Raising the Bottom Line

6 Resources Everyone in the Maryland Manufacturing Industry Should Know About

Posted by Edward Thompson on Tue, Mar 07, 2017 @ 07:02 AM

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As politics and policies continue to change under the new administration, it is more important than ever that Maryland manufacturers stay up to date on what is happening in the industry, take advantage of financial opportunities and keep an eye on new and existing tax credits.

Here are six resources Maryland manufacturers should know about:

1. The National Association of Manufacturers (NAM)

Though it is the largest manufacturing association in the United States, Maryland manufacturers may be interested in the free national manufacturing data NAM produces on a regular basis. NAM puts out resources like:

 2. The Regional Manufacturing Institute (RMI)

This Maryland-based nonprofit focuses on representing the interests of manufacturers across the state by providing programs, services and advocacy for manufacturers. RMI hosts a number of events throughout the year, including seminars, networking and honorary events, like the Champions of Maryland Manufacturing, for Maryland’s top manufacturers.

 3. Maryland Manufacturing Extension Partnership (Maryland MEP)

A long-time partner of RMI, Maryland MEP is focused on providing high quality solutions and programs to improve Maryland manufacturing operations, spark innovation and increase growth. Through training and events, the group is committed to making Maryland a leader in manufacturing.

 4. Maryland Economic Adjustment Fund (MEAF)

As a state sponsored fund, MEAF helps small manufacturers:

  • Upgrade manufacturing operations
  • Develop commercial applications for technology
  • Enter into or compete in new economic markets

To be eligible for the funds, manufacturers must demonstrate credit worthiness, financial viability to repay the fund and an inability to qualify for financing through other lending channels.

 5. Maryland Business Tax Credits

Maryland manufacturers may be eligible for state tax credits. The Comptroller of Maryland keeps a running list of current credits available, including details on eligibility requirements. In particular, the Maryland Commuter Tax Credit and Job Creation Tax Credit are good credits for Maryland manufacturers to keep in mind.

 6. Gross Mendelsohn's Manufacturing Blog

Instead of spending time checking multiple websites and news outlets for updates relevant to the Mid-Atlantic manufacturing industry, subscribe to our manufacturing blog and you’ll get manufacturing related articles delivered straight to your inbox. Blog topics include: inventory best practices, new regulations that may affect your business, accounting and tax issues specific to Mid-Atlantic manufacturers, fraud prevention and more.

Need Help?

If you have any questions on your manufacturing business, feel free to contact us online at 800.899.4623.

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Tags: Manufacturing & Distribution, tax, Ed Thompson, tax planning, manufacturing

3 Signs Manufacturers Should Be Increasing Capital Spending in 2017

Posted by Will Sasser on Mon, Jan 30, 2017 @ 02:02 PM

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As we settle into another new year, manufacturers across the country are betting big that 2017 is going to be a big improvement over years prior. With the combination of a changing political climate and the advantageous financial opportunities currently available, manufacturers will risk missing out if they do not take the opportunity to increase their capital spending in 2017.

But why is now, more than ever, such a huge opportunity to increase your manufacturing business’ capital spending?

1. Political Changes Ahead

President Donald Trump’s tax plan is focused on cutting taxes for corporations and individuals as well as incentivizing investments in an effort to stimulate the domestic economy. In fact, Trump’s plan specifically states, “Firms engaged in manufacturing in the US may elect to expense capital investment…”

In the past, a corporation’s ability to expense purchases of property, plant and equipment was subject to a bright line of dollar and income limitations. However, under Trump’s new plan, the full cost of capital spending in 2017 can be used to offset and decrease taxable income. This is an opportunity for manufacturers to increase spending on machinery and equipment, which can increase efficiency and decrease tax liability.

2. Rock Bottom Interest Rates

Since the 2008 Recession, the Federal Reserve (FED) has, for the most part, stood by its decision to keep the interest rates, or the Federal Reserve Rate, low. The ability to lower interest rates is a tool used by FED to incentivize businesses to increase expenditures on capital and investments. The lower the rate, the lower the cost will be to borrow money for purchases of expensive property, plant or equipment.

For seven years, FED voted to maintain the Federal Reserve Rate at 0.0-.25 basis points. However, in December 2015, there was an increase in the target rate to .25-.50 basis points, followed by another .25 basis point increase in December 2016, where the rate still remains today.

