Raising the Bottom Line

New Tax Law Brings About Accounting Method Changes for Construction Businesses

Posted by Chaim Fine on Mon, Feb 05, 2018 @ 10:47 AM


There’s one aspect of the new tax law that hasn’t gotten a lot of attention, but is worth considering — the $25 million average gross receipt.

The new $25 million average gross receipt threshold brought about by the new tax will have a big impact on construction businesses and other businesses that have inventory.

Before we dig into the new $25 million threshold, let’s look at some definitions and rules related to accounting methods.

$25 Million Average Gross Receipts

Average gross receipts generally means the average gross receipts for the three taxable years preceding the current year. The $25 million threshold is to be adjusted for inflation for tax years beginning after 2018.

Accrual Method of Accounting

Under the accrual method of accounting, revenues and expenses are reported when earned or incurred, not when the cash is actually received or paid out.

Cash Method of Accounting

Under the cash method of accounting, revenues and expenses are reported when cash is received or paid out. This method ignores any revenues and expenses that have been earned or incurred but no cash was received or paid.

IRC Section 263A Adjustment

The 263A uniform capitalization rule requires that certain costs that would normally be expensed be capitalized as part of inventory for tax purposes.

Completed Contract Method

The completed contract method defers the reporting of income and expenses for long-term contracts (generally construction jobs) until the project is complete.

may-2-2018-seminarPercentage-Of-Completion Method for Long-Term Contracts (POC)

The POC method is an accounting method that allows the revenues and expenses of long-term contracts to be recognized as a percentage of the work completed during the period.

Change in Accounting Method and 481a Adjustment

A change in an entity’s accounting method – for example, changing from the accrual method of accounting to the cash method, or from POC to completed contract method – requires a taxpayer to file Form 3115, Application for Change in Accounting Method, and may require a 481a adjustment. A 481a adjustment is made to prevent amounts from being duplicated or omitted solely by reason of the change in accounting method.

Now that we’ve established some definitions and rules, let’s look at four changes brought about by the new tax law, along with the rules prior to and after the Tax Cuts and Jobs Act, also known as TCJA.

1. Safe Harbor for C Corporation Use of the Cash Method of Accounting

Before TCJA: C corporations with average gross receipts of $5 million were required to use the accrual method of accounting, as were partnerships with a 5% or more corporate partner. Personal service corporations, S corporations and partnerships (without 5% corporate partners) had no limit on gross receipts and were allowed to use the cash method. If the business had inventory it needed to use the accrual method of accounting for purchases and sales regardless of what kind of entity it is. More on inventory below.

After TCJA: Effective for years beginning after December 31, 2017, the threshold for average gross receipts of $5 million was raised to $25 million. Rules for all other entities remain the same as under the prior law.

The biggest benefit of changing from the accrual method to the cash method is that the cash method ensures taxes are not paid on revenues that have not yet been received. This can improve cash flow.

2. Completed Contract Method

Before TCJA: Businesses that had average gross receipts of $10 million or less were able to use the completed contract method on contracts that were estimated to be completed within two years.

After TCJA: Effective for years beginning after December 31, 2017, the threshold for average gross receipts of $10 million was raised to $25 million. The change is made on a cut-off basis for all similarly classified contracts entered into on or after the year of change.

The benefit of using the completed contract method vs. POC is the opportunity to defer tax due until the job is complete. Keep in mind that for alternative minimum tax (AMT) purposes, you need to calculate your income based on POC, which often reduces the benefit of using the completed contract method for regular tax. However, the new law significantly increased the AMT exemption amounts for individuals and repealed the corporate AMT. This increases the benefit of using the completed contract method.

3. Inventory and 263A Adjustment

Before TCJA: Resellers (as opposed to producers) with average gross receipts of $10 million or less were able to treat inventory as non-incidental materials and supplies, which meant that you still needed to capitalize these items until they are sold, but you did not need to keep a formal inventory schedule. The big benefit here was that because you didn’t need to keep a formal inventory schedule, the 263A adjustment did not apply, meaning you didn’t have to calculate a portion of your overhead to inventory.

