income tax rates. However, as a business owner, you may qualify to deduct certain expenses from your gross income and ultimately reduce the amount of tax you owe.

For 2018, the TCJA introduces a new potential tax savings for owners of pass-through businesses in the form of a 20 percent deduction on certain qualified business income (QBI). Meeting the eligibility requirements for this deduction depends on a taxpayer’s line of business, the type and amount of income they earn, as well as the amount of W-2 wages the business pays to employees and the depreciable income-producing property it owns. Due to the complexity of this provision of the new tax law, it behooves owners of pass-through businesses to engage the counsel of professional accountants and tax advisors, in order to develop an appropriate strategy that meets their unique circumstances and maximizes their potential tax savings.

I Itemized Deductions on my 2017 Tax Returns

Because the TCJA nearly doubles the standard deduction for tax years beginning in 2018, it is expected that far fewer taxpayers will itemize their deductions in the future. However, should you continue to itemize, you should be aware that the new law limits, and in some cases eliminates, some of the deductions you may have taken in the past.  For example, gone are deductions for moving expenses; fees paid to legal, tax and financial advisors; and theft and casualty losses that occur outside a federal disaster area declared by the president. In addition, there is now a $10,000 limit on the amount of state and local taxes you may deduct on your federal tax returns as well as a cap on the amount of casualty losses you may deduct and the size of a mortgage loan for which you may deduct interest. With these changes in mind, it may make sense for you to meet with a tax advisor who can project whether it makes sense for you to continue itemizing deductions in the future.

Tax reform is a game-changer that can have a significant effect on individuals’ tax bills, especially when considering how they earn wages, the types of income they earn and the way in which they structure any business entities in which they have an ownership interest. If you have not already addressed the impact of tax reform on your situation, you still have time to meet with qualified accountants to put into place an appropriate strategy to maximize tax efficiency for the remainder of the year.

 

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.

What Constitutes Best Evidence to Support Claims of Economic Damages? by Scott Bouchner, CMA, CVA, CFE, CIRA

Posted on June 11, 2018 by Scott Bouchner

Attorneys involved in economic damages cases understand that they have an obligation to prove lost profits with “reasonable certainty” based on their use of “best evidence.” However, the courts have not agreed on one universally accepted standard or criteria for what specifically constitutes best evidence; such decisions inevitably rely on the facts and circumstances of each individual case. Therefore, two courts faced with similar issues may reach entirely different opinions when deciding whether a plaintiff has supported its damage claim using the best evidence.

In Eastern Fireproofing Co. v. United States Gypsum Co., No. 57-938-G (US District Court Mass., 1970), the court stated:

“a plaintiff may not conjure up favorable estimations and hold back more solid but less favorable evidence otherwise available. And the admissibility of a particular class of evidence will depend to a degree upon the availability of less speculative evidence. On the other hand, there is no rule of law that only the best available evidence may be used. This would necessarily imply a determination of what class of evidence is best and it seems that such a determination cannot be made without infringing on the proper function of the jury as the finder of fact.”

With this in mind, attorneys have an opportunity to strengthen damages cases when they focus on reliable facts and sound methodology that other experts have attempted to use to meet or fail to meet the reasonable certainty standard. Following are just some of the factors that attorneys should consider when proving or disproving economic damages.

Use of Plaintiffs / Defendants Historical Financial Data

Supporting claims for economic damages in a commercial dispute typical starts with an historical review of a plaintiff and/or defendant’s financial data that preceded the alleged bad act of the other party. This assessment can include historical revenue, costs and profits/losses in the years leading up to a point in time and compare it to the same facts that occurred during and after the alleged damages period. Yet, experts should also consider whether or not there are factors other than the defendant’s alleged bad acts that could have caused a change in the injured party’s financial results. This may include changes in the economy, competition, technology, governmental regulation, the introduction of alternative products, etc.

Use of Contemporaneous Third-Party Market Data

The availability of contemporaneous, third-party market data can potentially help a plaintiff’s expert establish claims for damages. Conversely, defendants’ experts have been successful using contradictory data to demonstrate flaws in the plaintiffs’ analyses. Therefore, expert witnesses should tread carefully and consider the credibility and relevance of the data they use as a foundation for their testimony and make efforts to consider how other information could potentially lead to different conclusions. Moreover, they should be prepared to explain how they weighed alternative sources of data and the reasons why one set of data was preferable or more reliable than an other.

Use of Plaintiffs Other Businesses

When a plaintiff’s business does not have a sufficient track record to establish evidence of profitable operations, its historical financial data may not be an appropriate basis for estimating future profitability. Under these circumstances, some courts have accepted the historical data of a plaintiff’s other businesses as a benchmark or yardstick to establish economic damages.

However, the plaintiff ultimately bears the responsibility to demonstrate sufficient comparability between the subject business and the other benchmark businesses and make adjustments to account for differences to the extent applicable.

Reliance on Specific Customer Sales Data

Ideally, the identification of specific lost sales caused by the defendant’s bad acts helps to substantiate a claim for lost profits and can be very persuasive to a jury. With this in mind, it is generally a useful exercise to review historical sales patterns, analyze communications with customers and attempt to demonstrate sales that a plaintiff would have made but for the defendant’s actions. From a practical standpoint, however, it is rare that the plaintiff can identify the name of the customer, along with the date, amount of the would-be sale and the reasons for the loss. When it is not possible to identify these specific lost sales, some plaintiffs have been able to overcome this lack of direct information by analyzing changes in customer behavior and sales patterns, and demonstrating their connection to the specific allegations.

Use of Contemporaneous Pre-Litigation Projections and Transactions

The court’s decision in Reese Schonfeld vs. Russ Hilliard, Les Hilliard and International News Network, Inc., 218 F.3d 164; 2000 U.S. App. LEXIS 15684 is frequently cited in economic damages cases to demonstrate that a plaintiff’s contemporaneous, arm’s-length transactions involving investments in or the sale of ownership interests in the subject company may provide more reliable evidence of damages than lost profit calculations, especially when the lack of a track record would require the development of potentially “speculative assumptions.”

Similarly, the courts have often found that financial projections prepared by one or both parties prior to any litigation to be more persuasive than those prepared solely for, or in response to, litigation.

With this in mind, attorneys should be prepared to share with their experts their clients’ accounting and operational data, budgets, financial forecasts and projections, pre-trial business and marketing plans, sales and pricing agreements, memorandums of understanding and other transactional contracts, all of which may be useful to identify and substantiate assumptions used to quantify damages.

Use of Multiple Regression Analysis / Statistical Analyses

Multiple regression analysis, sampling methodologies and other statistical analyses have become increasingly common and accepted methods used to establish reasonable certainty in damages calculations. However, the effectiveness of such statistical approaches are dependent on an expert’s understanding of how to conduct them properly, based on verifiable facts, to avoid common errors that could invalidate the results.

Plaintiffs, along with their counsel and retained experts, should work collaboratively to identify the best evidence available to establish with reasonable certainty a defensible claim for economic damages.  In determining what constitutes best evidence, it generally is advisable that the parties identify other information that may be contrary to the data they relied upon and that they be prepared to explain how they considered this additional information in the preparation of the damages claim.

 

About the Author: Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with Berkowitz Pollack Brant’s Forensic Accounting and Business Valuation Services practice, where he serves as a litigation consultant, expert witness, court-appointed expert and forensic investigator on a number of high-profile cases. He can be reached at the CPA firm’s Miami office as (305) 379-7000 or via email at info@bpbcpa.com.

 

You Can Correct Mistakes on your Tax Return by Nancy M. Valdes, CPA

Posted on June 05, 2018 by

If you realize that a tax return that you already filed for any of the prior three years contains mistakes, do not fear. The IRS offers taxpayers a simple process for making corrections and reporting information that you may have mistakenly omitted.

Here is what you need to know about filing amended tax returns.

  • Do not amend to correct math errors, which the IRS will correct for you automatically.
  • Do not amend if you forgot to attach tax forms, such as a Form W-2 or 1099. The IRS will mail you a request for any missing forms that it requires.
  • Amend to change filing status or to correct income, deductions or credits on original tax returns.
  • Use IRS Form 1040X, Amended U.S. Individual Income Tax Return, to correct an originally filed tax return. You may not file Form 1040X electronically; it must be mailed along with other supporting IRS forms and schedules to the IRS at the appropriate address.
  • If you are amending a return for more than one tax year, complete and mail separate Forms 1040X for each year and be sure to track them to ensure that the IRS receives them. The agency can take up to 16 weeks to process amended tax returns.
  • Pay any additional tax that you owe as soon as possible to avoid IRS penalties and interest.
  • You have three years from the date you filed an original tax return to file Form 1040X to claim a refund, or within two years from the date you paid a tax liability, if that date is later.
  • Taxpayers who will owe more tax should file Form 1040X and pay the tax as soon as possible to avoid penalties and interest. They should consider using IRS Direct Pay to pay any tax directly from a checking or savings account at no cost.
  • If you expect to receive a refund from the most recent tax returns you just filed, wait until after you receive the refund before filing an amended tax return.

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.

Florida Farms, Businesses May Now Apply for Hurricane Recovery Sales and Fuel Tax Refunds and Exemptions by Karen A. Lake, CPA

Posted on June 05, 2018 by Karen Lake

The Florida Department of Revenue recently published the following forms for qualifying businesses to apply for tax relief that the state legislature created in response to the 2017 hurricane season.

Form DR-26SIAG allows farming and agricultural business to apply for a refund of sales tax paid on purchases of materials used to repair or replace nonresidential farm buildings and/or agricultural fencing damaged by Hurricane Irma. Nonresidential farm buildings refer to temporary or permanent buildings or support structures used primarily for agricultural purposes and not intended to be used as a residential dwelling. This may include a barn, a greenhouse, a shade house, a farm office or a storage building. The refund applies to building materials purchased between September 10, 2017, and May 31, 2018.

Form DR-26IF provides farming and agricultural businesses with a method to apply for a partial refund on fuel tax paid for agricultural shipments made between September 10, 2017, and June 30, 2018. The refund of .02 cent fuel tax and 0.125 inspection fee for fuel placed in storage tank may apply to farms, nurseries, orchards, vineyards, gardens, apiaries or nonfarm facilities that transported agricultural products to or from a processing or storage facility that is involved in the production, preparation, cleaning or packaging of crops, livestock, related products, and other agricultural products.

Form DR-26SIGEN applies to nursing homes and assisted living facilities that purchased generators or other emergency power equipment between July 1, 2017, and December 31, 2018. The amount of the refund can be as much as $15,000 in sales tax and surtax paid for the purchase of qualifying equipment made to a single facility.

Applying for Florida tax refunds and exemptions requires businesses to gather and submit a significant amount of detailed supporting documentation. The tax accountants and advisors with Berkowitz Pollack Brant have deep experience helping clients prepare and submit these requests on the state and federal levels.

About the Author: Karen A. Lake, CPA, is SALT (state and local tax) 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.

How to Be Tax Compliant After Offshore Voluntary Disclosure Program Closes by Arthur Dichter, JD

Posted on June 01, 2018 by Arthur Dichter

 The IRS announced it will end the Offshore Voluntary Disclosure Program (OVDP) on Sept. 28, 2018. This move will leave taxpayers with one less option for avoiding penalties and criminal prosecution when they did not previously report all of their non-U.S. income, or when they did not comply with all of the U.S.’s various reporting requirements applicable to non-U.S. income and assets.

The good news is that taxpayers who need the OVDP still have time to participate in the program, but they will have to hurry. The better news is that the IRS will continue to provide reticent taxpayers with other amnesty programs offering penalty relief and/or protection against criminal prosecution. Most of these programs, however, do not offer relief from income tax liabilities or interest on non-reported amounts.

It is common for non-compliant taxpayers to ask, “Which program is best for me?” While there is no on-size-fits-all solution, the answer will depend on the unique facts and circumstance of each individual’s specific case.

What are my Options to Become Tax Compliant?

Offshore Voluntary Disclosure Program (OVDP)

According to the IRS, more than 56,000 taxpayers have participated in the OVDP, and the government has collected more than $11.1 billion in taxes, penalties and interest since introducing the program in 2009. With the IRS’s plan to end the program on Sept. 28, 2018, taxpayers have a limited amount of time to apply to participate, receive clearance from the agency’s Criminal Investigation division and make their OVDP submission.

The OVDP requires taxpayers to file eight years of amended or original income tax returns (including all required information returns) and eight years of foreign bank account reports using FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Taxpayers will be subject to income tax, interest and penalties for lack of accuracy, late filing and/or late payment. In addition, they will be required to pay a one-time OVDP penalty equal to 27.5 percent of the value of their foreign accounts and certain other foreign assets for the year during the eight-year period where the aggregate value of such assets was the highest. This penalty increases to 50 percent when a taxpayer has accounts at certain financial institutions or when they received advice from certain individuals determined to be facilitators. The IRS has published a list of 146 facilitators and financial institutions that it considers “bad” and for which the 50 percent penalty will apply.

One of the key advantages of the OVDP is that cooperative taxpayers will be unlikely to face criminal prosecution. In addition, the program provides taxpayers with peace of mind in the form of a closing agreement concluding the matter and more certainty with respect to penalties, which may be less than what they would have faced under the Tax Code.

In addition to burdening taxpayers with a requirement to file eight years of income tax returns and FBARs, the OVDP is very rigid, and IRS agents have little flexibility regarding abatement of penalties.  Moreover, taxpayers are required to track down and provide the IRS with account statements covering eight years of all of their foreign accounts, which can be a very challenging, expensive and time-consuming process.

Streamlined Filing Compliance Procedures

The streamlined procedure is available to both U.S. residents and non-resident taxpayers whose failure to report foreign financial assets and pay all tax due on their offshore income was the result of “non-willful conduct.” This means that their reticence resulted from negligence, inadvertence or mistake, or a good-faith misunderstanding of the requirements of the law.

A main advantage of streamlined procedures is that they require taxpayers to prepare fewer tax returns than required by other programs. Taxpayers must submit only three years of income tax returns (with all applicable information returns), six years of foreign bank account reports using FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), and a certification statement indicating that they meet the streamlined eligibility requirements.

In addition, while taxpayers using streamlined procedures will be subject to income tax and interest on delinquencies, the IRS will not impose penalties for a taxpayer’s late filing and/or late payment, inaccuracy, or failure to file information returns. Taxpayers who qualify for the non-resident program will not be subject to any penalties, whereas taxpayers who qualify for the resident program will pay a 5 percent penalty based on the highest aggregate balance/value of their foreign financial assets during the years included in the penalty period.

The disadvantages to streamlined procedures include a lack of protection from criminal prosecution and exposure to IRS audit of submitted returns covering the delinquency period. In addition, once a taxpayer applies this procedure, he or she no longer has the option to participate in a voluntary disclosure. Finally, because the IRS typically does not acknowledge receipt of a streamlined submission, participating taxpayers will not have the certainty provided by an OVDP closing agreement. In other words, no news is the best news.

Delinquent FBAR, Delinquent International Information Return Submission Procedures

Taxpayers may avoid FBAR penalties and file delinquent FBARs directly to the U.S. Treasury Department with an explanation for their late filing, only when they satisfy all of the following requirements:

  • they have unfiled FBARs,
  • they are not required to use the OVDP or streamlined procedure to file delinquent or amended tax returns to report and pay additional tax,
  • they are not already under IRS investigation, and
  • they have not been contacted previously by the IRS regarding delinquent FBARs.

Under certain circumstances, taxpayers may qualify to file directly with the appropriate service center delinquent information returns and amended income tax returns, if required, along with a reasonable cause statement explaining the facts related to their failure to file. The IRS may impose penalties based on whether the agency agrees with the taxpayer’s reasonable cause position.

Returns submitted through these procedures will not automatically be subject to audit. Yet, they may be selected through the existing audit selection processes that are in place for any tax or information returns.

Service Center Filings

Some taxpayers who do not meet the eligibility requirements of the streamlined procedures, but who feel they do not have enough substantial offshore income and/or assets to justify an OVDP submission, may wish to simply file original and/or amended income tax returns with information returns and a reasonable-cause statement and hope for the best. This option also works for taxpayers who feel that there were extenuating circumstances that justified their failure to file properly.  This is a very risky strategy, but it may be appropriate in certain cases. Taxpayers deciding to pursue this route should do so very carefully and only after consulting with an attorney with knowledge about offshore reporting matters and all of the available programs.

Conclusion

In the current regulatory environment, it is much more difficult for U.S. taxpayers to avoid reporting and paying taxes on foreign assets. To avoid exposure to criminal prosecution and significant penalties, it makes sense for taxpayers to come forward and disclose their offshore interests through one of the IRS’s amnesty programs. In addition to speaking with an experienced tax advisor, it is always a good idea for taxpayers to discuss their situations with an attorney.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

 

About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

IRS Reaffirms Retirement Plan Contributions Limits for 2018 by Nancy M. Valdes, CPA

Posted on May 30, 2018 by

Tax season is here, and most taxpayers are focused on gathering documentation to file their 2017 tax returns by the April 17, 2018, deadline. Yet, it’s also important for taxpayers to consider the cost-of-living adjustments that the IRS has applied to retirement plan contributions in 2018, which taxpayers will report on their returns in 2019.

The maximum amount an individual taxpayer can contribute via salary deferrals to an employer-sponsored 401(k), 403(b) and most 457 plans increases to $18,500 in 2018, up $500 from the prior two tax years. However, the catch-up contribution limit for savers 50 and older remains at $6,000 in 2018.