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In FED’s most recent meeting, the group said, “Expectations are that economic conditions will evolve in a manner that will warrant only gradual increases to the Federal Funds Rate.” That means the door is still officially open for future rate hikes. As a result, manufacturers who remain hesitant to fund capital expenditures through borrowing may end up spending more by waiting to borrow.

3. Lean Manufacturing

According to the National Association of Manufacturing (NAM), output per hour for all workers in the manufacturing sector has more than doubled since 1987. Part of this growth is attributable to the growing idea of lean manufacturing,” a management philosophy focused on identification and elimination of “wastes” to increase production efficiencies and workflows.

While some practical applications of this philosophy are done through evaluations, discussions and quality controls, staying lean is also dependent on the machines and tools available for use. Older equipment has the tendency to break down, and have idol times and output defects, creating waste. To eliminate these inefficiencies, manufacturers can increase expenditures on new capital and machinery, allowing for more refined processes, monitoring and just-in-time output.  

Where Do I Start?

When investing in new capital, you want to first make sure your existing financial house is in order. For advice on capital spending, contact our Manufacturing Group online or call 800.899.4623.

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Tags: Manufacturing & Distribution, R&D Tax Credit, tax, tax planning, manufacturing, tax credits

What Trump’s Proposed Tax Plan Means to You

Posted by Paul Wallace on Tue, Dec 06, 2016 @ 12:28 PM

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During his campaign, Donald Trump proposed several significant changes to income and transfer taxation of individuals. And immediately after being named as Trump’s Secretary of the Treasury, Steven Mnuchin stated there will be major changes to the tax code, the likes of which we haven’t seen since the Reagan years. If you’re old enough, you’ll remember the tax law changes that brought us accelerated tax depreciation, lower tax rates and the concept of passive loss limitations. If the Reagan years are the benchmark, then I fully expect broad brush changes to the current tax code under Trump’s presidency.

Significant Changes to Personal Income Taxation Could Come Quickly in 2017

Not only is there high probability that individual income tax provisions will change, but with a Republican House and Senate, change will most likely occur relatively quickly in 2017.

Let’s take a look at the major changes being considered. Trump has proposed to:

  • Reduce the current seven brackets (ranging from 10% to 39.6%) down to three: 12%, 25% and 33%.

  • Eliminate the alternative minimum tax and the net investment income tax (3.8% of investment income, including gains on asset sales).

  • Not change the capital gain and qualified dividend tax rates.

  • Increase the standard deductions to $15,000 for single taxpayers and $30,000 for married couples filing jointly.

  • Limit the amounts of itemized deductions taxpayers could claim at $100,000 for single taxpayers and $200,000 for married couples filing jointly. This is a significant proposal because it would increase the tax base.

Usually, income tax planning strategies revolve around deferral of income, which can occur by postponing income recognition into a subsequent year or accelerating tax deductions into the current year. In light of the anticipated income tax changes for 2017, as a general rule, year-end planning for 2016 should have been no different.

With tax rates expected to be lower in 2017 than 2016, it made sense to defer income into a year with lower marginal rates. Additionally, for taxpayers whose itemized deductions might have exceeded the proposed capped amounts, it made sense to generate deductions into 2016 where there is no cap. The cap appears to apply to ALL itemized deductions, including charitable contributions. 

The Federal Estate and Gift Tax Could be Repealed

Another proposal from the Trump campaign is a repeal of the federal estate and gift tax. As a trade-off, assets in estates in excess of $10 million would not receive “stepped up” basis, but rather would have carryover basis from the decedent. So instead of a 40% federal estate tax rate, estates in excess of $10 million would at worst carry a 20% capital gain tax when those assets were ultimately liquidated. There may be exemptions for small businesses and family farms.

Download our free Estate Planning Scorecard to find out if your estate plan is up-to-date.

While not as much of a given as rate reductions for income tax purposes, it’s quite possible that an outright repeal of the estate and gift tax could materialize. The tax raises relatively little revenue and would have been repealed in 2005 except for congressional emergency measures in response to Hurricane Katrina, which re-prioritized Congress’s legislative agenda. Finally – and with tongue firmly planted in cheek – what better way to allow Donald Trump to minimize future perceptions of conflicts of business interests than for him to divest of his business interests on a gift tax free basis? 

What’s Next for You, the Taxpayer?

If history is a guide, and campaign promises are kept, you can expect lower income tax rates and a possible elimination of the estate and gift tax.

