As the 2017 hurricane season comes to an end, reminders of this year’s devastating storms continue to plague cities and people across Florida, Texas and Puerto Rico. However, it is important that individuals and business owners located in federal-declared disaster zones stay mindful of a number of tax relief provisions that are available to them regardless of whether or not they incurred any significant losses.
Both individual taxpayers and businesses received an extension until January 31, 2018, to meet some of their 2016 and 2017 tax filing and payments responsibilities. This includes paying 2017 third-quarter and fourth-quarter estimated tax payments and filing extended income tax returns for 2016.
Individuals and businesses located outside the covered disaster areas may also be eligible for the filing extension and qualify for penalty relief if their records or tax preparers were located in the storm-affected areas.
Full Deductibility of Casualty Losses
It is critical that taxpayers keep receipts for hurricane-related expenses they incurred, including repairs, maintenance, landscaping and even food replacement costs, in order to receive a full deduction for all hurricane-related losses exceeding $500 that are not covered by insurance. Traditionally, this deduction has been limited to the amount of the casualty loss in excess of 10 percent of a taxpayer’s Adjusted Gross Income (AGI). However, under the provisions of the hurricane relief package, full deductibility can be taken as an additional itemized deduction or as a deduction in addition to the standard deduction for taxpayers who do not itemize. Furthermore, taxpayers have the option to claim casualty losses either on their 2017 tax returns or on an original or amended 2016 return, depending on which year provides the taxpayer with the greatest benefit.
Employee Retention Tax Credit for Qualifying Employers
Businesses that were unable to continue normal operations due to the storms but continued to pay employees’ wages may be eligible to receive an income tax credit of up to $2,400 for each employee. In order to compute the Employee Retention Tax Credit of 40 percent of the first $6,000 of qualified wages businesses paid to eligible employees during specific dates that vary with each storm, they will need to maintain meticulous payroll records.
Easing of Restrictions on Withdrawals and Hardship Loans from Retirement Plan
Eligible taxpayers may take loans or hardship distributions from their retirement accounts before January 31, 2018, free of early-withdrawal penalties. This applies to victims who live within a covered disaster area and to individuals who live outside those areas when they use retirement funds to help a son, daughter, parent, grandparent or another dependent who lived or worked in the disaster area.
Such retirement plan distributions will be includible in an individual’s gross income and subject to income taxes, which the plan participant may spread out over a three-year period. If the account owner is younger than 59 ½, he or she will also be subject to an additional 10 percent tax on the withdrawn amount unless he or she recontributes the distributed amount over the next three years.
Hardship loans, which are limited to $50,000 or half of a vested balance, will not be subject to tax as long as employees pay back loan amounts pursuant to a repayment schedule agreed-upon with plan sponsors.
Extension of Time to Complete Section 1031 Tax-Free Property Exchanges
Real estate developers, owners and investors who were in the midst of a Section 1031 property exchange on the dates that the hurricanes hit may receive additional time to identify and close on like-kind replacement property and still qualify for tax deferral treatment.
For example, taxpayers affected by Hurricane Irma who sold property and entered into a 1031 exchange before September 11, 2017, will have until the later of January 31, 2018, or 165 days from the date their relinquished property was sold to identify possible replacement properties. In addition, Irma victims will have until the later of January 31, 2018, or 300 days from the date their relinquished property was sold to close on the purchase of replacement property. Affected taxpayers should notify their qualified intermediaries so that their Section 1031 deadlines are properly extended.
This 1031 extension may also apply to taxpayers located outside of the covered disaster areas when they meet specific criteria established by the IRS.
In the wake of this year’s active hurricane season and the subsequent uncertainty surrounding tax reform, taxpayers may be anxious and unsure of how they should proceed into the New Year. The advisors and accountants with Berkowitz Pollack Brant have more than 35 years of experience helping businesses and individuals navigate through complex laws to maintain regulatory compliance, mitigate risks and maximize wealth-building opportunities.
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 in the CPA firm’s Miami office at 305-379-7000, or via email at firstname.lastname@example.org.
Partnerships and LLCs must be prepared to contend with new rules for how the IRS will assess and collect tax deficiencies identified under audit for tax years beginning on Jan. 1, 2018. With just a few weeks left in 2017, partnerships have a limited amount of time to consider how the new rules will affect them, and how they may take action if they have not done so already.