The 2018 contribution limits to IRAs and Roth IRAs remains unchanged at $5,500, with an additional $1,000 allowance for savers age 50 and older. Taxpayers who have not yet maximized their IRA contributions for 2017 still have an opportunity to do so by April 17, 2018, and apply that amount to their 2017 tax returns.

For 2018, the IRS has increased the income eligibility thresholds for taxpayers to contribute to traditional IRAs and Roth IRAs. For single taxpayers covered by a workplace retirement plan, the income phase-out range is $63,000 to $73,000. For married couples filing jointly in which the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000. The income phase-out range for taxpayers making contributions to Roth IRAs increased to $120,000 to $135,000 for singles and heads of household, or $189,000 to $199,000 for married couples filing jointly.

The maximum amount you may contribute in 2017 to a traditional IRA or Roth IRA before April 15, 2017, is $5,500, or $6,500 if you are age 50 or older. The type of IRA you are eligible to set up will depend on your filing status and annual income.

With the reality of tax reform effective Jan. 1, 2018, it is important that individuals take the time now to understand how the new law will ultimately impact on their future tax liabilities for 2018 and beyond. Under the guidance of experienced accountants, taxpayers may begin planning now to minimize their tax liabilities in the future.

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.

 

Family Offices Gain Multiple Benefits with Cloud Accounting Services by Laurence Bernstein, CPA

Posted on May 22, 2018 by Laurence Bernstein

Many affluent families have complex financial lives and responsibilities.  Along with the opportunities that can come with wealth are a myriad of challenges that families must plan for under the guidance of experienced family office professionals who can simplify financial management, pay bills, manage charitable giving, oversee succession planning and collaborate with other trusted advisors on administration and management of family wealth.

Accounting is a crucial component to family office success. It demonstrates how money flows between family members, their businesses and investments, and provides a basis for year-end tax planning. However, affluent families should neither underestimate the level of insight that regular bookkeeping can provide, nor should they ignore the countless opportunities they may have to modernize and improve these processes.

The once painstaking process of maintaining accurate financial records on a desktop computer located in a physical office building is today much simpler and easier to maintain, thanks to cloud accounting software, like QuickBooks Online. Cloud-based solutions can automate many accounting processes and reduce the need to hire staff with accounting skills to manage them. Moreover, in today’s 24/7, on-demand society, families can access and manage important financial data at any time and at any place with the click of a button on a mobile device.

Cloud-based accounting systems are the future, and the future is here. By combining the benefits of these services with the expertise of qualified accountants, affluent families can gain peace of mind and financial and administrative freedom.

Improve Organization and Productivity

Accounting software eliminates the need to spend time searching through files and pages of data to find important information, such as when a specific payment was received, a bill was paid or an asset was purchased. These solutions organize information in an intuitive and systematic manner that makes it easy for users and the family office team to find what they are looking for within seconds.

Access Real-Time Financial Data

Cloud-based accounting software connects seamlessly to a family’s bank and credit-card accounts and automatically imports data to synchronize in real-time with recorded transactions. This eliminates the need for manual entry of bank deposits, payments, purchases and withdrawals, and helps to improve recording accuracy by automatically populating financial transactions in the general ledger. Additionally, these platforms are constantly evolving and adding new features that they automatically update to end users’ desktops, laptops and mobile devices.

Improve Process Efficiency

Accounting platforms can easily integrate and share data with other cloud-based business-management applications, such as Bill.com, which manages account payables and receivables; Tallie for automating employee expense reports; Tsheets for tracking employee time and automating payroll processes for household employees. With these and other add-on applications, family offices can synchronize relevant data back to their cloud-accounting software to create powerful and efficient solutions for managing all of the core systems that make up their general ledger. Users may also employ trend analysis and analytic-reporting features to gain further insight into their family’s financial picture, and they may deploy this information immediately to share with key stakeholders, including investment advisors, legal counsel, and interested family members.

Store and Access Backup Data Safely

No one is immune from computer failures or natural disasters, including hurricanes, which can wipe out data stored in file cabinets, on desktops and even on backup systems.  However, with cloud-based solutions, families have the security of knowing their data is stored and easily accessible on the internet rather than on a computer’s hard drive, which is susceptible to damage. Affluent families need only an internet connection to access general ledgers, financial statements, vendor invoices and bill payment history required to sustain operations and substantiate any insurance claims for accidental loss of data.

Even with all of the conveniences that cloud-based accounting solutions provide, affluent families should still meet with their accountants on a regular basis and not just at tax time. By combining technological solutions with face-to-face professional counsel, families can ensure their finances are on track and that they are flexible enough to manage challenges and take immediate advantage of opportunities that can lead to future growth.

About the Author: Laurence Bernstein, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he provides tax and consulting service to high-net-worth families, entrepreneurs and owners of privately held businesses. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at 954-712-7000 or via email at info@bpbcpa.com.

 

Marrying a Foreign Prince Like Meghan? You will still Owe U.S. Taxes by Rick Bazzani, CPA

Posted on May 18, 2018 by Rick Bazzani

Behind the fairytale nuptials of British Prince Harry to American actress Meghan Markle is a dose of reality that the recently betrothed couple will need to pay their share of U.S. taxes during their marriage.

Under U.S. tax laws, U.S. citizens must report and pay taxes on their worldwide income, including assets held in overseas bank accounts, regardless of whether or not they reside in the U.S. By law, Markle must maintain her U.S. citizenship and pay U.S. taxes even if she applies for residency status in the U.K., which can be a three-year process.  Any money that she earns in Britain or elsewhere will be subject to U.S. taxes.

Moreover, if Markle and the Prince have joint financial accounts with a balance of more than $10,000 at any point during the year, the bank or financial institution holding those accounts would be required to share the royal couple’s personal financial information with Uncle Sam, thanks to the U.S.’s Foreign Account Tax Compliance Act (FATCA). This includes all of the royal family’s trusts and offshore accounts in which Prince Harry holds ownership interest or for which he is a named beneficiary. Finally should the royal couple bear children while Markle is a U.S. citizen, those offspring will be considered U.S. citizens subject to U.S. tax laws.

If Markle becomes a dual citizen of the U.S. and the U.K, she may still have to meet her annual U.S. tax reporting requirements and disclose sensitive information about trusts and other financial accounts held by the royal family. However, as a U.S. citizen or dual citizen, she may qualify for either a foreign earned income exclusion or a foreign tax credit for taxes she paid in the U.K. on U.K.-source income. Should she take the deduction, she would be able to waive U.S. taxes on the first $104,000 of non-investment income she earns in the U.K. If she takes the credit, she may be able to use the taxes she paid in the U.K. to reduce her U.S. tax liabilities.

One option to keep the IRS’s prying eyes and hands away from the royal couple’s finances is for Markle to renounce her U.S. citizenship after the requisite three-to-five year waiting period.

While this may appear to be the simplest option, it would subject Markle to a significant exit tax and make it difficult for her to regain U.S. citizenship in the future.

U.S. citizens living abroad should meet with experienced tax advisors to understand their U.S. and foreign tax reporting responsibilities based upon such things as the type of income they receive.

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.

 

Avoid IRS Audit Red Flags by Richard Cabrera, JD, LLM, CPA

Posted on May 10, 2018 by Richard Cabrera

According to the IRS, the number of tax returns that the agency examines under audit has decreased each year since 2010. However, the IRS’s shrinking budget and limited resources are not enough to give taxpayers a reprieve from an audit. Following are 10 of the top red flags that could trigger IRS scrutiny.

 

  1. Not reporting or misreporting income that is a matching item. Income that is reported on W-2s and 1099s should match the numbers that you report on your federal income tax return.
  2. Earning more than $1 million. In 2017, the IRS audited 4.4 percent of tax returns with income exceeding $1 million, 0.8 percent of returns reporting income of more than $200,000, and just 0.2 percent of returns with less than $200,000 in income;
  3. Big changes in income from year-to-year, including a significant increase or significant decrease in amount you report;
  4. Abnormally high charitable deductions will be easier to spot for the 2018 tax year thanks to the tax reform law that increases the standard deductions and will reduce the number of taxpayers who itemize;
  5. Unusually low compensation paid to an S Corporation owner;
  6. Incorrect Social Security Numbers;
  7. Claiming hobby losses could draw the attention of the IRS, which follows very specific rules regarding the treatment of income earned from a business or from an expensive hobby;
  8. Showing consecutive years of losses on Schedule C, Profit or Loss from a Business;
  9. Excessive use of a home office deduction, or unreimbursed employee expenses;
  10. Excessive claims for meals and entertainment deductions, which the Tax Cuts and Jobs Act limits in 2018.

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.

Be on Alert to Avoid the Top-12 Tax-Related Scams by Joseph L. Saka, CPA/PFS

Posted on May 06, 2018 by Joseph Saka

The April tax filing deadline has passed, but taxpayers are still at risk of falling victim to tax-related fraud and identity theft schemes that continue throughout the year. Following is a list of the top-12 scams that the IRS identified for 2018.

  • Identity Theft. If criminals gain access to your personal information, such as your Social Security number, they can steal your identity to file fraudulent tax returns in order to claim a refund before you do. Never give your personal information to anyone you do not know, and take precautions to protect your sensitive information stored on computers, mobile devices and online financial sites.
  •  Phone Scams. The IRS will never make an unsolicited telephone call to a taxpayer to request personal information or to threaten the taxpayer with arrest or deportation for unpaid tax liabilities. If you receive a call from someone claiming to be from the IRS, hang up without providing any details about yourself.
  • Email Phishing Scams. Phishing occurs through unsolicited emails or fake websites that lure potential victims into clicking on links and divulging personal and financial information. Often, the emails come from criminals posing as a bank or other legitimate institution you know. To avoid falling victim to phishing attacks, remember that that the IRS will never initiate contact with a taxpayer to request personal information, and such personal data should never be shared via email or text message.
  • Tax-Return Preparer Fraud. Consumers must do their homework before engaging the services of a tax preparer to ensure that the individuals they choose to work with are in fact qualified and are not among the many scam artists that pose as legitimate professionals. Never sign a blank tax return. Before sharing any of your personal information with a new tax preparer, ask for an IRS Preparer Identification Number and search the IRS database of credentialed professionals at https://irs.treasury.gov/rpo/rpo.jsf
  • Falsely Inflating Refunds. In order to yield a higher refund from the U.S. government, taxpayer and their return preparers may falsely report artificially low income or report credits, deduction or exemptions that you are not legally qualified to claim.
  • Falsely inflating income in order to qualify you for a refundable tax credit to which you are not legally entitled.
  • Falsely padding deductions to create a larger refund than you are entitled to or to reduce the amount of tax you are required to pay.
  • Improperly claiming business credits to which you are not entitled.
  • Making frivolous tax arguments in an effort to reduce your tax liability or defend against fraudulent claims.
  • Abusive Tax Shelters. Hiding income and structuring assets to avoid taxes is illegal. The IRS is especially concerned about the use of schemes involving the use of “micro-captive” insurance structures that do not meet the true attributes of an insurance product.
  • Fake Charities. It is common for scammers to take advantage of a natural disaster or other national issue and develop fake charities though which they solicit donations from the unsuspecting public. Before opening your heart and your wallet, verify that the organizations is a qualified charity with the IRS. If you are unsure, refocus your donation to well-established charities.
  • Hiding Money Offshore. While it is perfectly legal to hold assets in offshore banks and brokerage accounts, you are responsible for reporting and paying applicable U.S. taxes on those assets. If you previously failed to report foreign financial assets, you have until Sept. 28, 2018, to voluntarily disclose this information to the IRS and avoid criminal prosecution. After this date, the IRS will end its Offshore Voluntary Disclosure Program (OVDP).

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.

Florida Kicks off 2018 Hurricane Season with Week-Long Sales Tax Holiday by Michael Hirsch, JD, LLM

Posted on May 04, 2018 by Michael Hirsch,

The Florida legislature recently announced the creation of a seven-day Disaster Preparedness Sales Tax Holiday from June 1 to June 7, 2018.

During this first week of the 2018 hurricane season, Florida residents will not be required to pay sales tax on hurricane-preparation supplies that include the following:

  • Reusable ice costing $10 or less,
  • Flashlights, lanterns and candles that cost $20 or less,
  • Gas or fuel containers that cost $25 or less,
  • Coolers and batteries that cost $30 or less,
  • Radios, tarps, bungee cords, Visqueen and other flexible waterproof sheeting that cost $50 or less, and
  • Portable generators costing $750 or less.

Consumers should note that the sales tax holiday does not apply to the rental or repair of any of the qualifying supplies nor to any sales that occur in an airport, theme park, entertainment center or public lodging establishment.

Residents and businesses located in Florida will also benefit from several hurricane-related tax exemptions the legislation approved, effective retroactively to 2017, including:

  • A refund of taxes paid for residential homestead property damaged by a natural disaster beginning in 2017,
  • An exemption from documentary stamp tax on emergency loans taken, and
  • A sales tax exemption for generators purchased for nursing homes or assisted living facilities.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

 

 

 

Can I Exclude Foreign Income on my U.S. Tax Return? by Arthur J. Dichter, JD

Posted on May 02, 2018 by Arthur Dichter

Due to the complexity of the U.S. tax system, it is not uncommon for foreign persons to accidentally become U.S. tax residents subject to taxation on their worldwide income based on such factors as the number of days they spend in the country.

Individuals who were born in the United States are automatically U.S. citizens subject to U.S. taxation on their global income. However, when an individual has a “tax home” outside the United States and meets other requirements, he or she may be able to exclude a certain amount of foreign earnings from U.S. taxes.

Under U.S. tax laws, a person’s “tax home” is generally where the person lives in order to maintain a place of business, employment or post of duty, regardless of where he or she maintains a family home. In fact, an individual’s tax home may be different from his or her country of residence.

The foreign earned income exclusion may apply when a U.S. citizen or resident alien is a bona fide resident of a foreign country (or countries) for an uninterrupted period that includes one entire calendar year, or he or she must meet a physical presence test based on his or her unique facts and circumstances. Factors considered when applying the bona fide residence test include an individual’s intention to remain in a country, the purpose of his or her travels, and the nature and length of a stay abroad.

Just as the U.S. relies on a physical presence test to determine whether an individual qualifies as a U.S. tax resident alien, it also counts the aggregate number of days an individual is physically present in a foreign country to determine whether or not income earned in that country can be excluded from U.S. tax exposure. The exact calculation is based on an individual’s physical presence in a foreign country during an entire taxable year or a minimum of 330 full, 24-hour days over a 12 consecutive month period. The 330-day threshold need not occur consecutively; rather it is based on a cumulative amount of time over 12 consecutive months. Excluded from the calculation are days of travel into and out of the foreign country as well as days in which an individual leaves the foreign country for less than 24-hours.

For 2018, the maximum amount of foreign income a taxpayer may exclude from U.S. taxes is $104,100, which is indexed annually for inflation.  It is important to note, however, that the exclusion applies only to “earned” income; passive income from sources such as interest and dividends do not qualify. Any foreign tax credits that might otherwise be available are reduced on a proportionate basis to the amount of foreign income excluded. Moreover, while individuals whose tax home is outside the United States will receive an automatic two-month extension of time to file their U.S. income tax return and pay any taxes due, interest on the tax that is owed will accrue during the extension period.

It is advisable that U.S. taxpayers seek the advice of experienced international tax and accounting professionals to assess their unique personal situation and develop appropriate strategies for minimizing tax liabilities, especially when taxpayers have homes and assets in multiple countries. While individuals whose tax home is outside the United States receive an automatic two-month extension of time to file their U.S. income tax return and pay any taxes due, however, interest will accrue during the extension period on any tax that is owed.

 

About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. 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.

The Basics of Bitcoin, Etherium, Ripple and Other Cryptocurrency by Dustin Grizzle

Posted on April 23, 2018 by Dustin Grizzle

You cannot peruse the news or scroll through social media without reading about cryptocurrency, such as Bitcoin, Etherium’s Ether and Ripple’s XRP token. Despite such widespread coverage, few individuals truly understand how this new world money works or how investors yielded significant returns from their investment in it in 2017.  Following is a crash course in cryptocurrency.

What is Cryptocurrency?

Cryptocurrency is a form of digital money with no tangible, physical form. It is created (or “mined”) and stored digitally on a specialized public network of computer systems where users may access the platform like cash and transfer it electronically to others to buy goods, services or other cryptocurrency. Users may buy and sell virtual currency, including digital tokens, as an investment on an exchange, such as Coinbase and Kraken, in the same way they would buy and sell gold or other commodities. However, it is important to remember that crypto tokens do not satisfy the legal definition of money. Rather, they are intangible assets, such as a copyright or brand that can be linked to a real-world asset.

How do I Acquire Cryptocurrency?

Individuals may buy Bitcoin and other forms of cryptocurrency with paper money, such as U.S. dollars, or they may acquire it by accepting it as payment for goods and service.

Unlike the dollar, the euro or other traditional forms of currency issued and controlled by a government entity or central bank, cryptocurrency is not subject to regulatory oversight from a centralized authority. Rather, a digital ledger records and tracks all cryptocurrency transactions, known as blocks, using complex mathematical algorithms that super computers on the shared network compete with to solve. The miner that finds the solution is rewarded in Bitcoin or other currency only after the other miners validate the solution. At that point, the block is added to the shared digital ledger using cryptographic techniques. As new blocks are added and linked, they create a blockchain, and the digital ledger continues to grow exponentially.

How Does Blockchain Fit in the Cryptocurrency Puzzle?