It’s best to proactively look for ways to reduce your taxable income and take advantage of every tax break to which you are entitled. Our tax planning experts can help you do just that. Call Paul Wallace, CPA, CFP, at 800.899.4623 or contact us online to evaluate your tax situation and plan for what’s coming down the road.

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Tags: individual tax planning, Paul Wallace, income tax, estate planning, high net worth, tax, tax planning

5 Strategies to Diversify Concentrated Stock Positions (CSP)

Posted by David Goldner on Tue, Nov 01, 2016 @ 10:42 AM

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Business owners and executives pour their hearts and souls into building a successful company. Often their hard work and dedication pays off, quite literally, with the sale of the business to a publicly traded company. Those corporate executives and their families end up with the majority of their wealth tied up in a single asset – the stock of a publicly traded company.

While the wealth you accumulate from the stock can be substantial, a concentrated stock position presents several problems, namely, that there is risk associated with tying all of your wealth to a single company. Sure, you can sell the stock, but this can result in a big tax liability. So what do you do?

Let’s look at how you can better manage your family’s wealth by diversifying your concentrated stock position.

Get Emotion Out of the Way

Let’s say you’ve accrued a concentrated stock holding because you sold your business to a publicly traded company ten years ago. You’ve enjoyed watching your wealth grow substantially over the years.

If you’re like many people, you have a real personal attachment to the stock because it’s the primary source of your family’s wealth. Your feeling is that, “This company helped build my assets and it is part of my legacy, so I want to participate in its continued success.” In addition, you’re thrilled because as you’ve watched your wealth grow, you’ve avoided income taxes simply by not selling the stock.

It’s all good, right? Well, yes and no. While the stock has grown your family’s nest egg to a nice size, any emotional attachment you have to the stock has likely been a roadblock when it comes to effective tax and financial planning.

Diversifying your concentrated stock position makes sense when it comes to minimizing risk and taxes. But to accomplish those goals, your emotional attachment to the stock can’t get in the way.

Consider Various Strategies for Diversifying Your Concentrated Stock Position

There are steps to take and plans that should be put in place to accomplish all of your family’s financial and personal goals.

Your first step should be to determine a minimum goal for your family wealth. For example, if your family has a $100 million CSP, ask yourself, “What is the minimum amount of wealth my family would want, assuming any risk that the CSP value would drop to zero?” Let’s assume the plan is to create at least $25 million of wealth outside of the CSP. This is your first step toward diversifying.

One choice is a simple sale of about one-third of the stock position. This will, in a straightforward and uncomplicated way, create the wealth you need, net of taxes. This will provide the peace of mind you need to secure your family’s financial future.

Another choice is to enter into a hedged transaction. A number of different strategies are available to create your family’s wealth outside of the concentrated position. Let’s look at those options. 

  1. You can create an equity collar to lock in the value of the stock within a certain range of value, allowing a range of potential future value. An equity collar places a cap on upside potential, while limiting downside risk at little or no cost. This is accomplished by selling a call and buying a put to lock in value.

  2. A variable prepaid forward contract (VPF) allows a taxpayer the right to sell stock in the future at a fixed price – locking in that value but deferring the income until the closing out of the contract. The contract usually allows a withdraw of up to 90% of the asset value that can be used for diversification of the position.

  3. An exchange fund, often sponsored by a brokerage, allows the contribution of some of the CSP and in exchange provides the owner with a diversified position in various types of investments.

    Two other methods of diversifying a CSP is to incorporate your family’s charitable goals into a plan to create a private family foundation or charitable remainder trust

  4. Set up either a private family foundation or a supporting charitable organization. These vehicles allow a family with a sale of stock to offset between 20-30% of the tax liability with a direct charitable contribution of the appreciated security. Your family will then have funds to be used for charity to achieve other long term personal and social goals, over a timeframe that your family controls.

  5. Set up a charitable remainder trust (CRT) where you contribute a portion of the concentrated stock position and then sell the remaining position. The sale is not currently taxable and the trust will provide income for your family either for a period of years or for life. As a bonus, when forming the trust, you generate a significant income tax deduction for a percentage of the assets put in the CRT. This deduction can be used to offset a direct sale of stock that can help in your overall diversification plan.

Which Diversification Strategy is Right for You?

The short answer is that there is no one best method to diversify a CSP. Identifying and formalizing your family’s goals, with the help of a wealth management professional who has solid tax expertise, will result in a plan for strategically managing your family’s wealth while minimizing taxes.

Need Help?