On June 13, 2017, the IRS re-released proposed regulations that it originally circulated in an unofficial form on January 19, 2017, on the new partnership audit rules enacted by the Bipartisan Budget Act of 2015 (BBA). Under the new rules, the responsibility for all adjustments of partnership income, gains, losses, deductions, credits, and related penalties and interest will shift from the individual partners to the entity itself.
The BBA replaces the current partnership audit and adjustment rules that have been in place for more than 30 years under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Under that regime, each individual partners bore the burden of paying any of a partnership’s tax underpayments identified under audit. The IRS would recalculate each partner’s return for any adjustments at the entity level and send to each partner a bill for tax deficiencies.
In contrast, under the BBA, the IRS will now require the partnership entity to collect and remit taxes at the highest individual rate (currently at 39.6 percent), plus penalties and interest, in effect during the year in which the agency uncovers the underpayment (the adjustment year), rather than the audit year. As a result, it is possible that an entity’s current partners will be responsible to pay for the tax liabilities of its former individual partners, who would have received the tax savings in prior years. In addition, the new rules do not allow partnerships to deduct any payments of tax, interest and penalties relating to a prior year’s underpayment. Instead, the payment of tax understatements would be treated as a nondeductible item allocable to the current partners.
Another significant change under the BBA is a new requirement that partnerships assign one person to serve as the entity’s sole representative in all tax and legal matters with the IRS. While the selected representative does not have to be a partner in the entity, he or she must be a person or entity with a substantial presence in the U.S. Should a partnership or LLC fail to update its existing partnership agreement with the appointment of a personal representative, the IRS will make the selection on the entity’s behalf.
The Push-Out Election
The personal representative has the option to make a push-out election. Under the election, the partnership issues revised tax information returns (Schedules K-1) to affected partners and the partnership isn’t financially responsible for additional taxes, interest and penalties resulting from the audit.
The push-out election allows the partnership to push the effects of audit adjustments out to the partners that were in place during the tax year under review. This effectively shifts the resulting liability away from the current partners to the partners that were in place during the tax year to which the adjustment applies. The push-out election must be filed within 45 days of the date that the IRS mails a final partnership adjustment to the partnership. This deadline cannot be extended. The proposed regulations specify the information that must be included in a push-out election. The partnership must also provide affected partners with statements summarizing their individual shares of adjusted partnership tax items.
A partnership should update its agreements to address whether the partnership representative is required to make the push-out election or the circumstances in which a push-out election will be made.
The Opt-Out Election
A very limited exception permits certain small partnerships to elect annually to opt out entirely from the BBA rules. To qualify for this opt-out election, a small partnership must have 100 or fewer partners, and it must be composed entirely of individuals, C-corporations, S-corporations, foreign entities treated as a C-corporations, or estates of deceased partners. The opt-out election is unavailable to a partnership that has a flow-through entity as a partner (such as another partnership or LLC). It is important to note that even partnerships making the opt-out election must appoint a partnership representative.
Actions to Take
It will become more important than ever that partnerships identify any potential issues that could result in an imputed underpayment. They will need to more closely review partnership agreements to consider whether the entity can elect out of the new regime and push these obligations out to the former partners, or if it will be obligated to pay any tax liability with current partnership assets.
This will undoubtedly require entities to conduct significant due diligence and potentially revise existing partnership agreements. It may also require modifications to the structure of partnerships to better manage its risks and potential exposure to a partnership level tax liability. Should a partnership decide to pay taxes and penalties at the entity level, it will need to consider how the current partners will bear the payment. Conversely, if the partnership opts out of the new standard, it will need to have systems, policies and procedures in place for making such elections. It will also need to reach out to former partners, calculate their obligations and ensure that the make required payments. No matter what decision the partnership makes, it can expect that the new standard will impact its financial statements and disclosures, both retroactively and in the future.
Time is of the essence for partnerships to make sense of the new audit standard and understand how it will impact the risks, liabilities and opportunities it will bring to the entity and its current and former partners. The advisors and accountants with Berkowitz Pollack Brant work extensively with domestic and international entities, including real estate developers and investors, to meet complex regulations and ensure maximum tax efficiency.
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 email@example.com.