Blockchain is essentially the one record that links together and records the movement of all cryptocurrency transactions. Because each transaction is uniquely time-stamped, traceable and readily available for all users to see, blockchain technology has the potential to disrupt how businesses will operate in the future. For example, blockchain applications are already making an impact and improving the efficiency of businesses tracking orders in the supply chain, managing logistics and even managing retail sales. According to Gartner Group, it is estimated that blockchain technology and its ability to manage vast amounts of data will deliver $21 billion in business value-add or technology innovation by 2020, and $3.1 trillion by 2030.

What are the Risks Associated with Cryptocurrency?

Every investment involves risk, and cryptocurrency is no different. In 2017, Federal Reserve Chairman Janet Yellen referred to Bitcoin as a “highly speculative asset” without “a stable store of value.” Yet, despite the lack of a unified standard for legal, tax and accounting best practices, investors continue to buy crypto token as new cryptocurrencies enter the market and raise significant funds via initial coin offerings (ICOs). According to icodata.oi, startups completed 881 ICOs in 2017, crowdfunding their crypto platforms and raiding more than $6 billion by the end of the year.  For some investors, the returns were beyond phenomenal. For example, Ripple was the breakout star of 2017 yielding gains of more than 36,000 percent, while Bitcoin grew by more than 1,000 percent over the same 12-month period. To be sure, few investors ended the year completely unscathed by intense and volatile cryptocurrency trading activity.

With the wide opportunities for financial gain that cryptocurrency can provide, it is no wonder that criminals have entered the market and developed scams to deceive users and steal their funds. Without the benefit of a regulatory agency to oversee cryptocurrency transactions, consumers bear the burden of protecting themselves from bad actors and minimizing their risks of falling victim to cryptocurrency schemes.

Finally, while not necessarily a risk, gains and losses that cryptocurrency investors realize during the year are subject to income tax reporting and payment liabilities. As a word of warning, the IRS as recently as February 2018 reminded taxpayers that it has unleashed a team of criminal agents to investigate individuals who may be evading taxes by using the anonymity offered by Bitcoin, Ripple or other digital coins.

Despite its cult-like following, cryptocurrencies, such as Bitcoin, Etherium and Ripple, are complicated and not without risks. The underlying technology of blockchain, however, holds promise for businesses to improve efficiencies and cut costs far into the future.

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.

 

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 and its Impact on U.S. Businesses by Laurence Bernstein, CPA

Posted on April 20, 2018 by Laurence Bernstein

It can be argued that U.S. businesses and their shareholders will be the biggest winners from the Tax Cuts and Jobs Act (TCJA). However, because the law falls short of its aim to simplify the tax code, significant advance planning under the guidance of professional advisors is recommended to help taxpayers dig through the law’s complexity and reap its potential benefits.

Business Taxes

One of the most significant provisions of the TCJA is an immediate and permanent reduction in the corporate tax rate from 35 percent to a flat 21 percent and a complete repeal of the corporate alternative minimum tax. This historically low rate takes the U.S. off its perch as the country with the highest corporate tax rate and puts it a more competitive position compared with other advanced economies around the globe.

For businesses organized as pass-through entities, which represent more than 90 percent of all U.S. businesses, the new law is far more complicated. In general, the TCJA introduces a potential 20 percent deduction on certain income that flows from S Corporations, partnerships, LLCs and sole proprietors through to their owners’ individual income tax returns.  However, there are a number of limitations and exclusions to this deduction based on such factors as the new concept of qualified business income (QBI), the amount of W-2 wages a business pays and the cost of the depreciable income-producing property owned by the business. Additional limitations apply to “specified service businesses” in the fields of health, law, accounting, actuarial sciences, performing arts, consulting, and financial and brokerage services or any other business whose primary asset is the reputation or skill of its owner or employees. How the IRS will interpret this provision remains to be seen as of today. What is known if that, unlike the corporate tax reduction, the treatment of pass-through businesses, is scheduled to expire in 2025.

With just these provisions in mind, it makes sense for some pass-through businesses to weigh the pros and cons of restructuring as C corporations in the near future. Consideration should be given to such matters as state and local tax liabilities and deductibility, exposure to double taxation and the tax treatment of retained profits and dividends paid to owners and partners of C corporations. If business owners intend to reinvest profits in their companies, a C corporation structure may make the most sense. Alternatively, if businesses intend to pull profits out their companies to distribute them to their owners, a C corporation with double-tax treatment may be more expensive. Based on the taxpayer’s specific and unique facts and circumstances, a conversion may not be the best option for minimizing tax liabilities.

Credits and Deductions

The TCJA provides corporations with a mixed bag of both limited and enhanced credits and deductions that may require careful planning in 2018 to minimize future tax liabilities.

For example, gone are deductions for domestic production activities. In addition, businesses may no longer deduct expenses for entertainment, including costs they incur for seats or suites at entertainment venues, tickets and meals for sporting events and concerts, and dues for membership in in business, recreational and social organizations.

The costs that a taxpayer incurs when treating clients or prospective customers to a business-focused lunch or dinner remains 50 percent deductible, as long as the meal occurs outside of an entertainment facility. Similarly, a company may continue to deduct 50 percent of the reimbursement for meals they provide to traveling employees and 100 percent of costs for a holiday party or similar employee event. However, under tax reform, businesses have until Dec. 31, 2025, to deduct on an annual basis only 50 percent of the costs for meals they provide to their employees for their benefit or in an employer’s on-site cafeteria. Despite these limitations, the law does provide businesses with some enhanced benefits.

Net Operating Losses (NOLs)

Net operating losses are a prime example of the ying and yang of tax reform. While NOL carrybacks areno longer allowed beginning in 2018, unused losses that were previous limited to 20 years of carryforwards are now permitted to be carried forward indefinitely. Yet, only 80 percent of taxable income will be can be offset with an NOL carryforward. As a result, corporations will no longer be able to use NOLs to bring their tax liabilities to zero.

Limitations to Business Interest Deduction

The deduction for business interest, including interest on related-party debt, is limited for certain taxpayers under the new law to 30 percent of earnings before interest taxes, depreciation and amortization (EBITDA) until 2021. At that point, the limitation is set to apply to earnings before interest taxes (EBIT). Any remaining business interest expense that is not allowed as a deduction may be carried forward indefinitely and applied to future tax years. An exception to the 30 percent limitations exists for businesses whose gross receipts for the three most recent tax years are less than $25 million, as well as for qualifying taxpayers who accrued interest in real property trades or business that elect the slower alternative depreciation system or ADS. Additional guidance on this topic is forthcoming from the IRS.

Limitations to Carried Interest

The TCJA preserves the favorable long-term capital gains treatment of gains from partnership interest held by managers and partners for a share of a business or project’s future profits. Yet, it also limits the benefit to assets held for a minimum of three years, rather than the previous holding period of one year, unless a corporation owns the partnership interest.  The new longer holding period applies to capital assets.  Curiously, the law does not apply the longer holding period to trade or business assets, also known as Section 1231 assets, which typically include apartments, office buildings and other depreciable property used in a trade or business and held for more than one year. We will watch for additional guidance from the IRS and on this topic.

Expanded Opportunities to Expense Business Assets

One significant bright spot in corporate tax reform deductions is available for businesses that invest in capital assets. For one, qualifying tangible property that businesses acquire and put into service after Sept. 27, 2017, and before Jan. 1, 2023, may be eligible for 100 percent “bonus” depreciation in the year of purchase. The new law defines qualifying property as tangible personal property with a recovery period of 20 years or less and including for the first time used property. Prior to the TCJA, bonus depreciation was limited to 50 percent of the cost of new tangible property or non-structural improvements to the interiors of nonresidential building.

Expanded Definition and Expensing of Section 179 Property

The new law expands the definition of Section 179 qualifying improvement property and business assets to include improvements to nonresidential property, such as roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems improvements. In addition, the law increases the maximum amount a taxpayer may expense under Section 179 to $1 million per year. Previously, the Section 179 deduction was limited to $500,000, and it began to phase out at $2 million.

Changes in Accounting Methods

The TCJA qualifies a larger percentage of corporations and partnership to use the cash method of accounting when filing their tax returns, rather than the accrual method, by raising the gross receipts test from $5 million to $25 million over a three-year period. Moreover, taxpayers that meet the average gross receipts test are no longer required to account for inventory using the accrual method. Rather, taxpayers have the option to either treat inventory as non-incidental materials and supplies or rely on the same method of accounting they use for financial statement purposes.

In order for businesses to take advantage of what may be the largest corporate tax cut in history, proper and timely planning is required. The professional advisors with Berkowitz Pollack Brant work with domestic and international businesses to implement tax efficient strategies that comply with complex laws and minimize taxpayer’s liabilities.

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 Provides Initial Guidance on New Tax and Withholding Rules for Foreign Partners Disposing of Partnership Interests by Arthur Dichter, JD

Posted on April 19, 2018 by Arthur Dichter

The IRS issued Notice 2018-29 providing guidance relating to the new withholding rules that apply when a foreign person disposes of a partnership interest. An IRS notice does not have the force and effect of actual regulations, but it does provide taxpayers with direction on how the IRS expects to enforce rules and eventually issue regulations in the future.

The recent tax reform law codified a long-held IRS position that gain or loss from the sale, exchange or other disposition of a partnership interest by a nonresident alien or a foreign corporation is taxable to the extent that the foreign person would have been subject to tax had the partnership sold all of its assets at fair market value. This rule applies to dispositions occurring on or after November 27, 2017. The notice does not provide any further guidance on determining the actual gain that is subject to tax.

The Tax Cuts and Jobs Act (TCJA) added an obligation for the acquirer (transferee) of a partnership interest to withhold a 10 percent tax on the amount realized on the transfer unless the transferor furnishes an affidavit or certificate to the transferee stating that the transferor is not subject to withholding. If the transferee fails to withhold the tax, the partnership is required to withhold from distributions to the transferee until the unpaid withholding tax (plus interest) has been satisfied. The recent Notice does not address the mechanics for this withholding. The IRS previously issued guidance suspending the withholding requirement on dispositions of certain publicly traded partnerships.

Notice 2018-29 generally adopts the forms and procedures for withholding on dispositions of U.S. real property interests under the Foreign Investment in Real Property Act (FIRPTA), which requires the purchaser of a U.S. real property interest from a foreign person to withhold and remit 15 percent of the sale proceeds as a withholding tax. The purchaser uses Forms 8288 and 8288-A to report the amount realized and the amount of tax withheld to the IRS, which then processes the withholding tax and returns a stamped copy of Form 8288-A to the transferor. In order to claim a credit for the withholding tax on their income tax return reporting the sale, the transferor must attach a copy of the IRS-stamped copy of Form 8288-A.

The Notice further provides that the transferee of a partnership interest should write “Section 1446(f)(1) withholding” at the top of Forms 8288 and 8288-A and remit payment within 20 days of the transfer of partnership interest. Transferees who fail to withhold properly are liable for the tax, and failure to submit the withholding tax may result in other civil and criminal penalties. The IRS will not assert penalties or interest when transferees file these forms and pay amounts to the IRS on or before May 31, 2018.

Under the Notice, transferees may eliminate their withholding obligation when they receive the following certifications:

  • A certification of non-foreign status or IRS Form W-9 from the transferor;
  • A certification from the transferor that no gain will be recognized on the transfer;
  •  A certification from the transferor that the partnership interest had been held for at least two years and his or her allocable share of partnership effectively connected income (ECTI) was less than 25 percent of his allocable share of all partnership income;
  •  A certification from the partnership that if it sold all of its assets, the amount of gain that would have been treated as ECTI (including gain from U.S. real property interests) would be less than 25 percent of the total gain; or
  •  A certification from the transferor that a non-recognition provision applies.

The exact information that transferees must receive differs for each certification. However, in general, the transferor or partnership must sign the certification under penalties of perjury. The transferee can rely on the certification unless he or she has knowledge that the information is false.

For purposes of determining the amount realized that is subject to withholding, the disposing partner must consider the amount of liability relief he or she obtained and include the amount realized on the transfer. A partner who owned a less than 50 percent interest in partnership capital, profits, deductions or losses may provide the transferee with a certification that provides the following:

  • the amount of the partner’s share of partnership liabilities reported on his or her most recently received Schedule K-1, and
  •  confirmation that he or she does not have actual knowledge of events occurring after the issuance of the Schedule K-1 that would cause the amount of his or her share of partnership liabilities to be more than 25 percent above than the amount shown on the K-1.

The partnership may also issue a certification relating to the transferor partner’s share of liabilities. The notice does not specify a method for a partner who owns 50 percent or more of the partnership to certify his or her share of partnership liabilities. Therefore, in that situation, presumably the partnership certification would be required.

The total amount withheld cannot exceed the amount the transferor realized (without considering the transferor’s liabilities). If the transferee is unable to determine the amount realized because certification of the transferor’s share of liabilities is not provided, the transferee must withhold the entire amount he or she realized, determined without regard to the transferring partner’s liabilities.

The tax and withholding rules apply to partnership distributions in excess of the foreign partner’s basis in the partnership that would be treated as a capital gain (a partial disposition of the partnership interest).

These rules also apply in cases involving tiered partnerships. If a transferor transfers an interest in an upper-tier partnership that owns an interest in a lower-tier partnership, and the lower-tier partnership would have effectively connected taxable income (ECTI) on the deemed disposition of all of its assets, a portion of the gain recognized by the transferor is characterized as effectively connected gain. Therefore, the lower-tier partnership would be required to provide the upper-tier partnership with information in order for the upper-tier partners to be able to comply with these rules.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

 

 

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.

Florida Businesses Can Apply Now to Receive a Tax Credit by Shifting Sales Tax on Rental Property to Scholarship Organizations by Karen A. Lake, CPA

Posted on April 13, 2018 by Karen Lake

Included in Florida’s budget for fiscal year 2018 is an expansion of the state’s Sales Tax Credit Scholarship Program. Under the program, eligible businesses may receive a tax credit when they redirect their sales tax on commercial real estate leases to approved organizations that fund scholarships and job-training programs for eligible students throughout the state. The Department of Revenue (DOR) has already begun accepting applications from businesses, for which the state will allocate $57 million in available credits.

Tenants that occupy, use or are entitled to use commercial property may apply to the state to receive a dollar-for-dollar credit against the real estate rental tax they paid to a landlord when they make monetary contributions to an eligible scholarship-fund organization in the state that is exempt from federal income tax. Eligible organizations may include scholarship-funding organizations, such as Step Up For Students and Gardner Scholarships; private schools with students in grades K through 12; and accredited facilities that provide job-training services to persons who have low income, workplace disadvantages or other barriers to employment.

Timing is critical for businesses that wish to apply to allocate their tax credits to qualifying scholarship-funding organizations. While the DOR expects to receive numerous applications, it will allocate the $57 million in available credits on a first-come-first-served basis. Upon the DOR’s approval of an application, the agency will send a certificate of contribution to the business’s landlord, who will then reduce the tax that he or she collects from the business’s lease payments beginning on October 1, 2018.

With advance planning under the direction of experienced state and local tax advisors, businesses that pay commercial rent can apply to the Florida Sales Tax Credit Scholarship Program and realize potential tax savings while helping underprivileged children get the education they deserve.

 

About the Author: Karen A. Lake, CPA, is SALT (state and local tax) 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.

 

About the Author: Karen A. Lake, CPA, is SALT (state and local tax) 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.

Make Sure your Accountant Reviews Cost Segregation Studies by Angie Adames, CPA

Posted on April 12, 2018 by Angie Adames

Cost segregation studies have proven to be valuable tools for helping taxpayers who have constructed, purchased, expanded or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes. However, a recent Memorandum issued by the IRS highlights the fact that relying on a third party to perform a cost segregation study does not release taxpayers from potential negligence penalties associated with the underpayment of tax.

In the matter before the IRS Chief Counsel, a small business hired an engineer to conduct a cost segregation study, which the business ultimately used to accelerate depreciation deductions over five years, rather than 39, and create a significant tax loss for the years at issue. Nonetheless, the IRS determined that the business understated its tax liabilities by claiming excessive deductions based upon the engineer’s report, which the IRS characterized as “the most egregious misrepresentation” of the useful life of a building’s components. Ultimately, the IRS found the taxpayer to be negligent in meeting its tax burden while imposing penalties on the engineer for “aiding and abetting” the tax underpayment.

While it is true that the engineer will pay for his aggressive cost segregation study, it is important for real estate professionals to remember that just because they paid a licensed engineer to develop a report, does not mean that the report is accurate. Nor does it alleviate taxpayers of their responsibilities to substantiate all claims of income and deductions. This is especially true when considering the nuances in the tax laws relating to bonus depreciation, including appropriate allocations made between land and buildings, the definition of units of property (UoP) and the decision to capitalize or expense repairs and improvements.

With this in mind, it is critical that real estate professionals engage tax advisors and accountants to review cost segregation studies in order to identify potential inaccuracies and ensure that depreciation deductions and reclassifications of building components make sense. Having another professional agree that a cost segregation study is valid will help to reassure taxpayers that their claims have a better chance against a potential IRS audit.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

IRS to Eliminate Voluntary Offshore Disclosure Program by Arthur Dichter, JD

Posted on April 10, 2018 by Arthur Dichter

Taxpayers have until Sept. 28, 2018, to avoid criminal prosecution and steep penalties when they coming forward voluntarily and share with the IRS previously undisclosed foreign financial assets. The IRS announced that on that date it will end the Offshore Voluntary Disclosure Program (OVDP) that it implemented to encourage reticent taxpayers to come into compliance with U.S. laws and pay their fair share of U.S. taxes.