David Goldner, CPA, CFP, CVA, is Gross Mendelsohn’s managing partner. Specializing in delivering integrated tax, estate and investment planning strategies, David enjoys working with high net worth families. Contact David here or call 800.899.4623.

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Tags: high net worth, David Goldner, private foundation, tax planning, business owners, charitable remainder trusts, wealth management

Family Limited Partnership Transfers Might Get More Costly

Posted by David Goldner on Tue, Sep 06, 2016 @ 10:02 AM

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A few clients contacted me after reading my last blog post, Possible Major Estate Tax Change on the Horizon: Take Action Now to Minimize Tax While You Still Can. We are working with them now to take advantage of today’s favorable tax planning environment before proposed tax regulations could dramatically change the landscape of one of the most often used estate planning tools – the family limited partnership, also known as an FLP.

If your estate plan involves a family limited partnership, now is the perfect time to transfer wealth to the next generation. That’s because recently proposed regulations could soon make FLPs much less advantageous from a tax standpoint.

Schedule a free consultation to make sure your estate plan takes advantage of every possible tax planning opportunity.

Many high net worth individuals and families have successfully used FLPs and other family-controlled entities as a wealth transfer tool, often at substantial discounts from the fair market value of the underlying assets.

How an FLP Works

Let’s take a step back and consider how an FLP works.

To execute an FLP strategy, you contribute assets — such as marketable securities, real estate and private business interests — to a limited partnership. In exchange, you receive general and limited partner interests.

Over time, you gift, sell or otherwise transfer interests to family members and anyone else you wish – even charitable organizations. For gift tax purposes, the limited partner interests may be valued at a discount from the partnership’s underlying assets because limited partners can’t control the FLP’s day-to-day activities and the interests may be difficult to sell.

This can provide substantial tax savings. For example, under federal tax law, you can exclude certain gifts of up to $14,000 per recipient each year without depleting any of your lifetime gift and estate tax exemption. So, if discounts total, say, 30%, in 2016 you can gift an FLP interest that worth as much as $20,000 before discounts (based on the net asset value of the partnership’s assets) tax-free because the discounted fair market value doesn’t exceed the $14,000 gift tax annual exclusion.

Proposed Changes

Now the IRS is proposing changes that could substantially reduce (or even eliminate) valuation discounts for certain family-entity interests. The proposed regulations, issued on August 2, 2016, address the treatment of certain lapsing rights and restrictions on liquidations in determining the value of the transferred interests.

More specifically, the proposed regs include provisions to:

  • Amend existing rules on what constitutes control of a limited liability company or other entity or arrangement that isn’t a corporation, partnership or limited partnership,
  • Address death-bed transfers (made within three years of the transferor’s death), and
  • Modify what’s considered an “applicable restriction” by eliminating a comparison to the liquidation limitations of state law.

Under existing tax law, an applicable restriction is “a limitation on the ability to liquidate the entity (in whole or in part) that is more restrictive than the limitations that would apply under the state law generally applicable to the entity in the absence of the restriction.” The IRS is proposing that restrictions imposed on a limited partner’s ability to liquidate his or her interest be ignored, irrespective of whether those restrictions are imposed by the partnership agreement or state law.

The proposed regs also add a new class of “disregarded restrictions” that would be ignored if, after the transfer, the restriction will lapse or may be removed, without regard to certain interests held by non-family members by the transferor or the transferor’s family. Restrictions that defer the payment of liquidation proceeds for more than six months or permit payment in any manner other than cash or other property also would be disregarded under the proposal.

Additionally, the proposed regs address FLPs that include charities and other unrelated parties as partners in an effort to preserve valuation discounts. Under the proposal, the existence of such an interest would be disregarded unless it’s “economically substantial and longstanding.” If all non-family interests are disregarded, the entity is treated as if it’s controlled by the family.

When to Consider Transfer Restrictions

Let’s look at a typical scenario where transfer restrictions may be disregarded under the proposal.

Suppose Jerry creates an FLP. Jerry owns a 98% limited partner interest, and his daughters, Gloria and Kitty, each own a 1% general partner interest.

Under the partnership agreement, the FLP will dissolve and liquidate on June 30, 2066, or by the earlier agreement of all the partners. It otherwise prohibits the withdrawal of a limited partner. Under applicable local law, a limited partner may withdraw from a limited partnership at the time, or on the occurrence of events, specified in the partnership agreement. Under the partnership agreement, the approval of all partners is required to amend the agreement. None of these provisions is mandated by state law.

Jerry subsequently transfers a 33% limited partner interest to each daughter. Under the proposed regs, would the transfer restrictions be considered when deciding on the valuation discounts for the limited partner interests?

By prohibiting the withdrawal of a limited partner, the partnership agreement imposes a restriction on the partner’s ability to liquidate his or her interest in the partnership that is not required by law and that may be removed by the transferor and members of the transferor’s family, acting collectively, by agreeing to amend the partnership agreement. Therefore, under the proposed changes, the restriction on a limited partner’s ability to liquidate that partner’s interest would be disregarded in determining the value of each 33% limited partner interest.

These proposed regulations won’t go into effect unless and until they’re finalized. (Unlike many IRS proposals, it’s not effective immediately or retroactively.) As we explained in our last article on this topic, the Treasury is now collecting feedback to discuss at its public hearing on December 1, 2016. Even then, any changes won’t into effect until 30 days after the Treasury finalizes the regulations.

Take Action Now

There could still be time to set up an FLP (or similar family-controlled entity) and be grandfathered from any new rules. But caution and diligence are the names of the game — as always, excessive discounts, do-it-yourself appraisals and other aggressive estate planning tactics are likely to attract IRS scrutiny.

Need Help?

Our estate planning experts can help you take advantage of today’s favorable tax planning environment. Call David Goldner, CPA, CFP, CVA, at 800.899.4623 or contact him to schedule a free estate planning consultation to make sure your plan is up-to-date and set to take full advantage of favorable tax planning opportunities. David specializes in maximizing wealth accumulation for high net worth families through proactive tax and estate planning techniques.

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Tags: IRS, individual tax planning, estate planning, high net worth, tax, David Goldner, tax planning, family limited partnership

Possible Major Estate Tax Change on the Horizon: Take Action Now to Minimize Tax While You Still Can

Posted by David Goldner on Tue, Aug 09, 2016 @ 06:11 AM

A recent proposal by the Treasury Department would significantly limit a high net worth family’s ability to avoid the estate tax.

Our cut-to-the-chase recommendation in light of this potential change is to work with your estate planner NOW to take advantage of today’s favorable tax planning environment while you still can.

Let’s take a quick look at the back story to more fully understand the magnitude of the potential change.

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Estate taxes are levied on assets that are transferred from one person to another person at the time of death. The current estate tax applies to transfers by an individual whose estate exceeds $5.45 million, and married couples whose estate exceeds $10.9 million.

There are many cutting-edge tax planning tactics that can lower the taxable value of transferred assets at the time of death.

Discounts Will Possibly Be Limited or Not Allowed At All

This potential change, announced August 2, 2016, particularly affects family investment entities. Some families, with the help of a skilled estate planning expert, bundle their assets – such as marketable securities and real estate into a limited liability corporation (LLC) or family limited partnership (FLP) in an effort to lower their tax liability. Under current tax law, the value of these assets with proper planning can be discounted since a case can be made that selling a portion of the LLC or partnership would be difficult to transfer based on restrictions contained in the entities. When discounts are taken, the LLC or FLP is worth less, meaning the taxpayer can end up saving significant estate taxes.

Schedule a free consultation to make sure your estate plan takes advantage of every possible tax planning opportunity.

The proposed new regulations would make it much harder for wealthy families to claim valuation discounts and avoid estate taxes. In turn, more tax will be paid by wealthy families and will land in the pockets of Uncle Sam.

The fairness of the estate tax has been a hotly contested issue for decades. An added twist to the controversy is that the future of the estate tax could be heavily influenced by the outcome of the presidential election. While the Republican nominee, Donald Trump, wants to completely eliminate the estate tax, Democratic candidate Hillary Clinton wants to make the estate tax applicable to even more people.

Stay Tuned for More Advice

The Treasury Department’s proposed regulations are subject to a 90-day public comment period, which will conclude in November 2016. The Treasury Department says that “the regulations themselves will not go into effect until the comments are carefully considered and then 30 days after the regulations are finalized.” It may be the last chance to take advantage of these gifting discounts.

With possible changes on the horizon, our advice is to work with your estate planner NOW to ensure that you have time to take advantage of today’s favorable tax planning environment while you still can.

Need Help?

David Goldner, CPA, CFP, CVA, Gross Mendelsohn’s managing partner, specializes in delivering integrated tax, estate and investment planning strategies. David enjoys helping high net worth families and business owners minimize tax burdens and maximize wealth accumulation through proactive planning techniques. Contact David to schedule a free estate planning consultation or call him at 800.899.4623.