The IRS first introduced an OVDP in 2009 to allow noncompliant taxpayers to come forward voluntarily to resolve their unreported income and assets. Consequently, more than 56,000 taxpayers have participated in the program and paid taxes, interest and penalties in excess of $11 billion. The agency reissued and updated the program several times, as recently as 2014, when the penalty for unreported assets held in certain foreign financial institutions investigated by the Justice Department was substantially increased.

Eligible taxpayers who unwillingly and unintentionally failed to disclose their foreign income and foreign assets may continue to use the Streamlined Filing Compliance Procedures (SFCP) as well as Delinquent International Information Return and Delinquent Foreign Bank and Financial Account (FBAR) Filing Procedures to meet their tax reporting obligations. For now, these programs remain in effect indefinitely. However, the IRS may choose to terminate them at any time.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. 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.

U.S Businesses with Foreign Ownership Have an Immediate Reporting Requirement by Andrew Leonard, CPA

Posted on April 09, 2018 by Andrew Leonard

U.S. businesses owned by foreign persons or multinational corporations have an obligation every five years to complete the Bureau of Economic Analysis’s Benchmark Survey of Foreign Direct Investment in the United States (BE-12). Taxpayers are responsible for providing their financial and operational data on the BE-12 regardless of whether or not they actually receive a survey or are contacted by the Bureau.

BE-12 reports covering fiscal year 2017 are due May 31, 2018. Taxpayers who did not receive a notice via postal mail may access the survey online at www.bea.gov/efile.

Who must file a BE-12?

The B-12 is mandatory for each U.S affiliate of an entity for which a foreign person or entity owns or controls, directly or indirectly, 10 percent or more of the U.S. enterprise’s voting securities, or an equivalent interest if an unincorporated U.S. business enterprise, at the end of the enterprise’s fiscal year that ended in calendar-year 2017. Businesses that are unsure if they meet the filing requirements should contact their accountants as soon as possible.

What if I need more time to file?

Applicable businesses may request a filing deadline extension when they submit such requests before May 31, 2018.

How does the government use the information I provide?

The BEA uses information provided by BE-12 respondents to understand the state of foreign-owned business activities in the United States and make informed decisions regarding U.S. jobs, wages, productivity and taxes. Business leaders may use the census data to make hiring and investment decisions. All respondents are protected by federal privacy laws.

If you received a survey from the BEA or if believe you may be required to file a BE-12, please contact your tax professional. The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

About the Author: Andrew Leonard, CPA, is an associate director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

 

 

How U.S. Tax Reform Affects Canadians by Jeffrey M. Mutnik, CPA/PFS and James W. Spencer, CPA

Posted on April 06, 2018 by Jeffrey Mutnik

The Tax Cuts and Jobs Act (TCJA) that reforms the U.S. Tax Code will have a significant impact on Canadians with businesses, investments, and residency in the United States beginning in the 2018 tax year. With these policy changes come a new way of thinking and a call for affected individuals and businesses to plan appropriately in an effort to minimize their tax liabilities going forward.

 

First, it is important to understand how the U.S. imposes tax on foreign individuals, regardless of their immigration status.

 

In most cases, the U.S. presumes foreign citizens to be nonresident aliens (NRAs), who are required to pay U.S. income taxes only on earnings that come from U.S. sources. Once foreign citizens apply for a green card or exceed the requisite days considered to have a substantial physical presence in the U.S., they will be considered resident aliens (RAs), who, like U.S. citizens, are required to report and pay taxes on their worldwide income. Conversely, foreign individuals’ exposure to the U.S. gift and estate taxes depends upon their domicile, or physical presence and intent to stay in the U.S. for an indefinite period.

 

Enhanced Estate Tax Unified Credit and Marital Deduction

 

The TCJA doubles the amount that U.S. taxpayers may exclude from gift and estate taxes, from US$5.49 million in 2017 to US$11.18 million in 2018 and through 2025. Therefore, Canadian domiciliaries who own U.S. situs assets (assets legally located in the U.S.), such as U.S. real property or shares in U.S. corporations, can now claim a larger pro-rated unified tax credit against U.S. estate tax. This combined with a larger marital deduction for the estates of married Canadian domiciliaries who own U.S. situs assets can result in an estate being subject to zero U.S. estate tax when the worldwide estate is no more than US$ 22.36 million. Previously, the threshold was US$ 10.98 million.

 

Reduced Individual Income Tax Rates for Nonresident Aliens

 

The TCJA reduces the top income tax rate on ordinary income from 39.6 percent in 2017 to 37 percent in 2018. These lower rates apply to nonresident aliens, such as Canadians who are neither U.S. citizens nor green card holders and who do not spend excessive days in the U.S. during a calendar year. For U.S. citizens and resident aliens, such as Canadians who are dual citizens or green card holders, the TCJA decreases the top tax rate on ordinary income (which includes the Net Investment Income Tax of 3.8 percent) from 43.4 percent to 40.8 percent. The long-term capital gains tax rate of 23.8 percent has not changed.

 

Personal Exemptions

 

The TCJA eliminates the use of personal exemptions that U.S. citizens, RAs and NRAs could previously claim for themselves, their spouses or their dependents. However, the law nearly doubles the standard deduction that taxpayers may claim to reduce their taxable income from US$6,500 for individuals (US$13,000 for married couples) to US$12,000 (US$24,000 for married couples) starting in 2018.

 

Home Mortgage Interest

 

The TCJA limits the deduction that Canadians who are U.S. tax residents and have a principal residence located in the U.S. may claim for the interest paid on their home mortgage from US$1 million in 2017 to US$ 750,000 in 2018. This limit applies only to mortgage loans entered into after December 15, 2017; interest on loans that were entered into before this date can continue to be deductible up to the US$1 million limit.

 

In addition, the law puts a US$10,000 limit on the amount that Canadians and U.S. taxpayers may deduct for property taxes on their U.S. homes along with other deductible taxes (such as state income taxes and state sales tax).

 

Moving Expenses

 

Under the TCJA, Canadians who move to the U.S. beginning in 2018 will no longer be able to claim a deduction for any of their moving expenses, including the costs they incur to transport their belongings.

 

U.S. Real Estate Investment

 

Canadians who earn profits from renting U.S. real estate may be able to claim a deduction as high as 20 percent of their rental profits when they are organized as pass-through entities, such as partnerships, LLCs, S corporations and sole proprietorships, and their adjusted gross income (AGI) is below US$ 157,500 (US$ 315,000 for married couples). This would essentially reduce the highest tax rate for qualifying taxpayers from 37 percent to 29.6 percent. If AGI is above these limits, taxpayers may be able to claim a deduction up to the sum of 25 percent of paid W-2 wages plus 2.5 percent of their unadjusted investment basis in qualifying property, which includes tangible property subject to depreciation, held by a qualified trade or business, and used in the production of qualified business income.

 

Upon selling U.S. property after a holding period of more than one year, the highest tax rate that would apply to the gain from the sale would be the maximum long-term capital gains tax rate of 20 percent plus the Net Investment Income Tax of 3.8 percent.

 

Two additional tax benefits for real estate investors survived the negotiations of the new law, including the tax-deferred treatment of Section 1031 exchanges of like-kind real property that meet the requisite holding period restrictions. The law also preserves the preferential 20 percent long-term tax capital gains treatment of carried interest, or management fees and other forms of compensation paid to partners, managers and developers for a share of a business or project’s future profits, but limits it to apply solely to assets held for more than three years or sold after three years.

 

In addition, the TCJA calls for qualifying tangible property, including used property, acquired and put into service after Sept. 27, 2017, and before Jan. 1, 2023, to receive 100 percent bonus depreciation in the year of purchase. Without the new law, bonus depreciation would have been limited to 40 percent in 2018 and 30 percent in 2019.

 

Ownership of U.S. Corporations

 

With the passage of the TCJA, Canadian individuals and businesses that own shares in U.S. corporations will enjoy more after-tax profits, which may translate to higher dividends from those corporations. This is due to the law’s reduction of the corporate tax rate from 35 percent to 21 percent. When including state taxes, the rate drops from approximately 38 percent to approximately 25 percent.

 

However, to the extent that such U.S. corporations generate Net Operating Losses (NOLs) in years after 2017, those loss carryforwards will only be available to offset 80 percent of future corporate taxable income. This means that U.S. corporations will always pay U.S. tax on at least 20 percent of their taxable income, despite the magnitude of their post-2017 NOL carryforwards. Pre-2018 NOLs are not subject to this limitation.

 

Business Interest Deductions

 

Under the new tax law, corporations and other businesses will generally be able to deduct business interest expense up to a limit of 30 percent of EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) for years 2018 through 2021. In 2022, the deduction will be limited to 30 percent of EBIT (Earnings before Interest and Taxes).

Controlled Foreign Corporations (CFCs)

 

For many years, the U.S. has had a CFC Regime somewhat similar to the Canadian Controlled Foreign Affiliate (CFA) Regime, and the U.S.’s Subpart F rules have been somewhat similar to Canada’s Foreign Accrual Property Income (FAPI) rules. However, up until 2018, the U.S. has not had anything remotely similar to Canada’s Exempt Surplus Regime. With the passage of the TCJA, U.S. corporations (but not individuals) that own CFCs will be able to claim a Participation Exemption for dividends from those CFCs up to a certain level. The Participation Exemption Regime may be equated somewhat to Canada’s Exempt Surplus Regime.

 

However, in order to transition to the Participation Exemption Regime, U.S. corporations and individuals (including Canadians who are also U.S. citizens or U.S. RAs) that have direct or indirect ownership in CFCs will have to pay a one-time toll charge tax on all of the earnings they have accumulated from 1987 until 2017 (Pre-1987 Earnings are not subject to the tax).

 

To ease the burden of this one-time toll-charge tax, the U.S. provides affected taxpayers with two benefits:

 

(1) pay a favorable tax rate of between 17.5 percent and 8 percent depending on (a) the type of taxpayer and (b) how much of the CFC’s earnings have been reinvested in liquid vs. non-liquid assets, and

 

(2) the ability to elect to spread the payment of the one-time tax over an eight-year period with no interest charges on the deferred tax liability.

 

The first installment of the tax payments, which is due on or before April 17, 2018, is equal to 8 percent of the toll charge. Once taxpayers make the election and pay the first installment, they may take all of the pre-2018 earnings out of the CFC in the form of dividends, even though much of the payment of the toll charge tax has been deferred to subsequent years.

 

Canadian individuals who are also U.S. citizens or U.S. Resident Aliens may want to consider transferring their CFCs to a U.S. corporation to take advantage of the participation exemption for a certain amount of dividends received from the CFC as well as a 50 percent deduction for profits attributed to Global Low Taxed Income. However, this strategy should not be employed without consulting with a U.S. International Tax advisor.

 

About the Authors: 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 jmutnik@bpbcpa.com. 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.

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.

Tax Reform Limits Business Use of Net Operating Losses by Joanie B. Stein, CPA

Posted on March 29, 2018 by Joanie Stein

The Tax Cuts and Jobs Act aims to make it impossible for businesses to continue using net operating losses (NOLs) to reduce their corporate tax liabilities to zero over more than two decades.

 

For taxable years beginning after Dec. 31, 2017, NOL carrybacks are eliminated for most business (excluding farming and insurance businesses), and NOLs carryforwards are limited to 80 percent of the taxpayer’s taxable income. Moreover, the new law prohibits taxpayers from claiming business losses in excess of $250,000 for individual taxpayers and $500,000 for joint filers. The one bright spot is a new provision that allows taxpayers to carry NOL’s forward indefinitely to offset future taxable income.

 

Under the previous tax regime, taxpayers could deduct losses they incurred in an active trade or business from other income sources, including passive and investment income. Moreover, taxpayers were permitted to carry those NOLs back two years and forward 20 years to offset taxable income and either claim a refund for prior tax years or reduce tax liabilities in future years.

 

With the new regulations concerning NOLs, taxpayers should meet with advisors to understand how they should treat NOL’s generated prior to Jan. 1, 2018, and how they may carefully minimize the impact of any potential adverse tax and cash-flow issues in the future.

 

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.

 

 

 

Recent Tax Court Decision is a Cautionary Tale in Taxpayer’s Burden to Prove Deductions by Arthur Lieberman

Posted on March 27, 2018 by Arthur Lieberman

In matters in which the IRS determines that a taxpayer is deficient in meeting his or her income tax liabilities, it is generally presumed that agency is correct. It is the taxpayer who bears the burden to prove the IRS wrong by a preponderance of evidence. In essence, the IRS can challenge any and all taxpayer claims to credits and deductions, even if the taxpayer is in fact entitled to them. Taxpayers must then show demonstrative proof to back up the tax treatment for which they claim they are entitled.

This was the issue before the U.S. Tax Court in February 2018 when the IRS challenged a Mississippi family’s deduction of $27,646 in expenses incurred to replace carpeting and make other routine maintenance repairs to rental units in real estate property that the family owned.  The IRS issued the taxpayer a notice of tax deficiency and a related penalty contending that those repairs constituted a property “improvement” that the taxpayer should have written off and depreciated over time. The only proof that the taxpayer presented to prove that it properly deducted those expenses was a three-page list of its itemized repairs and associated costs.

The court subsequently ruled in favor of the IRS due to the taxpayer’s inability to meet its burden of proof and provide a preponderance of documents, records and other physical evidence to counter the IRS’s claim.

What could the taxpayer have done differently? According to the court, the taxpayer could have corroborated its position with records documenting the value of its properties before and after the repairs through appraisals, or inspection reports or lease contracts that stipulate the taxpayer’s requirement to make repairs in between tenants.

In light of the court’s decision, it behooves taxpayers to err on the side of caution and take extraordinary steps to prove their decisions to claim deductions, especially with regard to real property and the repair regulations. As a minimum, taxpayers should take before and after photographs and/or video of items that require repairs in order to demonstrate that the costs they incur are in fact a result of general property maintenance and not improvements, restorations and betterments to extend the property’s useful life or adapt it for a new or different use.

About the Author: Arthur Lieberman is a director in the Tax Services practice of Berkowitz Pollack Brant, where he works with real estate companies and closely held businesses on deal structuring, tax planning, tax research, tax controversies and compliance issues.  He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

Mitigation of Damages in Lost Profits Calculations

Posted on March 24, 2018 by Richard Pollack

Berkowitz Pollack Brant directors Richard A. Pollack and Scott Bouchner were invited to join experts in the fields of accounting, economics, finance and law to write a chapter for a recently published guidebook about lost profits, damages and business valuations. Here is an excerpt of their contribution to “Lost Profits Damages: Principles, Methods, and Applications”, which Quickreads and The National Association of Certified Valuators and Analysts (NACVA) calls “a must have for aspiring and experienced lost profits damages experts.”

 To order a copy of “Lost Profits Damages: Principles, Methods, and Applications”, visit http://www.valuationproducts.com/lostprofits/.

 Mitigation of Damages in Lost Profits Calculations

 The concept of mitigation of damages pertains to the legal principle that an injured party cannot recover damages that it could have otherwise avoided with reasonable effort. As discussed in the Restatement (Second) of Contracts,

  1. Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.
  2.  The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.[1]

Like breach of contract actions, this principle of mitigation is similarly applicable in tort cases, as discussed in Restatement (Second) of Torts.

  1. Except as stated in Subsection (2), one injured by the tort of another is not entitled to recover damages for any harm that he could have avoided by the use of reasonable effort or expenditure after the commission of the tort.
  2.  One is not prevented from recovering damages for a particular harm resulting from a tort if the tortfeasor intended the harm or was aware of it and was recklessly disregardful of it, unless the injured person with knowledge of the danger of the harm intentionally or heedlessly failed to protect his own interests. [2]

Contrary to common understanding, there is no absolute “duty to mitigate” as an affirmative obligation. While the failure to do so could result in a reduction of the damage award, establishing liability and determining the gross damages award are not dependent upon the plaintiff’s efforts to mitigate. The plaintiff is required to act in good faith and take appropriate actions to overcome the damages purported caused by the defendant.[3]

Also referred to as the avoidable consequences doctrine, mitigation “finds its application in virtually every type of case in which the recovery of a money judgment or award is authorized.”[4]

The implications of mitigation in the computation of lost profits, however, are often overlooked or underappreciated by the damages expert. Plaintiff’s expert may focus upon analyzing plaintiff’s economic profits “but for” the alleged wrongdoing by defendant while substantially accepting plaintiff’s “actual” earnings as recorded for past damages computations or as projected for future damages calculations. Likewise, defendant’s expert may concentrate on rebutting the “but for” projections of plaintiff’s expert while also paying little attention to plaintiff’s recorded or projected post-injury economic profits. In contrast, the concept of mitigation is directed toward an analysis of whether plaintiff’s actual post-injury net economic profits could or should have been greater had plaintiff reasonably mitigated its losses. If so, plaintiff’s lost profits damages will be less when measured as the difference between the “but for” and successful mitigation-adjusted “actual” returns than if the mitigation adjustments were not performed. There may be circumstances, however, where the plaintiff’s efforts to mitigate its damages are unsuccessful, which could result in an increase in damages.

To the extent that the defendant is able to demonstrate that the plaintiff could have avoided or limited its damages by taking reasonable actions, it may be possible to reduce or eliminate the defendant’s obligation to pay for damages suffered by the plaintiff. Conversely, if challenged, the plaintiff should be able to offer evidence as to whether it was possible to mitigate its losses, what the costs of such mitigation efforts would have been relative to the potential benefits, what attempts, if any, were made to avoid losses caused by the defendant, and what were the results of these efforts. While the parties’ damages experts often address these issues, they may be better addressed in some instances directly by or in concert with industry experts and fact witnesses.