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Tags: IRS, individual tax planning, estate planning, high net worth, tax, David Goldner, tax planning, family limited partnership, limited liability corporation

3 Tax Planning Strategies that Cost You Little But Provide Immediate Tax Savings

Posted by Paul Wallace on Mon, Aug 08, 2016 @ 05:49 AM

With so many of my high net worth clients being philanthropically inclined, there’s nothing I like better than a good tax savings strategy that ties into their charitable activities.

Typically, charitable contributions will result in a reduction of your net worth and usually involve giving up control over the contributed property. If only there was a way to make contributions without giving up immediate control AND still generate immediate tax benefits! Well, here are three ideas that can do just that.

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1. Conservation Easements

Taxpayers who own real property and wish to preserve its associated resources might be able to take advantage of the tax benefits related to the gifting of conservation easements.

The 2015 Protecting Americans from Tax Hikes Act allows owners of real property to make a gift of a permanent easement on their property to a land trust or similar organization interested in land conservation, while getting the benefit of a immediate tax break.

The easement will restrict the present and future owners from developing the property, and the tax deduction will equal the difference between the value of the property immediately before and immediately after the easement is placed.

Except for the restriction on the property, the owner can continue to enjoy the use and benefits of the property as before. It should be noted that these easements are available to owners of real estate even if they have no current intention of developing their property.

2. Charitable Remainder Trusts

Charitable remainder trusts, also known as CRTs, are tax planning vehicles that allow grantors to contribute assets, usually highly appreciated, to a trust. In exchange, they will receive an annual payment back from the trust for a specific period of time, and the remainder interest in the trust will go to qualifying charities chosen by the grantor.

The funding of a CRT is a nontaxable event, and the grantors will receive an immediate charitable deduction. In addition, the CRT provides significant income tax deferral benefits, and the grantors can name themselves as trustees and remain in control of the trust corpus during the term of the trust.

3. Private Foundations 

Private foundations are tax exempt organizations that can receive contributions from donors and generate immediate income tax deductions.

Let’s look at a typical scenario. A taxpayer creates and funds a private foundation in a year where he or she has an unusually high income tax liability that can be sheltered in part by the contribution to the private foundation, and may not want to make an outright gift to a public charity. The private foundation will allow the grantor to receive an immediate income tax deduction without giving up control of the assets contributed to the private foundation.

The grantor and/or his family can serve on the board of the private foundation, and designate in future years which charities will receive the required distributions from the private foundation, which usually equal 5% of its net asset base.

Need Help?

Paul Wallace, CPA, CFP(R), provides integrated income tax, estate tax, investment management, charitable giving and personal financial planning services to high net worth individuals, families and their closely held businesses. Call Paul at 800.899.4623 or contact us here for help developing a tax planning strategy that works for you.

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Tags: individual tax planning, Paul Wallace, high net worth, private foundation, tax planning, charitable contribution, charitable remainder trusts, philanthropy

Don’t Miss Out on the Opportunity to Claim Bonus Depreciation in 2016

Posted by Scott Handwerger on Mon, Jul 25, 2016 @ 09:44 AM

tax_cut.jpgThe Protecting Americans from Tax Hikes (PATH) Act of 2015 is designed to provide permanent tax relief for businesses and families.

Some of the most significant aspects of the PATH Act relate to depreciation. Most notably, a change to the definition of “qualifying property” expands the opportunity for taxpayers to claim bonus depreciation. Let’s take a closer look.

The PATH Act extended bonus depreciation for property acquired and placed in service during 2015 through 2019. Eligible taxpayers can now claim a 50% bonus depreciation allowance for property placed in service during 2015, 2016 and 2017. The allowance is reduced to 40 percent in 2018, 30 percent in 2019, and expires after 2019.

An Expanded Definition of Qualified Property

Before the PATH Act, bonus depreciation was available for qualified property that met the following requirements:

  • Modified accelerated cost recovery system property with a recovery period of 20 years or less;
  • Computer software;
  • Water utility property; or
  • Qualified leasehold improvement property.

The PATH Act made changes to the above definition of qualified property: “qualified leasehold improvement property” was replaced with “qualified improvement property.” The definition of qualified improvement property is broader than the definition of qualified leasehold improvement property. Under the new definition, qualified leasehold improvement property is still eligible for bonus depreciation.

For property placed in service after 2015, qualified improvement property encompasses improvements to the interior of any nonresidential real property placed in service after the date the building was first placed in service. Expenditures to enlarge a building, for an elevator or escalator, or for the internal structural framework of the building do not meet the definition of qualified improvement property and would not be eligible for bonus depreciation. Unlike those for qualified leasehold improvement property, expenditures do not have to be made pursuant to a lease nor do they have to be made to a building three years old.

What Does the Broader Definition of Qualified Property Mean for You, the Taxpayer?

The broader definition of qualified property for bonus depreciation starting in 2016 allows taxpayers to claim bonus depreciation where previously bonus depreciation was limited to qualified leasehold improvements that required the building to be at least three years old and the expenditures to be made subject to a lease.

Allowing taxpayers to take bonus depreciation on qualifying 39-year nonresidential real property could generate substantial present-value tax savings. Unlike Section 179 expensing, taxpayers can take bonus depreciation whether or not they have net income and the deduction is not limited to a certain dollar amount.

Need Help?

With the ever changing depreciation laws, it’s important that taxpayers communicate with their tax advisors in order to help ensure that they are maximizing deductions and saving taxes.

Contact Scott Handwerger, CPA, here or call 800.899.4623. Scott, a partner in Gross Mendelsohn’s tax department, helps businesses make the most of all available tax savings opportunities.

Tags: Manufacturing & Distribution, tax, Scott Handwerger, real estate, tax planning, construction, business tax planning, depreciation, business owners, PATH Act

Breaking Up Is Hard to Do, But for Private Foundations It Just Got Less Costly

Posted by David Goldner on Thu, Jul 14, 2016 @ 04:08 PM
Breaking Up is Hard To Do, But For Private Foundations It Just Got Less CostlyPrivate foundations are often launched by high net worth families who are philanthropically inclined. In addition to giving families the opportunity to support the causes they care about, charitable giving provides powerful tax and estate planning benefits.

Ideally, before a private foundation is created, the family puts a lot of thought into identifying the philanthropic activities that’ll support their values and desired legacy. The foundation is usually governed by family members, often led by a family patriarch or matriarch, and supported by children and grandchildren.

But even the best laid plans can go awry, as the saying goes. Just because the family’s matriarch once had a vision of supporting education in urban areas through the family foundation, for instance, doesn’t mean that the family’s next generation will share that same vision.

A private foundation’s vision can get disrupted by family squabbles and deviating interests, among other things. When this happens, one or more family members might choose to split off from the original foundation, and form one or more new private foundations to pursue their new interests and create their own legacies.

What Happens to the Original Foundation’s Assets?

This question was answered in a recent IRS Private Letter Ruling PLR 201609001.

The ruling was issued after a private foundation, governed and operated by its founder’s nine children and grandchildren, wanted to transfer 40 percent of its assets to two new private foundations. The desire for the split came about because board members no longer agreed on which charitable organizations to support.

The family wanted to continue operating the original foundation, with the two new foundations being governed and operated by one of the founder’s children. Under the new arrangement, the family wanted to transfer 20 percent of the original foundation’s assets to each of the two new private foundations. The other 60 percent of assets would remain under control of the original foundation.

The IRS ruled that the proposed transfer of the original foundation’s assets to the new private foundations qualified as transfers of assets described in Section 507(b)(2). This means that the two foundations receiving the transferred assets would not be treated as newly created organizations. Furthermore, the transferor – the original foundation transferring the assets – is not a termination to which the private foundation tax applies.

Contact us if you're interested in exploring the transfer of assets.

What Does This Mean For Private Foundations?

This is great news for family-run private foundations because it provides the flexibility to separate assets for personal or family reasons, while avoiding a termination tax on the transfer assets.

Need Help?

David Goldner, CPA, CFP, CVA, is Gross Mendelsohn’s managing partner. Specializing in delivering integrated tax, estate and investment planning strategies, David enjoys working with private foundations and high net worth families. To learn how this ruling might affect your private foundation, or if you’re interested in exploring the transfer of assets, contact David here or call 800.899.4623.

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Things to Consider Before Moving to a Low- or No-Tax State

Posted by David Goldner on Mon, May 23, 2016 @ 10:05 AM

Florida_House.jpgYear-round sunshine and warmth aren’t the only reasons people in high-tax states like Maryland and DC relocate to places like Florida. For many, tax savings considerations play a major role in their decision to relocate to a new state. High income earners who make millions of dollars every year are turning over a hefty portion of their earnings to high tax states. That taxpayer can potentially save a lot of money by moving to a no-income tax state like Florida.