 

About the Authors: Richard A. Pollack, CPA/ABV/CFF/PFS, ASA, CBA, CFE, CAMS, CIRA, CVA, is director-in-charge of Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice. Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with the practice. Both professionals have served as litigation consultants, expert witnesses, court-appointed experts and forensic investigators on a number of high-profile cases. They can be reached at the CPA firm’s Miami office as (305) 379-7000 or via email at info@bpbcpa.com.

 

ENDNOTES

[1] Restatement (Second) of Contracts § 350. St. Paul, Minn: American Law Institute, (1981)

[2] Restatement (Second) of Torts § 918. St. Paul, Minn: American Law Institute, (1977); See also National Communications Assoc. v. AT&T, 93 Civ. 3707 (LAP) (New York 2001) (which states that “A plaintiff who fails to take reasonable steps to avoid the alleged loss ‘has broken the chain of causation, and loss resulting to him thereafter is suffered through his own act[; i]t is not damage that has been caused by the wrongful act of the [defendant]”), citing McClelland v. Climax Hosier Mills, 252 N.Y. 347, 359, 169 N.E. 605, 609-10 (New York 1930)

[3] See Restatement (Second) of Contracts § 350 (1981), which states “It is sometimes said that it is the “duty” of the aggrieved party to mitigate damages, but this is misleading because he incurs no liability for his failure to act. The amount of loss that he could reasonably have avoided by stopping performance, making substitute arrangements or otherwise is simply subtracted from the amount that would otherwise have been recoverable as damages.” Also see In re Std. Jury Instructions-Contract & Bus. Cases, 116 So. 3d 284, (Supreme Court of Florida 2013), which states that “[t]here is no actual ‘duty to mitigate,’ because the injured party is not compelled to undertake any ameliorative efforts.”

[4] See Sedgwick on Damages, 9th ed., sec.204, p. 390; 15 Am. Jur., sec. 27, p. 420; 25 C.J.S., Damages, sec. 33, p. 499.

IRS Clamps Down on Cryptocurrency Users by Dustin Grizzle

Posted on March 23, 2018 by Dustin Grizzle

The high times are over for cryptocurrency investors who thought their gains and profits from Bitcoin, Etherium, Ripple and other firms of virtual money could escape the watchful eye of Uncle Sam.

The IRS has made it clear that it considers digital money to be a physical asset subject to U.S. income taxes, and it will take all necessary efforts to uncover and criminally pursue digital currency tax evaders. In a recent development, Coinbase, the cryptocurrency exchange platform, announced it will comply with a 2017 district court ruling requiring it to share with the IRS the records of more than 13,000 of its customers who since 2013 bought, sold, transferred and stored more than $20,000 in digital currency for which an unreported tax liability may be due. As the IRS and other government agencies focus on regulating cryptocurrency, investors must understand how the tax code treats virtual money, and they must commit to meet their related tax responsibilities or risk criminal prosecution.

Taxable Events with Cryptocurrency

Cryptocurrency’s treatment as a capital asset means that taxes will apply whenever an investor does any of the following:

  • sells digital currency for a gain
  • converts it to cash
  • trades it for another digital currency, or
  • uses it like cash to buy a product or service at a point in time in which its value is more than the investor initially paid to acquire it.

The applicable tax rate depends upon several factors, including the holding period, which is the amount of time between when an investor acquires the asset and when the taxable event occurs.

For example, if an investor bought Etherium in 2016 and holds it for at least one year before selling it in 2018, he or she will be subject to a 20 percent long-term capital gain tax on the difference between the purchase price and the value of Etherium at the time of the sale. However, if the same investor cashes in his or her Etherium during the same year as acquisition, the realized gain would be subject to ordinary income tax, which, depending on the investor’s annual earnings and tax bracket, could be as high as 37 percent.

It is important that investors consider the wide fluctuations in cryptocurrency value that can occur before making any decision to use, sell or trade their Etherium, Bitcoin or Ripple tokens. Not only can timing help to minimize tax liabilities when investors sell or cash out their virtual money, it can also help investors avoid the mistakes of incurring taxes and paying outlandish prices when they use cryptocurrency to make purchases. For example, consider an investor who bought 100 Bitcoin on Jan. 1, 2016, when the value of one bitcoin was equal to approximately U.S. $433. If the investor purchases airline tickets with Bitcoin via Expedia on March 2, 2018, when one Bitcoin was equal to more than $11,000, he or she should first be concerned about overspending for the flight. In addition, he or she will also be exposed to capital gain tax on the $105,670 difference between his or her original cost basis and the value at the time of the taxable sale.

Conversely, individuals who invested in Ripple at the start of 2017 and maintained their holding without using, trading or cashing it in by the end of the year, will have reaped 36,018 percent tax-free returns on their investment. However, as soon as individuals use their digital money, they may realize a gain and be required to pay taxes on that amount.

Cryptocurrency Treatment as 1031 Exchange Property

Historically, taxpayers could defer capital gains tax on the sale of appreciated property when they reinvested sale proceeds from one asset into a similar, like-kind property within a specific time period. Under Section 1031 of the Internal Revenue Code, this tax treatment was available to real estate investors as well as to collectors of art, jewelry and other highly appreciated assets. Investors in cryptocurrency had also assumed that 1031 treatment would apply to them when they traded one cryptocurrency for another.

While taxpayers can argue such a claim, in theory, they will be surprised to learn that 1031 treatment is not so easy to apply in reality. For one, taxpayers are required to track and report 1031 exchanges on their federal tax returns and back up their claims with documentation. Therefore, an investor who bought and sold virtual currency multiple times throughout the year would need to file with their tax returns an equal number of Forms 8824 reporting their like-kind exchanges. If an investor had 500 transactions during the year, he or she would need to file 500 forms.

Secondly, with the passage of the Tax Cuts and Jobs Act overhauling the U.S. tax code, the government has made it clear the only asset that will qualify for tax-deferred 1031 exchange treatment beginning in 2018 is real estate. As a result, investors who trade Etherium for Bitcoin or Ripple for Litecoin will need to report those trades to the IRS, even if they do not realize a gain or loss. When a trade results in an actual gain, the difference will be subject to tax. Should a trade result in a loss, taxpayers may, under certain circumstances, use that deficit to offset capital gains of the same type and potentially reduce their overall taxable income for the year.

As U.S. and foreign governments rush to regulate the cryptocurrency craze and grab their share of taxpayers’ extreme market gains, investors should err on the side of caution and prepare to report all of their virtual currency transactions to taxing authorities. It is far better to be forthright and self-report than it is to be exposed by a government-authorized release of investor information.

The advisors and accountants with Berkowitz Pollack Brant work with U.S. and foreign individuals and business to help them comply with tax laws while maximizing tax efficiency across borders.

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.

 

 

Will Tax Reform Expedite Divorces in 2018? How can Couples be Prepared? by Sandra Perez, CPA/ABV/CFF, CFE

Posted on March 22, 2018 by Sandra Perez

The Tax Cuts and Jobs Act (TCJA) that the president signed into law in December 2017 calls for the elimination of tax deductions for alimony payments made to a former spouse beginning on Jan. 1, 2019. Similarly, alimony recipients will no longer be required to include those payments as taxable income on their annual tax return filings. The law applies to divorce and legal separation agreements executed after Dec. 31, 2018. Taxpayers with alimony orders in place prior to Dec. 31, 2018, will not be affected, and payors will continue to receive preferential tax treatment for the spousal support they pay.  However, it is important to note that the alimony provisions of the TCJA will apply to future modifications of support orders in place prior to Dec. 31, 2018.

The TCJA upends settlement strategies in divorces.  Because the individual who pays alimony is traditionally in a higher tax bracket than the alimony recipient, the tax savings on the payor’s deduction is currently worth more than the amount of tax paid by the recipient. Essentially, because each dollar of alimony paid to a recipient costs less to the payor, the payor could afford to pay more in alimony. The elimination of the alimony deduction beginning in 2019, reduces the overall dollars a family has to divide.

This TCJA’s repeal of the alimony tax deduction combined with the law’s temporary through 2025 repeal of dependency exemptions and increase in standard deduction will eliminate the need for divorcing couples to argue over who may claim a dependent child as a deduction in future years. However, it is possible that the new law’s treatment of spousal support will create a sense of urgency for couples, especially high-earning spouses, to expedite a divorce in 2018 and take advantage of the tax break under current law.

As the government works to develop guidance for applying the new tax law, couples considering a divorce should recognize that the entirety of the law is subject to modification and even repeal under a new presidential administration or a change in the congressional majority. As a result, it behooves taxpayers to consult with professional advisors to understand the law in its current state and address in divorce settlements any potential changes that may impact former spouses’ future income and tax liabilities.

About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensics practice with Berkowitz Pollack Brant, where she works with attorneys and high-net-worth individuals with complex assets to prepare financial affidavits, value business interests, analyze income and net-worth analysis and calculate alimony and child support obligations in all areas of divorce proceedings. She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email info@bpbcpa.com.

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

 

Beware of Tax Refund Scam by Joseph L. Saka, CPA/PFS

Posted on March 19, 2018 by Joseph Saka

Tax season is unfortunately also the time of year that criminals step-up their efforts to swindle consumers for their own financial gain. In the latest twist on an old scheme, scammers are stealing taxpayer’s personal information to file fraudulent tax returns and have refunds electronically deposited into taxpayer’s actual bank accounts. Subsequently, these criminals pose as IRS agents or debt collectors and contact their victims demanding the return of the refunds erroneously deposited in taxpayers’ accounts. Often, criminals will use scare tactics, such as the threat of arrest, to trick victims into compliance.

While there is little that taxpayers can do to prevent this fraud from occurring, there are important steps they can take to resolve it as quickly as possible and avoid interest accruing on the erroneous refund.

Should taxpayers receive an unexpected direct deposit tax refund, they should first contact their accountants to communicate with the IRS then call the Automated Clearing House (ACH) department of the bank/financial institution to have the funds returned to the IRS. In most cases, taxpayers should also consider closing their accounts to prevent any further fraud.

If the fraudulent refund is in the form of a paper check, the IRS advises taxpayers to write “Void” in the endorsement section on the back of the check and mail it within 21 days to the IRS office in the city listed on the bottom of the check.

Finally, taxpayers should remember that the only way that the IRS will communicate with them is through notices sent via U.S. postal mail; at no time will the IRS contact them by telephone or email. Therefore, there is no reason taxpayer should ever share personal information, such as  Social Security number of bank account information, over the phone or via email.

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 firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

Taxpayers Face April 15 Deadline to Report Foreign Assets by Andrew Leonard, CPA

Posted on March 15, 2018 by Andrew Leonard

U.S. citizens and resident aliens have an obligation to annually report their financial interest in or signature authority over foreign bank accounts, securities or other financial accounts with an aggregate value exceeding $10,000 at any time during the tax year.

The deadline for taxpayers to electronically file a report of foreign bank and financial accounts (FBAR) for the 2017 tax year is April 15, 2018. Should taxpayers need additional time, they may take advantage of an automatic six-month extension to file an FBAR by Oct. 15, 2018. Taxpayers do not need to file an extension form to receive the additional time to file their FBAR for 2018.

Because FBAR reporting applies to individual taxpayers, married couples and their children will need to file and report the value of all joint accounts separately for each family member. Failure to file may result in a fine of $10,000 per unreported account per year. In addition, taxpayers who file a fraudulent FBAR or who intentionally fail to file will be penalized the greater of $100,000 or 50 percent of the balance in the unreported accounts as well as criminal charges.

In addition to the FBAR filing requirement, certain U.S. individuals and certain corporations, partnerships and trusts also have an obligation to file Form 8938, Statement of Specified Foreign Financial Assets when they have specified foreign financial assets (SFFAs) with an aggregate value of more than $50,000 on the last day of the taxable year, or $75,000 at any time during the tax year.

Different thresholds apply to individuals and married couples filing joint returns who live abroad. A “specified individual” includes anyone who is either a U.S. citizen, a resident alien of the United States for any part of the tax year, a nonresident alien (NRA) who makes an election to be treated as a resident alien for purposes of filing a joint income tax return, or an NRA who is a bona-fide resident of American Samoa or Puerto Rico.

To understand tax reporting requirements and avoid penalties for noncompliance, individuals should consult with U.S. tax advisors and/or certified public accountants (CPAs). The advisors and accountants with Berkowitz Pollack Brant have extensive experience working with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

About the Author: Andrew Leonard, CPA, is an associate director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

 

IRS Provides Winter Storm Victims with More Time to Request a Filing Extension by Flor Escudero, CPA

Posted on March 14, 2018 by

In consideration of the recent winter storms along the U.S.’s eastern seaboard, the IRS has granted businesses located in affected areas an extra five days to request an automatic filing extension.

Tax returns and requests for filing extensions for calendar-year partnerships and S Corporations are typically due on Thursday, March 15, 2018. However, with the IRS extension, business taxpayers located in the northeast and Mid-Atlantic states where winter storms Quinn and Skylar hit over the past few weeks will have until Tuesday, March 20, 2018, to file Form 7004 requesting an automatic six-month filing extension. While electronic filing of Form 7004 is the easiest and fastest option, businesses that choose to file on paper should write “Winter Storm Quinn” or “Winter Storm Skylar” on their extension requests.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and international businesses across a broad range of industries to comply with tax laws while maximizing tax efficiency.

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.

Tax Reform Brings Immediate Impact to U.S. Taxpayers Doing Business Overseas by Andre Benayoun, JD

Posted on March 08, 2018 by Andrè Benayoun, JD

While many provisions of the Tax Cuts and Jobs Act (TCJA) will not be reportable by U.S. taxpayers until they file their 2018 tax returns in 2019, individuals and businesses with overseas operations must prepare now and, in some instances, apply provisions of the new law to their 2017 tax returns. Following are two important and timely provisions of the law that require immediate attention and planning.

Deemed Repatriation Tax

The TCJA introduces an immediate, one-time “deemed repatriation tax” on income that U.S. businesses earned and were previously allowed to hold overseas as untaxed profits since 1987.  More specifically, the law requires businesses to presume they brought foreign earnings back to the U.S. in 2017 and pay taxes on that amount. The tax on these deemed repatriated earnings tax is 15.5 percent on liquid assets (or 17.5 percent on those liquid assets held by individuals) and 8 percent on investments in illiquid assets, such as plants and equipment (9.05 percent when the tangible assets are held by U.S. individuals).

Because the deemed repatriation tax is effective immediately, it requires taxpayers to quickly assess their tax liability on as much as 30 years-worth of foreign earnings through 2017, and convert those foreign earnings from local accounting and tax standards to U.S. tax standards and, ultimately, also into U.S. dollars.

While the law does allow U.S. taxpayers to elect to pay this obligation over an eight-year period, the first installment is due on the same day as the taxpayer’s federal income tax filing deadline without regard to extension. For example, an individual with foreign, untaxed earnings subject to this rule would need to make the first installment payment on April 16, 2018, even if the taxpayer receives a six-month filing extension. Should the taxpayer miss the initial installment due-date, he or she may lose the option to pay the deemed repatriation tax over the next eight-year period and instead be compelled to pay the entire tax liability up-front in one lump-sum payment.

This leaves U.S. multinationals with a very limited window of time to determine not only the amount of earnings they hold offshore under U.S. tax principles but also the tax rates that should apply to that income based on the liquidity of their foreign-entity balance sheets. Making this determination and deciding whether to allocate overseas earnings to liquid or illiquid assets for purposes of calculating the tax will be a time-consuming, burdensome process. For example, according to the law, stock held in a publicly traded company is a liquid asset because taxpayers may easily sell their shares for cash. Conversely, shares in a private company are considered illiquid assets, which would be subject to the lower repatriation tax rate of 8 percent or 9.05 percent.

Accuracy is key when calculating the deemed repatriation tax, and businesses should be prepared to substantiate their calculations with supportable facts in the event the IRS challenges their estimates. A good starting point for many businesses to comply with this law would be an earnings and profits (E&P) study on their untaxed accumulated offshore earnings and profits.  An E&P study looks at the historical foreign earnings reported under local tax principles and recalculates those amounts under U.S. tax principles with the support necessary to pass IRS audit procedures.

Once an E&P study is complete, taxpayers should consider what other benefits may be available to lower their deemed repatriation tax liabilities. As an example, the law permits taxpayers to apply E&P deficits from one foreign company against the earnings of another. In addition, the law allows for taxes paid by the foreign corporation to partially reduce the deemed repatriation tax if the U.S. taxpayer is a C corporation. Generally, U.S. individual shareholders who in invest in foreign corporations are not allowed to take credit for foreign taxes paid at the foreign-entity level, but they may be able to do so by making certain elections. As such, it behooves businesses to engage professionals to appropriately and accurately calculate and support the required repatriation tax.

Looking beyond the deemed repatriation tax, the new tax law provides a participation exemption for C corporations to effectively exclude from future income those dividends they receive from certain foreign corporations. For example, distributions of earnings to a C corporation by its long-held foreign subsidiary may not be subject to a second level of tax upon repatriation of those earnings to the U.S. Yet, U.S. corporations will not be able to deduct or claim a credit on their federal U.S. income tax returns for any withholding tax that they pay abroad on those future dividends. With this in mind, U.S. individual taxpayers with an interest in a foreign corporation may consider establishing or converting an existing LLC to a C corporation to bring dividends from abroad to a U.S. corporation free of U.S. taxation.  It is also worth noting that imposing a C corporation between a U.S. individual and a foreign corporation may result in a lower rate of tax upon ultimate distribution to the U.S. individual if the foreign entity is organized in a country that does not have an income tax treaty with the U.S.

Global Intangible Low-Taxed Income (GILTI)

One provision of the new tax law that will not go into effect until 2018 is the new anti-deferral regime known as Global Intangible Low-Taxed Income (GILTI).  In an effort to prevent U.S. businesses from shifting profits offshore to low-tax countries, the TCJA imposes an annual tax on foreign income that exceeds 10 percent of a taxpayer’s return on all foreign depreciable assets, including plants, equipment and real estate. The law excludes from this calculation some items of income, most notably income that is subject to a local tax rate above 18.9 percent that would otherwise be treated as Subpart F income (Subpart F income is a currently existing anti-deferral regime). The effective GILTI tax rate through 2025 is 10.5 percent for C corporations and as high as 37 percent for individuals and S corporations. Beginning in 2026, the rate is scheduled to increase to 13.125 percent for C corporations and remain at 37 percent for individuals.

Again, due to this preferential treatment afforded to C corporations, partnerships and other pass-through entities might consider converting to a C corporation in 2018 to avoid a potentially higher tax liability come 2019.

The provisions of the tax law that relate to outbound international matters are complex and will require further guidance from the IRS in the coming months. It is critical that U.S. taxpayers with overseas interest meet with qualified tax professionals to assess the entirety of their domestic and foreign operations and develop strategies to improve global tax efficiency going forward.

About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for repatriation of profits ; treaty analysis; tax-efficient debt financing; and pre-immigration tax planning. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

If You Owe the IRS Money, You May Lose your Passport in 2018 by Adam Slavin, CPA

Posted on March 06, 2018 by Adam Slavin

Taxpayers with “seriously delinquent” unpaid federal income tax debt in excess of $51,000 may have their passports revoked in 2018.

Under the Fixing America’s Surface Transportation (FAST) Act of 2015, the State Department, upon notice from the IRS, is required to deny passport applications and passport renewals for  individuals who have unpaid tax liabilities and for whom a federal tax lien has been filed. Excluded from the law are taxpayers who are located in a federally declared disaster area, who are in the midst of bankruptcy proceedings, or who the IRS identified as a victim of tax-related identity theft.

To avoid a potential passport issue, the IRS urges U.S. citizens traveling or living outside the country to determine if they have delinquent U.S. tax liabilities and, if they do, to take one of the following actions:

•                   Immediately pay the tax debt in full,

•                   Make timely payments under the terms of an installment agreement with the IRS,

•                   Pay the tax debt under an accepted offer in compromise or under the terms of a settlement agreement with the Department of Justice,

•                   Pay a levy and request a pending collection due-process appeal, or

•                   Make an innocent spouse election or request innocent spouse relief to suspend collection efforts.

Once the tax deficiency is resolved, the IRS will notify the State Department within 30 days to remove any restriction on an existing and pending passport application. The accountants and advisors with Berkowitz Pollack Brant help individuals and businesses maintain tax efficiency while meet their U.S. and foreign tax reporting responsibilities.

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

Disregarded Entities with Foreign Ownership Face Challenges and Opportunities Filing 2017 Tax Returns by Andrew Leonard, CPA

Posted on February 28, 2018 by Andrew Leonard

While the media is rightfully paying significant attention to the U.S.’s new tax laws effective for the 2018 tax year, foreign persons with direct or indirect ownership in certain U.S. entities and structures should not forget that they have a significant new filing requirement effective for the 2017 tax filing season.

For taxable years beginning in 2017, foreign-owned domestic disregarded entities, including single-member limited liability companies (SMLLCs) must, 1) maintain a set of permanent financial records, 2) obtain from the Internal Revenue Service (IRS) an employer identification number (EIN) and 3) file both a U.S. corporate income tax return and IRS informational reporting Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code). Failure to file the return or maintain proper records could result in a penalty of $10,000 for each violation of the law.

Generally, the Internal Revenue Code (IRC) treats SMLLCs as disregarded for all tax purposes. This means that a SMLLC would not have any U.S. income tax or information-reporting requirements separate from its foreign owner. However, under the new rules, such disregarded entities owned by a foreign person are treated as a domestic corporation that must meet all of the reporting and recordkeeping requirements applicable to domestic corporations with foreign owners. This includes filing an income tax return even if the foreign owner is already filing a U.S. tax return to report the SMLLC’s activity. The tax return will provide only general identifying information, but the Form 5472 that must be attached includes disclosure of the SMLLC’s direct and indirect foreign owners and any transactions that occurred between the SMLLC and a related party (including but not limited to the owner).  For this purpose, a foreign owner includes a nonresident alien individual, foreign corporation, partnership, trust or estate.

It is likely too late for applicable taxpayers to avoid the domestic disregarded entity filing and recordkeeping requirements in 2017. However, taxpayers do have an immediate opportunity during the first few months of 2018 to plan ahead and change their structures.

For example, a SMLLC may elect to be treated as a corporation for U.S. income tax purposes in order to take advantage of the reduction in the U.S.’s corporate income tax rate from a high of 35 percent to 21 percent beginning in 2018. While this option may be acceptable and easy for some foreign owners of SMLLCs to do, it is not really a solution since it will not eliminate the need for filing a tax return, and Form 5472 may still be required.  If the SMLLC owns U.S. real property there may be FIRPTA issues.

Or, if the SMLLC is owned by a foreign corporation and holds personal use property, the LLC may be liquidated and avoid a U.S. corporate tax return filing requirement going forward until the property is sold. However, this option may also yield future tax implications, including foreign tax consequences, depending on the SMLLCs activities and whether the foreign corporation owns other assets.

Before making any decisions, it is vital that taxpayers engage the expertise of accountants and advisors to conduct a thorough review of their unique circumstances and a careful analysis comparing the options available to them.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

About the Author: Andrew Leonard, CPA, is an associate director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

New Tax Law Overhauls Tax Benefits of Meals and Entertainment Expenses by Jeffrey M. Mutnik, CPA/PFS

Posted on February 27, 2018 by Jeffrey Mutnik

The Tax Cuts and Jobs Act (TCJA) makes it more costly for businesses to wine and dine prospects and clients with meals and entertainment beginning on Jan. 1, 2018. While the new legislation keeps a 50 percent deduction for the cost of meals and beverages, it completely eliminates the deduction for client entertainment expenses regardless of whether or not they are directly related to business activities.

 

Under previous law, businesses could deduct 50 percent of “entertainment, amusement or recreation” expenses that were directly related to the active conduct of the taxpayer’s trade or business. With the passage of the TCJA, businesses can still deduct expenses for certain social events that benefit their employees. However, once these activities include clients, prospective clients or other non-employed persons, the deduction will disappear. This applies to tickets to sporting events, concerts and theatrical performances; golf and fishing outings; and membership dues to athletic, social and country clubs.

 

Despite the preservation of the 50 percent deduction for non-employee social activities, the new law puts a 50 percent deduction limit on the meals that businesses provide to their employees, either through an in-office cafeteria or catered meals. In 2026, this limited deduction is set to expire. Under prior law, as recently as 2017, these expenses were 100 percent deductible. In reality, all business meal expenses are now limited to 50% deductibility.

 

Taxpayers with an employer-operated dining facility should review expenses associated with the operation of such a facility, and determine if the limitation (and eventual denial) of a deduction for these expenses warrant a change in the taxpayer’s policy or practices with regard to the facility.  All businesses should review their chart of accounts to separate meals from entertainment expenditures as of Jan. 1, 2018.

 

With these changes in the tax law, businesses will need to reconsider whether their generosity and business-building social activities will be worth the potential tax hit they will incur.

 

Because the law reduces the federal corporate tax rate from 35 percent to 21 percent, the impact of the lost deductions may not be so severe for those businesses organized as C corporations. Owners of businesses organized as pass-through entities, will also benefit from reduced federal tax rates, but the rate reduction may not be able to offset the loss of entertainment deduction.

 

All types of businesses, regardless of the structure, must assess the impact the changes to the meals and entertainment (M&E) deduction will have on their bottom lines. At the same time, they must also consider that new law eliminates a number of other employer deductions.  For example, the TCJA removes an employer’s ability to deduct transportation expenses that subsidize workers’ commuting costs, and it limits the deductibility of employee achievement awards.

 

Businesses have a lot of decisions to make in 2018 that will affect their ultimate tax liabilities in the future. Making these assessments should be conducted under the guidance of experienced accountants and advisors who understand the nuances of the new tax law and how they will impact businesses and their owners.

 

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.

 

Are you Ready to File your 2017 Tax Returns? by Angie Adames, CPA

Posted on February 26, 2018 by Angie Adames

The IRS has begun accepting tax returns for the 2017 tax year, for which the agency expects to receive nearly 155 million returns. To ensure the smooth and efficient processing of your return and any refund you are due, the IRS recommends that taxpayers take the following steps:

Know the Deadlines

The 2017 individual tax-filing deadline is Tuesday, April 17, 2018. Taxpayers may request an extension by that date to file no later than Oct. 15, 2018.

Gather Documents

Before filing tax returns, individuals should take the time to ensure that they have all of the appropriate year-end statements in hand from their employers, their banks, their financial advisors and others who share income and tax information with the IRS. Following are just some of the most common forms taxpayers will need to file their tax returns for 2017. If you do not receive these forms by the end of February, contact the issuer, whether it be an employer, a bank or other financial institution, before reaching out to the IRS.

  • Employer Form W-2 reports the annual wages and benefits you receive as an employee as well as the taxes withheld from your pay and paid on your behalf directly to the IRS
  • Employer Form 1095-C reports whether or not you were covered by health insurance during every month of the year
  • Forms 1098-E and 1098-T details the amount of tax-deductible student loan interest and tuition and fees you paid, respectively
  • Form 1099-DIV reports the dividends your investments paid to you and the capital gains and distributions you received from those investments
  • Form 1099-INT is issued by banks and financial institutions to report any interest exceeding $10 that was paid to you from interest-bearing accounts.
  • Form 1099-MISC reports the amount of non-employee compensation you received from working as a freelancer or independent contractor as well as rent and royalties paid to you
  • Form 1099-R details the distributions you may have taken from pensions and retirement accounts

In addition to these tax-related forms, individuals should be gathering documentation to demonstrate charitable deductions, medical expenses and other items that may claim to reduce their taxable income for the year.

Remember the New Tax Extenders

On February 9, the president signed into law a 2018 budget that retroactively extends into 2017 more than 30 tax provisions that expired at the end of 2016. Included on this list of tax extenders that individuals should address on their 2017 tax returns are an above-the-line deduction for qualified tuition and related expenses, and the ability to exclude from gross income the discharge of qualified principal residence of qualified principal residence indebtedness (often, foreclosure-related debt forgiveness).

Choose E-file and Direct Deposit

The safest and most accurate way to file a tax return is electronically. Similarly, using direct deposit will expedite the receipt of any tax refund directly into your bank account. Yet, the IRS reminds taxpayers claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) that they should not expect to receive a refund until after February 27.

Renew Expiring ITINs

Individuals who have U.S. tax filing or income reporting obligations but are not eligible for a Social Security number (SSN) are issued Individual Taxpayer Identification Numbers (ITINs) that must be kept up-to-date. ITINs with the middle digits 70, 71, 72 and 80 expired at the end of 2017. Affected individuals must file IRS Form W-7 to renew their ITIN before filing their tax returns for 2017 and note that the process could take as long as 11 weeks to receive an ITIN assignment letter.

Get Professional Tax Help

The tax laws are complicated and rife with a number of exceptions, limitations and other challenges that can make it difficult for individuals to file accurate annual returns and compute their tax liabilities. By engaging the knowledge and experience of a certified public accountant (CPA) and professional tax advisory firm, individuals can more easily comply with tax laws while minimizing their income tax liabilities.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

How Income and Assets affect your Child’s Potential Financial Aid Award by Joanie B. Stein, CPA

Posted on February 23, 2018 by Joanie Stein

There is no denying that a college education is expensive. According to the College Board, the average tuition and fees at a four-year public university for the 2017-2018 school year university is $8,230 for in-state students and $33,450 at a private institution. When you add in costs for room, board, books and everyday living expenses, the amount can become overwhelming for families at most all income levels. Thankfully, there are a number of ways that students can receive financial assistance based on their academic achievements and/or their financial needs. Understanding how these processes work is not for the faint of heart; they require some advance planning.

The Dreaded FAFSA

Each Fall, the U.S. Department of Education encourages high school seniors to complete the Free Application for Federal Student Aid (FAFSA) online at www.fafsa.gov by the Spring deadline, which for 2018 is June 30. Despite this generous allotment of time, it is recommended that student complete the online form as early as possible since aid is typically given on a first-come, first-serve basis. In addition, some colleges require prospective students FAFSA information in advance of their college application deadlines.

As its name implies, the FAFSA asks for information to help the federal government, states and post-secondary schools determine a student’s eligibility for financial aid. Contrary to popular belief, there is no income cut-off or academic threshold to qualify for tuition assistance. In fact, the Department of Education emphasizes that even if students have poor grades and/or their parents make a lot of money, they should still fill out the FAFSA each year to potentially receive scholarship dollars. According to the most recent data from the National Center for Education Statistics, 72 percent of all students received some form of financial aid in 2016. Sixty-three percent of those students received grants, which included scholarships that were not based on financial need.

How does the FAFSA determine a Student’s Eligibility for Aid?

The FAFSA asks families to provide information about the income and assets of both students and their parents as reported on tax returns filed two years prior to the school year in which aid is requested. For example, students entering college in 2018 would use information from their families’ 2016 tax returns as the base year. After entering information about balances in checking and savings accounts, certificates of deposit, taxable brokerage accounts and trust accounts, the government will estimate an Expected Family Contribution (EFC), which is the minimum amount that a family should expect to contribute towards a child’s education.

It is important to note that the government does not weigh all of a family’s income and assets equally. Assets owned by students or in custodial UGMA/UTMA accounts for the benefit of a child count against the family more than assets owned by the parents. More specifically, for every dollar in a child’s account, the government will subtract 20 cents from a potential financial aid award. Assets held in a parents’ name will lose 5.64 cents of every dollar. Yet, 529 college savings plans in which a parent is an owner/custodian would count as the parents’ assets. When 529 accounts are owned by grandparents, they are completely excluded from the EFC calculation until a student takes a distribution to pay college-related expenses. At that point, the distribution is considered income to the student.

In addition, the EFC calculation excludes the value of a small business with 100 or fewer employees, the equity in a primary family residence and balances held in qualified retirement accounts, such as 401(k)s, Individual Retirement Accounts (IRAs), Roth IRAs and SEP IRAs. However, investments in real estate other than the family home and contributions to retirement accounts made during the base year will count in the EFC calculation.

Each college will interpret a family’s EFC differently, and some will also require applicants to complete a profile for the College Board’s College Scholarship Service (CSS) to determine financial aid awards. In general, the CSS requires the disclosure of more financial detail and weighs income and assets differently than the FAFSA.

With these details in mind, families at all income levels should take the time to apply for financial aid. In addition, advance planning under the direction of experienced financial advisors can help to improve a family’s chances of receiving financial aid and easing the burden of paying for children’s college education.

 

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.

 

 

 

 

Tax Reform Eliminates Kiddie Tax Complexity by Jeffrey M. Mutnik, CPA/PFS

Posted on February 21, 2018 by Jeffrey Mutnik

Congress first introduced the Kiddie Tax in the 1980s to prevent high-net-worth families from paying overall lower taxes on their investment income by transferring income-generating assets to their young children in a lower tax bracket. For example, during the 2017 tax year, unearned income that exceeds $2,100 from investments held by children age 19 and younger, or full-time students under the age 24, is taxed at the parent’s marginal tax rate, which could be as high as 39.6 percent. However, under the Tax Cuts and Jobs Act (TCJA) that the president signed into law in December 2017, the parent’s income and marginal tax rate are disregarded.

Instead, beginning in 2018 and through the end of 2025, a dependent child’s unearned investment income (from capital gains, dividends and interest) in excess of $2,100 is subject to the trust income tax rates, which are capped at 37 percent on income above $12,500. In addition, earned income for wages, salaries and other compensation a dependent child receives for providing personal services is subject to taxation at the single taxpayer rates, which can be as high as 37 percent on income exceeding $500,000. While this modification makes the taxation of such income simpler, there are other important factors that families should consider in their tax planning.

For example, under the TCJA, the highest 37 percent tax brackets for trusts and estate in 2018 kicks in at $12,500, a much lower threshold than the top 37 percent rate that would have applied to parents with $600,000 in taxable income before the new law was enacted. As a result, the benefits of the new law will depend on the amount of a child’s unearned income during a tax year. In most cases, transferring substantial investment assets into children’s names will potentially lower a family’s overall federal income tax liabilities in 2018 and through 2025, when this provision is set to expire. However, families should be mindful of the gift tax and asset control issues they may face when contemplating transfers to family members.

 

The advisors and accountants with Berkowitz Pollack Brant work with U.S. and foreign families to protect wealth and maintain tax efficiency while complying with complex global tax laws.

 

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.