Evaluate Tax Savings Resulting from a Change in Domicile

For instance, a 50-something hedge fund manager recently moved his residence and business from New Jersey, which has a top tax rate of 8.97%, to Florida. This move to a no-tax state will likely save him millions. On the flip side, the move is a major hit to New Jersey’s economy, resulting in millions of dollars in lost tax revenue.

In many cases, the annual tax savings from moving to a low- or no-tax state can pay the mortgage on a new home. In fact, if a taxpayer has a major tax event like the sale of a business or a large amount of publicly traded stock with large gains, the taxes saved in one year can buy the new family home.

But before you pack the moving van, there’s a long list of things to consider. When one of my clients asks if they’d reduce their state tax bill by moving to a low- or no-tax (Florida, Nevada and Texas) state, I make sure they understand what a “change in domicile” entails from a tax perspective. Once they consider all of these factors, they can make an informed decision as to whether it makes sense to relocate.

What Does a Change in Domicile Entail? 

To change residency, for example, from Maryland to another state, you must have evidence of abandoning your Maryland domicile and adopting a new domicile.

“Domicile” is a question of intent. It is established by your intention to treat a place as your true, fixed and permanent home. However, your intent to treat a place as your domicile is not enough. You must take specific actions to change you domicile. You have to sever ties with one jurisdiction and establish those ties in the new jurisdiction.

In Maryland, once a domiciliary status is established, you retain that domicile unless evidence affirmatively shows an abandonment of that domicile, along with an adoption of a new domicile.

In deciding whether you’ve abandoned your previous domicile and acquired a new one, courts will examine and weigh the factors relating to each place. While Maryland’s courts have never deemed any single circumstance conclusive, state authorities have considered certain factors as more important than others. Among the most important is where the person actually lives. As a guideline, Maryland established the following criteria to determine whether a change of domicile has occurred.

1. Home

  • What residences are owned or rented by the taxpayer?
  • Where are the residences located?
  • What is the size and value of each residence?

2. Time

  • Where and how does the taxpayer spend time during the tax year?
  • Is the taxpayer retired or actively involved in a business, occupation or profession?
  • How much does the taxpayer travel during the year and what is the nature of the travel?
  • What is the overall lifestyle of the taxpayer?

3. Items near and dear

  • What is the location of the items or possessions that the taxpayer considers: (1) “near and dear” to his or her heart, (2) of significant sentimental value, (3) family heirlooms and (4) collections of valuables?
  • Where are the possessions that enhance the qualities of one’s lifestyle?

4. Active business involvement

  • How does the taxpayer earn a living?
  • Is the taxpayer actively involved in any business ownerships or professions?
  • To what degree is the taxpayer involved in business ownerships?
  • How does this compare to business interests outside of the state?

5. Family connections

  • Where does the remainder of the taxpayer’s family live?
  • Where do the minor children attend school?
  • Where are the taxpayer’s social, community and religious ties?

6. Other factors

  • Where the taxpayer’s automobiles are registered
  • Location of bank accounts and safe deposit boxes
  • Where the taxpayer receives mail and votes

Though not required to establish an abandonment of a domicile, we recommend that clients sell their residence and purchase a new one in the no-income tax state. The first $500,000 of gain from the sale of any residence is not subject to tax if at the time of sale the property was their principal residence for two of the prior five years. If the residence is not sold within three years after the change of domicile, all of the gain from the sale would be subject to tax.

One last factor in the decision is understanding that states are desperate for revenue from income tax and will potentially scrutinize your abandoning state residence. This is especially true if, despite doing all of the little things like changing your voter’s registration, bank accounts and driver’s license, you do not sell your family’s primary residence. Without this key change, you are certainly helping the state challenge your abandonment of your residence in the old state.

As you can see, there are a lot of factors that play into the decision to relocate to another state to save taxes. First and foremost, consider whether your move qualifies as a change in domicile.

Need Help?

David Goldner, CPA, CFP, CVA, is Gross Mendelsohn’s managing partner. Specializing in delivering integrated tax, estate and investment planning strategies, David enjoys working with high net worth families. Contact David here or call 800.899.4623.

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Tags: individual tax planning, income tax, taxpayers, high net worth, David Goldner, tax planning