 

 

 

States Provide Penalty Relief to Qualifying Businesses with Unpaid Tax Liabilities by Michael Hirsch, JD, LLM

Posted on February 12, 2018 by Michael Hirsch,

Most U.S. states offer businesses an opportunity to potentially avoid penalties when they voluntarily report and pay previously unpaid liabilities of state and local taxes. In addition, many states establish temporary tax amnesty programs that also allow certain taxpayers to avoid the interest and penalties that accrued on their delinquent taxes. Taking advantage of these programs requires taxpayers to understand their eligibility to participate and the time frame in which the program will apply.

It is not uncommon for businesses to unintentionally forget one of the many tax-reporting responsibilities they are exposed to when doing business in a state, including, but not limited to, state-level sales and use tax, corporate tax, gross receipts tax, franchise tax, and/or motor and other fuels taxes. In addition, thanks to complex tax laws, businesses may overlook or miscalculate their true tax liabilities within those states where they operate. For example, a business headquartered and based in Florida may overlook filing corporate income tax returns in other states in which it rents commercial property.

Generally, Voluntary Disclosure Programs apply only to businesses that have not previously been contacted by a state taxing authority about an outstanding liability and whose delinquencies are neither intentional nor obvious.  Where states differ in their application of these programs is the number of years they will “look back” at a business’s tax liabilities after making the disclosure. For example, Florida looks back three years, whereas California relies on a longer six-year look-back period.

Once businesses report and pay their outstanding tax and interest liabilities through a Voluntary Disclosure Agreement (VDA), all penalties will be waived. However, as state governments continue to look for ways to bolster their budgets, many offer qualifying businesses a brief window of opportunity to also avoid paying interest on delinquent tax liabilities when they voluntarily comply with state and local tax laws. These tax amnesty programs not only help states close revenue gaps, they also help broaden their tax base by allowing previously unidentified taxpayers to enter and remain in the system.

For taxpayers, interest and penalty relief will apply when they voluntarily come clean within the applicable time frame. For example, both Ohio and Rhode Island have tax amnesty programs in place until Feb. 15, 2018. In Texas, delinquent businesses will have an opportunity to qualify for amnesty from interest and penalties on unreported state tax liabilities when they come into compliance between May 1 and June 29, 2018. The program applies to periods prior to Jan. 1, 2018, and includes only previously unreported liabilities.

Businesses with operations in multiple states should engage the services of State and Local Tax (SALT) professionals to regularly assess their tax reporting and payment responsibilities, assist in complying with voluntary disclosure programs and avoid potential risks of double taxation.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individuals and businesses to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

2017 Tax Filing Deadline Set for April 17, 2018 by Adam Slavin, CPA

Posted on February 12, 2018 by Adam Slavin

The IRS announced that the deadline for taxpayers to file their federal income tax returns for the 2017 tax year will be Tuesday, April 17, 2018.  The filing deadline is extended because the traditional due date of April 15 falls on a Sunday, and Monday is a legal holiday in the District of Columbia. April 17 is also the deadline for taxpayers to request a filing extension if needed.

In addition, the IRS said that that it will begin accepting taxpayers’ 2017 federal returns on Jan. 29, 2018, a few days later than last year, to ensure its systems are prepared to respond to any impact that tax legislation will have on 2017 returns.

Due to the passage of the Tax Cuts and Jobs Act, which went into effect on Jan. 1, 2018, the returns that taxpayers file this year for 2017 should, for the most part, reflect the tax code that was in existence prior to the tax reform law.

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

 

IRS Helps Taxpayers to More Easily Calculate Personal Casualty Losses from 2017 Hurricanes by Arkadiy (Eric) Green, CPA

Posted on February 06, 2018 by Arkadiy (Eric) Green

Individual taxpayers who suffered losses to their homes and personal belongings during the 2017 hurricane season should be aware that the IRS introduced safe harbor methods to calculate those losses on their 2017 income tax returns that they will file in April of this year.

 

Under the IRS guidance issued in December 2017, taxpayers with casualty losses of $20,000 or less may use an Estimated Repair Cost Method by using the lesser of two repair estimates prepared by two separate, independent and licensed contractors to determine a property’s decrease in fair market value (FMV). The estimates must detail the itemized costs required to restore the property to the same condition it was in immediately before the casualty event. Any improvement costs that would increase the property’s value above its pre-casualty condition must be excluded from the calculation.

 

For casualty losses to personal-use residential real property and personal belongings of $5,000 or less, taxpayers may rely on a De Minimis Safe Harbor Method under which they may use a good faith estimate of the cost of repairs required to restore the real property to its pre-casualty condition and the decrease in the fair market value of the individual’s personal belongings. Under this method, taxpayers must maintain meticulous records describing the affected real and personal property and detailing the methodology used for estimating the loss.

 

The Insurance Safe Harbor Method allows taxpayers to rely on reports from their homeowners’ or flood insurance companies that estimate the amount of losses they sustained to personal-use residential real property.

 

In addition to these safe harbor methods, individuals who suffered casualty losses to personal-use residential property as a result of a federally declared disaster may use the following methods: (1) the Contractor Safe Harbor Method under which the taxpayers may rely on contract price for the repairs specified in a binding contract prepared by a licensed independent contractor and signed by the individual and the contractor, or (2) the Disaster Loan Appraisal Safe Harbor Method, which allows taxpayers to use the estimated loss contained in appraisals prepared for the purpose of obtaining a Federal loan or loan guarantee from the Federal Government. To determine the amount of casualty or theft losses for personal belongings located in a federally declared disaster area, individuals may also use a Replacement Cost Safe Harbor Method that relies on a table that values the property based upon such factors as the amount of time the individual owned the property prior to the casualty event.

 

In a separate IRS announcement, the agency detailed safe harbor methods to specifically help victims of Hurricanes Harvey, Irma and Maria determine the amount of losses these storms inflicted on their homes located in Texas, Louisiana, Florida, Georgia, South Carolina, Puerto Rico, and the U.S. Virgin Islands. The calculations are based on cost indexes that consider the size of a home as well as the location and extent of its damages.

 

It is important to note that the IRS issued this updated guidance in December 2017, just prior to the passage of Tax Cuts and Jobs Act, which overhauls the tax code beginning on Jan. 1, 2018. The new law limits the tax break for personal casualty losses to those damages that result from a disaster declared by the president of the United States. On the surface, it appears that victims of major disasters, such as hurricanes and other federally declared disasters, would still be allowed to deduct personal casualty losses in the future, while homeowners affected by fires, flooding, winter storms and other casualty and theft events may no longer benefit from this form of tax relief. However, the actual implications of the new law will not be fully known until later this year when the IRS issues technical guidance on how it will address the provisions of the new tax law.

 

With offices in South Florida, Berkowitz Pollack Brant is well aware of the complicated tax and insurance issues individuals and businesses face when preparing for and recovering from natural disasters, such as hurricanes. Our advisors and accountants work closely with clients to insure and support claims of business interruption and assess of damages to property and businesses for purposes of claiming casualty loss tax deductions.

 

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.

 

 

Businesses Must Use New Withholding Rates beginning in February by Cherry Laufenberg, CPA

Posted on January 31, 2018 by Cherry Laufenberg

The IRS on Jan. 11, 2018, released new guidelines to help businesses and payroll-service providers adjust employees’ withholding calculations to reflect the new income tax rates and provisions of the Tax Cuts and Jobs Act. Businesses must apply the new withholding tables to workers’ paychecks by Feb. 15, 2018.

The new tables rely on the information that workers have already provided to their employers in existing Forms W-4, including the number of withholding allowance they claims. As a result, employees will not be required to complete new W-4s in 2018. However, it is recommended that workers check their withholding status on paychecks they receive after February 15 to ensure that the appropriate amount of income taxes are taken out of their pay each pay period.

While the payroll withholding adjustments under the new tax law will result in an increase in workers’ take-home pay, it does not mean that workers will owe less in taxes at the end of 2018. It is advisable that businesses and individual taxpayers meet with experienced accountants to guide them through the provisions of the new tax law.

The advisors and accountants with Berkowitz Pollack Brant work closely with businesses of all sizes and across virtually all industries to implement strategies intended to minimize tax liabilities, maintain regulatory compliance, improve efficiencies and achieve long-term growth goals.

 

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.

Tax Reform Seminar Materials

Posted on January 25, 2018 by Joseph Saka

On January 18, 2018, several of our tax and consulting leaders presented an overview of the Tax Cuts and Job Act and offered thoughts on strategies for high-net-worth individuals, families, entrepreneurs and businesses. More than 300 clients and friends attended the programs and many have requested copies of the slides used by our presenters.

For convenience, we broke them into segments.

Tax Reform – Domestic High-Net-Worth Jan. 18, 2018

Tax Reform – Real Estate Companies Jan 18, 2018

Tax Reform- Pass-Thru Entities Jan 18, 2018

Tax Reform – Corporate and Business Deductions Jan 18, 2018

Tax Reform – International Outbound – Jan 18, 2018

Tax Reform – International Inbound Jan 18 2018

 

 

(C) Berkowitz Pollack Brant.

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

 

 

 

 

Tax Reform and its Impact on Funding Children’s Education by Joanie B. Stein, CPA

Posted on January 23, 2018 by Joanie Stein

The Tax Cuts and Jobs Act (TCJA) signed into law in December 2017 expands the benefits of 529 college savings plans to cover private school tuition for children in grades K through 12. Effective Jan.1, 2018, the law allows families the opportunity to fund 529 accounts and take tax-free withdrawals of up to $10,000 per year to pay for a child’s non-college-level private or religious school education.  This is a significant development, especially when considering the rising costs of a private school education. In fact, according to the Private School Review, the annual cost to send a child to a private school exceeds the cost of one year’s tuition at an in-state public university.

 

529 college savings plans have long offered families at all income levels a tax-advantaged planning tool for affording the rising costs of a college education. Parents, grandparents or other individuals may contribute to 529s for the benefit of a young child and allow those dollars to grow tax-deferred for the next 18 years or so. When the child reaches college age, he or she may withdraw funds tax-free to pay for qualifying education expenses, including university tuition, books, computers and room and board.

 

Individual donors receive the flexibility to fund 529 plans in the manner that is most affordable to them, whether that be small monthly installments or larger annual gifts, free of gift taxes without the imposition of federal taxes on the investment gains. Additionally, donors can avoid federal gift tax on their 529 plan contributions when they give $15,000 or less per year, per beneficiary, or up to $30,000 per year, per beneficiary when donors are a married couple that files joint tax returns.

 

Under the new legislation, parents or grandparents with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for each of their children or grandchildren in one year with five years of tax-free dollars. For a single taxpayer, the maximum annual lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may contribute up to $150,000 to a 529 plan for each of their children or grandchildren. These contributions are free of gift taxes and can grow over the years free of capital gains taxes. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which is doubled from the current level under the tax reform law to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns. Theoretically, 529 plan beneficiaries may begin withdrawing up to a maximum of $10,000 per year when they turn kindergarten age to pay for schooling at a private institution or religious school and continue to take distributions at these restricted amounts for the next 13 years until they complete high school. At that time, they will be unrestricted in the amount of funds they withdraw each year for qualifying college-level education expenses, including tuitions, fees, room and board.

 

However, it is important to note that the use of 529 plan savings to pay for a child’s elementary or secondary school education at a private school or religious school is temporary; this benefit is set to expire on Dec. 31, 2025. That gives taxpayers potentially eight years to take advantage of the expanded use of 529 savings. It is critical that individuals meet with qualified advisors and accountants during the first half of 2018 in order to maintain their financial goals and maximize their tax savings in the current year and beyond.

 

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

Disregarded Entities with Foreign Ownership Face Immediate Challenges and Opportunities Filing 2017 Tax Returns by Arthur J. Dichter, JD, LLM

Posted on January 22, 2018 by Arthur Dichter

The media is rightfully paying significant attention to the U.S.’s new tax laws effective for the 2018 tax year. However, foreign persons with direct or indirect ownership in certain U.S. entities and structures should not forget that they have an important and immediate new filing requirement effective for the 2017 tax-filing season, which begins in January 2018.

For taxable years beginning in 2017, foreign-owned domestic disregarded entities, including single-member limited liability companies (SMLLCs), must 1) maintain a set of permanent financial records, 2) obtain from the Internal Revenue Service (IRS) an employer identification number (EIN), and 3) file both a U.S. corporate income tax return and IRS informational reporting Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code).

Failure to file the return or maintain proper records could result in a penalty of $10,000 for each violation of the law.

Generally, the Internal Revenue Code (IRC) treats SMLLCs as disregarded for all tax purposes. This means that an SMLLC would not have any U.S. income tax or information-reporting requirements separate from its foreign owner. However, under the new rules, such disregarded entities owned by a foreign person are treated as a domestic corporation that must meet all of the reporting and recordkeeping requirements applicable to domestic corporations with foreign owners. This includes filing an income tax return even if the foreign owner is already filing a U.S. tax return to report the SMLLC’s activity. The tax return will provide only general identifying information, but the Form 5472 that must be attached includes disclosure of the SMLLC’s direct and indirect foreign owners and any transactions that occurred between the SMLLC and a related party (including but not limited to the owner).  For this purpose, a foreign owner includes a nonresident alien individual, foreign corporation, partnership, trust or estate.

It is likely too late for applicable taxpayers to avoid the domestic disregarded entity filing and recordkeeping requirements in 2017. However, taxpayers do have an immediate opportunity during the first few months of 2018 to plan ahead and change their structures.

For example, an SMLLC may consider electing to be treated as a corporation for U.S. income tax purposes and take advantage of the U.S.’s new corporate income tax rate, which was has been reduced significantly from a high of 35 percent to 21 percent beginning in 2018. While this option may be acceptable and easy for some foreign owners of SMLLCs to do, it is not an ideal solution, since it will not eliminate the tax return filing requirement or, in some instances, the requirement to file Form 5472. In addition, if the SMLLC owns U.S. real property, there may be Foreign Investment in Real Property Tax Act (FIRPTA) issues.

Alternatively, if the SMLLC is owned by a foreign corporation and holds personal use property, the LLC may be liquidated and avoid a U.S. corporate tax return filing requirement going forward until the property is sold. However, this option may also yield future tax implications, including foreign tax consequences, depending on the SMLLCs activities and whether the foreign corporation owns other assets.

Before making any decisions, it is vital that taxpayers engage the expertise of accountants and advisors to conduct a thorough review of their unique circumstances and a careful analysis comparing all of the options available to them.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

 

About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Rules Regarding the Collection of Internet Sales Tax Face a Potential Reversal by Karen A. Lake, CPA

Posted on January 22, 2018 by Karen Lake

The U.S. Supreme Court has agreed to hear a case challenging a 26-year-old law regarding how businesses collect and pay sales tax for online transactions.

E-commerce has surged since the court’s 1992 decision in Quill Corp. v. North Dakota, which prohibited states from collecting sales tax on online purchases in which a business does not have a physical presence. During this same period, state and local governments have been struggling to fill significant budget gaps. In fact, according to the Government Accountability Office, states are losing more than $13 billion each year in tax revenue because they are not permitted to collect sales tax from out-of-state, online sellers. For those states that do not impose individual income taxes on its residents, such as Florida, Texas and South Dakota, the potential revenue they could generate from online sales tax is significant.

The case currently before the Supreme Court centers on a 2016 South Dakota law that would have allowed the state to collect sales tax from online retailers conducting sales with consumers located within its boundaries. In South Dakota v. Wayfair, the state claims that under the Quill decision, its “inability to effectively collect sales tax from Internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike.”

The Supreme Court is expected to hear the case beginning in the spring of 2018. A ruling in favor of South Dakota could overturn Quill and open the doors for states to collect sales tax on all remote sales. Such a decision would require Congressional action and new legislation.

In the meantime, it behooves online retailers to spend some time analyzing the states in which they are making sales and paying sales tax. If Quill is indeed overturned, these businesses could be in for a big change in their sales tax compliance.

 

About the Author: Karen A. Lake, CPA, is SALT (state and local tax) 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.

 

What Does Tax Reform Mean for Individual Taxpayers? by Tony Gutierrez, CPA

Posted on January 20, 2018 by Anthony Gutierrez

According to the Tax Policy Center, the Tax Cuts and Jobs Act (TCJA) will result in reduced tax liabilities for 95 percent of all taxpayers across all income levels in 2018. High-income earners may have the most to gain temporarily with a larger average tax cut as a percentage of their after-tax income, at least for the next eight years. In its current state, the law calls for many of the provisions affecting individuals to sunset at the end of 2025. However, it is important for individuals to recognize that the entirety of the legislation is subject to modification as the winds of political power change during a period of time in which there will be two presidential election cycles.

With these factors in mind, families must tread carefully. Under the guidance of experienced advisors, families will find opportunities to maximize the law’s temporary benefits while keeping an eye on the future and preparing their wealth and estate plans for a broad range of possibilities.

Tax Rates

Under the TCJA, almost all taxpayers will receive a reduction in their marginal income tax rate, which maxes out in 2018 at 37 percent on taxable income over $500,000 for individual filers and $600,000 for married couples filing jointly. In 2017, the top rate was 39.6 percent on taxable income exceeding $418,400 for single filers and $470,700 for married couples filing jointly.

Income Tax Deductions

On paper, it appears that the new tax code is unfavorable in terms of deductions and credits it allows taxpayers to claim to reduce their taxable income. For example, between 2018 through 2025, taxpayers may no longer claim deductions for interest on home equity loans or miscellaneous itemized expenses for fees paid to lawyers, accountants and investment advisors. The law also eliminates deductions for alimony paid to a former spouse when a separation agreement or final divorce decree is entered into after Dec. 31, 2018, and it limits the deductibility of personal casualty losses to only property located in a presidentially declared disaster area.

Additional deduction limitations that have been receiving a lot of media attention include the $10,000 cap on state and local tax payments and the limit on mortgage interest deductions for new mortgages beginning in 2018.

On the positive front, the new law nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing joint returns. In addition, taxpayers who elect to itemize deductions will no longer be restricted to a 3 percent of adjusted gross income (AGI) limitation.  In fact, the new law also increases to 60 percent of AGI the amount of deductible cash contributions taxpayers may give to charity. This provides high-net-worth families with the ability to leave behind a lasting legacy and give substantial sums to charitable organizations.

Estate and Gift Tax

Congressional republicans who called for eliminating the estate tax lost their battle during the very brief negotiations over tax reform. However, under the final legislation, only a small percentage of ultra-high-net-worth Americans will have to worry about the estate tax for the next eight years. Beginning in 2018, the estate and gift tax exemptions double and allow individuals to avoid taxes on assets of $11.2 million or less for individuals or $22.4 million or less for married couples filing joint tax returns. Estates valued above these thresholds will be subject to a 40 percent tax. The exemption is indexed with inflation but will revert to its pre-TCJA levels in 2026.

Even with the significant increase in the estate and gift tax exemption, it is critical that families plan carefully under the guidance of advisors who are well-versed in the tax code and the tools and strategies available to preserve wealth for multiple generations.

Other Provisions Affecting Families with Children

The TCJA introduces a new use for 529 college savings plans, for which families who fund these vehicles may take annual tax-free distributions of up to $10,000 through 2025 to pay for their children’s K through 12 private or religious school tuition. When individuals contribute $15,000 or less per year, per beneficiary, to a 529 plan, they can avoid federal gift tax on those amounts. For married couples, the exclusion is as high as $30,000 per year, per beneficiary. However, donors with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for as many children as they wish by contributing five years of tax-free dollars in one single year. For single taxpayers, the maximum lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may set aside $150,000 free of gift taxes and allow those dollars to grow free of capital gains taxes in a 529 plan for each of their children and/or grandchildren. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which the TCJA doubled from the previous level to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns.

Because the TCJA represents the most significant change to the tax code in more than 30 years, individuals will need to take the time to understand the law and change the way they typically plan for tax efficiency and wealth preservation. Advance planning is key under the direction of professional advisors who are keeping a watchful eye on the IRS and the technical guidance the agency will issue to apply the new law and who have the knowledge to develop appropriate strategies to meet taxpayers’ unique circumstances, needs and goals.

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 conducting business 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.

Tax Reform Brings Immediate Impact to U.S. Taxpayers Doing Business Overseas by Andre’ Benayoun, JD

Posted on January 19, 2018 by Andrè Benayoun, JD

While many provisions of the Tax Cuts and Jobs Act (TCJA) will not be reportable by U.S. taxpayers until they file their 2018 tax returns in 2019, individuals and businesses with overseas operations must prepare now and, in some instances, apply provisions of the new law to their 2017 tax returns. Following are two important and timely provisions of the law that require immediate attention and planning.

Deemed Repatriation Tax

The TCJA introduces an immediate, one-time “deemed repatriation tax” on income that U.S. businesses earned and were previously allowed to hold overseas as untaxed profits since 1987.  More specifically, the law requires businesses to presume they brought foreign earnings back to the U.S. in 2017 and pay taxes on that amount. The tax on these deemed repatriated earnings tax is 15.5 percent on liquid assets (or 17.5 percent on those liquid assets held by individuals) and 8 percent on investments in illiquid assets, such as plants and equipment (9.05 percent when the tangible assets are held by U.S. individuals).

Because the deemed repatriation tax is effective immediately, it requires taxpayers to quickly assess their tax liability on as much as 30 years-worth of foreign earnings through 2017, and convert those foreign earnings from local accounting and tax standards to U.S. tax standards and, ultimately, also into U.S. dollars.

While the law does allow U.S. taxpayers to elect to pay this obligation over an eight-year period, the first installment is due on the same day as the taxpayer’s federal income tax filing deadline without regard to extension. For example, an individual with foreign, untaxed earnings subject to this rule would need to make the first installment payment on April 16, 2018, even if the taxpayer receives a six-month filing extension. Should the taxpayer miss the initial installment due-date, he or she may lose the option to pay the deemed repatriation tax over the next eight-year period and instead be compelled to pay the entire tax liability up-front in one lump-sum payment.

This leaves U.S. multinationals with a very limited window of time to determine not only the amount of earnings they hold offshore under U.S. tax principles but also the tax rates that should apply to that income based on the liquidity of their foreign-entity balance sheets. Making this determination and deciding whether to allocate overseas earnings to liquid or illiquid assets for purposes of calculating the tax will be a time-consuming, burdensome process. For example, according to the law, stock held in a publicly traded company is a liquid asset because taxpayers may easily sell their shares for cash. Conversely, shares in a private company are considered illiquid assets, which would be subject to the lower repatriation tax rate of 8 percent or 9.05 percent.

Accuracy is key when calculating the deemed repatriation tax, and businesses should be prepared to substantiate their calculations with supportable facts in the event the IRS challenges their estimates. A good starting point for many businesses to comply with this law would be an earnings and profits (E&P) study on their untaxed accumulated offshore earnings and profits.  An E&P study looks at the historical foreign earnings reported under local tax principles and recalculates those amounts under U.S. tax principles with the support necessary to pass IRS audit procedures.

Once an E&P study is complete, taxpayers should consider what other benefits may be available to lower their deemed repatriation tax liabilities. As an example, the law permits taxpayers to apply E&P deficits from one foreign company against the earnings of another. In addition, the law allows for taxes paid by the foreign corporation to partially reduce the deemed repatriation tax if the U.S. taxpayer is a C corporation. Generally, U.S. individual shareholders who in invest in foreign corporations are not allowed to take credit for foreign taxes paid at the foreign-entity level, but they may be able to do so by making certain elections. As such, it behooves businesses to engage professionals to appropriately and accurately calculate and support the required repatriation tax.

Looking beyond the deemed repatriation tax, the new tax law provides a participation exemption for C corporations to effectively exclude from future income those dividends they receive from certain foreign corporations. For example, distributions of earnings to a C corporation by its long-held foreign subsidiary may not be subject to a second level of tax upon repatriation of those earnings to the U.S. Yet, U.S. corporations will not be able to deduct or claim a credit on their federal U.S. income tax returns for any withholding tax that they pay abroad on those future dividends. With this in mind, U.S. individual taxpayers with an interest in a foreign corporation may consider establishing or converting an existing LLC to a C corporation to bring dividends from abroad to a U.S. corporation free of U.S. taxation.  It is also worth noting that imposing a C corporation between a U.S. individual and a foreign corporation may result in a lower rate of tax upon ultimate distribution to the U.S. individual if the foreign entity is organized in a country that does not have an income tax treaty with the U.S.

Global Intangible Low-Taxed Income (GILTI)

One provision of the new tax law that will not go into effect until 2018 is the new anti-deferral regime known as Global Intangible Low-Taxed Income (GILTI).  In an effort to prevent U.S. businesses from shifting profits offshore to low-tax countries, the TCJA imposes an annual tax on foreign income that exceeds 10 percent of a taxpayer’s return on all foreign depreciable assets, including plants, equipment and real estate. The law excludes from this calculation some items of income, most notably income that is subject to a local tax rate above 18.9 percent. The effective GILTI tax rate through 2025 is 10.5 percent for C corporations and as high as 37 percent for individuals and S corporations. Beginning in 2026, the rate is scheduled to increase to 13.125 percent for C corporations and remain at 37 percent for individuals.

Again, due to this preferential treatment afforded to C corporations, partnerships and other pass-through entities might consider converting to a C corporation in 2018 to avoid a potentially higher tax liability come 2019.

The provisions of the tax law that relate to outbound international matters are complex and will require further guidance from the IRS in the coming months. It is critical that U.S. taxpayers with overseas interest meet with qualified tax professionals to assess the entirety of their domestic and foreign operations and develop strategies to improve global tax efficiency going forward.

About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for repatriation of profits ; treaty analysis; tax-efficient debt financing; and pre-immigration tax planning. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

IRS Extends Employers’ Affordable Care Act Reporting Deadline, Provides Taxpayers with Relief when Filing 2017 Tax Returns by Adam Cohen, CPA

Posted on January 18, 2018 by Adam Cohen

Despite a repeal of the individual insurance mandate that is included in the Tax Cuts and Jobs Act that went into effect on Jan. 1, 2018, U.S. taxpayers will still need to meet their 2017 Affordable Care Act reporting requirements on the tax returns they file this April.

However, the IRS has reversed its earlier decision to reject electronically filed returns that do not indicate whether or not the taxpayer had health coverage during the year. Therefore, taxpayers may indeed file their 2017 tax returns before the April 16, 2018, filing deadline without checking the “full-year coverage” box on Form 1040.

This development is due to the IRS’s decision to extend by 30 days the 2018 due date for some entities to provide 2017 health coverage information forms to their employees. Insurers, self-insuring employers, other coverage providers and applicable large employers now have until March 2, 2018, to provide to their workers Forms 1095-B, Health Coverage, and 1095-C, Employer-Provided Health Insurance Offer and Coverage Forms, which summarize the insurance they offered or did not offer to employees in 2017.

Notwithstanding this extension of time to share information with employees, employers will still need to meet their responsibilities to electronically file informational returns with the IRS by the April 2 deadline (or February 28 for paper filers) via Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C, Employer-Provided Health Insurance Offer and Coverage.

As a reminder, employers that do not meet their 2017 ACA reporting requirements may be subject to a penalty as high as $3.193 million, depending on their gross sales and when they correct or make a final informational return filing. Similarly, individual taxpayers who failed to have minimum essential health care coverage for any month in 2017, or who did not meet one the exceptions from the law, will be subject to the ACA’s individual mandate shared responsibility penalty, which is the greater of 1) 2.5 percent of a household’s modified adjusted gross income (MAGI) above the filing threshold or 2) a payment equal to $695 per adult and $347.50 per child with a maximum amount per family of $2,085.

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.

 

3 Tax Tips for Gig Workers in the Sharing Economy by Richard Cabrera, JD, LLM, CPA

Posted on January 18, 2018 by Richard Cabrera

In today’s sharing economy, individuals need little more than an Internet connection to become self-made entrepreneurs. Thanks to platforms such as Uber, Airbnb, TaskRabbit and Upwork, there are countless opportunities for individuals to make money driving cars, renting out rooms or providing on-demand services, either as their primary source of income or as a side gig. However, it is important that participants in the gig economy understand how their services affect their tax liabilities. Here are some quick points to keep in mind.

Income is Taxable.

The IRS considers gig workers to be independent contractors who must report and pay taxes on the income they earn, including cash payments. Income is generally taxable regardless of the amount of time individuals engage in a specific activity or whether or not they receive an income statement, such as Forms W-2 Wage and Tax Treatment, 1099-MISC for Miscellaneous Income, or 1099-K for Payment Card and Third Party Network Transactions.

In many instances, the IRS requires online platforms that facilitate transactions between consumers and gig workers to report to the IRS workers’ income when it exceeds $20,000 and/or when workers conduct more than 200 transactions in a given year. In contrast, freelance workers who do not use sharing platforms to secure work can expect to receive Form 1099-MISC, a copy of which is also provided to the IRS, when they receive income of $600 or more in a tax year.

Pay Taxes as You Go so You Don’t Owe.

Independent contractors must pay self-employment taxes in addition to federal income taxes. Gig workers can make estimated tax payments to the IRS throughout the year to cover these tax obligations rather than waiting to pay a significant tax bill when they file their tax returns.

Alternatively, freelancers who are considered to be employees of either an online platform or another business have the option to withhold more taxes from their paychecks by adjusting their exemptions on IRS Form W-4, Employee Withholding Allowance Certificate. It is beneficial for workers to meet with tax advisors to ensure that the correct amount is withheld from their income. When workers do not withhold enough tax, they may owe a significant tax bill at the end of the year and also be liable for estimated tax underpayment penalties. If they withhold too much tax, workers may unintentionally reduce their cash flow, give the IRS an interest-free loan, and lose out on opportunities to invest those extra dollars or benefit from compounding interest.

Take Qualifying Deductions to Lower Taxable Income.

The Tax Code allows individuals to deduct certain “ordinary and necessary” costs of doing business from their gross income. These deductible business expenses may include the costs of cell phones; wireless and Internet service plans; certain auto expenses, such as gas, oil, insurance, tune-ups and repairs; fees for parking and tools; and food and drinks. However, because freelance workers use their phones, cars and other items for both personal and business use, it is important that they carefully separate out and claim as a deduction only the business portion of these expenses. The IRS has very strict rules regarding what satisfies the business-use substantiation standards, including a requirement to maintain contemporaneous records, which can be very difficult for workers to implement when their gig is a side job. Alternatively, gig workers who use their cars for companies like Uber or Lyft can instead claim a standard mileage rate deduction or 53.3 cents per mile when they use their car for business purposes.

Similarly, taxpayers who earn income from renting out a house or an apartment must divide their use of the home between personal and business purposes in order to calculate the appropriate deductions of mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation, they may claim in a given year. It is important to note, however, that the IRS will generally not allow a taxpayer to deduct rental expenses that exceed the gross rental income limitation.

Independent contracts and freelancers represent a growing segment of the U.S. workforce who face unique tax compliance challenges. Engaging the services of professional tax accountants can help these workers meet their tax obligations and take advantage of potential tax benefits.

 

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.

 

Tax Reform for Real Estate Businesses and Investors by John G. Ebenger, CPA

Posted on January 17, 2018 by John Ebenger

The Tax Cuts and Jobs Act (TCJA) that overhauls the U.S. Tax Code represents new, often more-favorable tax treatment for real estate business owners and investors. However, the full benefit of these provisions will require careful evaluation and planning as the IRS catches up to the new law and provides technical guidance.

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 percent and 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 permanent corporate tax rate of 21 percent, down from 35 percent, while also eliminating the corporate Alternative Minimum Tax (AMT).

Pass-Through Business Structures

Businesses that are structured as pass-through entities, such as partnerships, LLCs, S corporations and sole proprietorships, may, subject to limitations, receive a deduction as high as 20 percent on U.S.-sourced “qualified business income” (QBI) that flows through to their owners’ personal tax returns. The deduction, which also applies to property rental businesses, trusts and estates and to taxpayers who receive qualified REIT dividends, qualified cooperative dividends, and/or qualified publicly traded partnership income, is available only through 2025; in 2026, the law calls for pass-through business income to be taxed using the standard individual tax rates and brackets that are in effect at that time.

In general, the 20 percent deduction is capped at the greater of the following:

1) 50 percent of wages paid to employees and reported on W-2s; or

2) 25 percent of W-2 wages plus 2.5 percent of a business’s original cost of qualifying, tangible depreciable property that generate trade or business income, including buildings, equipment, furniture and fixtures.

When determining the allowable deduction, many rental real estate operations will need to consider that while they may have limited W-2 wages, they may also have significant qualifying tangible and depreciable property to help maximize the 20 percent deduction.

Real estate businesses may need to reassess their existing operations in order to realize the potential benefits they may gain from the new pass-through deduction. This can include a review of their existing structures and the tax liabilities or savings they may potentially receive from restructuring, perhaps as C corporations. In addition, applicable businesses should assess how they pay employees and independent contractors and 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

Under the new law, qualified tangible property acquired and put into service after Sept. 27, 2017, and before Jan. 1, 2023, may be eligible for 100 percent “bonus” depreciation in the year of purchase. This first-year bonus depreciation deduction will begin to decrease after 2023 until it will no longer be available in 2027. Prior to the TCJA, businesses were permitted to expense only 50 percent of the price they paid to acquire and put into service qualifying property or to make non-structural improvements to the interiors of nonresidential buildings in 2017.  The rate was scheduled to decrease to 40 percent in 2018 and to 30 percent in 2019.

By effectively doubling the amount that businesses can write off in the first year for the purchase of all eligible assets, the new rules provide qualifying businesses with an immediate tax-saving opportunity to reduce the amount of profits that are subject to tax. Moreover, the law expands the availability of bonus depreciation in 2018 to “previously used” assets.

However, the new law specifically excludes from the definition of bonus-depreciation-eligible property qualified leasehold improvements; qualified restaurant and retail improvements; and replaced it with non-leased “qualified improvement property” (QIP), which the PATH Act identified as structural improvements to the interiors of nonresidential property that was placed in service after Sept. 27, 2017. It may appear that Congress intended to provide a 15-year recovery period for QIP and for it to be bonus-depreciation-eligible. However, until the IRS issues some form of technical correction, QIP will be depreciated over 39 years.

Section 179 Expensing

Beginning with the 2018 tax year, 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, including computer software and qualified leasehold, retail and restaurant improvements. The amount of the deduction will be 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 property, fire protection and alarm systems, and security systems) made to nonresidential real property.

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. Carryforwards will be limited to 80 percent of a business’s taxable income, but these NOLs may be applied against taxable income indefinitely. As a result of the tax reform law, businesses will need to adjust carryovers from prior tax years to account for the 80 percent limitation.

Business Interest Deduction

Generally, the TCJA limits the interest payments that businesses may deduct to 30 percent of adjusted gross taxable income beginning in 2018. The law reduces that limit further beginning in 2022. However, the law does provide a number of exceptions to this limit that are specific to real estate businesses and investors. For example, e