After TCJA: Effective for years beginning after December 31, 2017, the threshold for average gross receipts of $10 million was raised to $25 million and applies to both producers and resellers.

4. Restrictions on Interest Deductions

Before TCJA: There were no restrictions on interest deductions.

After TCJA: Effective for years beginning after December 31, 2017, a business that has average gross receipts of $25 million or more may not deduct interest expense for a taxable year in excess of (a) interest income plus (b) 30% of the business adjusted taxable income plus (c) floor plan financing interest (revolving line of credit that allows borrower to obtain financing for retail goods).

More to Consider

If you make changes based on the points above, it will be considered a change in your company’s accounting method.

According to the TCJA, any change in method of accounting made pursuant to the $25 million average gross receipts threshold shall be treated for purposes of Section 481 as initiated by the taxpayer and made with the consent of the IRS.

The passage of the TCJA has created a lot of questions and the IRS will need to offer guidance on many issues. Although we don’t know when the IRS will issue guidance, hopefully the IRS will allow an automatic accounting change related to this particular aspect of the new tax law.

The four items addressed above are only a few ways the sweeping new tax law impacts construction businesses and other larger businesses. For a general summary of the tax law, check out our blog post, Here’s How the New Tax Reform Law Will Affect You and Your Business.

For Help

It’s a good idea to work with your tax advisor to thoroughly analyze how your business will be impacted by the new law, and to make a plan for how to minimize your tax liability.

Contact our tax department here or call 800.899.4623 for help.


Tags: Chaim Fine, tax, tax planning, construction, business tax planning

8 Ways Manufacturers Will Be Impacted By the New Tax Law

Posted by Ernie Paszkiewicz on Tue, Jan 30, 2018 @ 08:02 AM

new tax law for manufacturers.jpg

While there are many good summaries of the new tax law, it can be overwhelming when trying to find only the changes that impact you and your business. This article focuses on some of the major items in the Tax Cuts and Jobs Act that impact manufacturers.

Before we dig in, it’s interesting to note that optimism among manufacturers was at an all-time high in the fourth quarter of 2017, when the tax bill was signed into law. According to a National Association of Manufacturers Outlook Survey, most respondents believe tax reform will help their businesses. More than half of respondents believe the tax reform will create opportunities to grow their manufacturing businesses. In fact, according to the survey, two-thirds of manufacturers considered “a vote against tax reform as a vote against their business.”

Let’s take a look at eight aspects of the new tax law manufacturers should pay attention to.

1. Reduction In Tax Rates

The tax rate for C corps is being lowered to a flat 21% of taxable income. The C corp graduated tax brackets have been eliminated. The rates for individual taxes that affect pass-through entities are being lowered across the board and manufacturers will also get an extra 20% reduction in taxable income. So the question then becomes, “Am I better off as a C corp or a pass-through entity?”

As with almost all tax questions the answer is, “It depends.”

In the short term, switching to a C corp might save taxes, but there is still the embedded double tax of a C corp on distributions and upon the sale of a business.

While each company’s individual situation has to be analyzed, the conventional wisdom is that usually it’s still better to be a pass-through entity from a tax standpoint. Also, remember that this could all be changed or revoked with the next change in administration in Washington, DC.

As always, you should talk with your tax advisor before making any decision on this.

2. Domestic Production Deduction

What the government giveth it also takes away!

Yes, tax rates were lowered, but the new tax law also removes the domestic production deduction under Section 199 of the tax code. Essentially this increases taxable income for most profitable entities by removing the 9% reduction in income allowed under this provision.

3. Limits on Deductibility of Interest Expense

I am sure you heard there were some changes to home mortgage interest deductibility. The deduction for business interest was also limited by the new tax law.

While it may not have a big impact on all manufacturers, there could be an impact on companies with low profitability and substantial debt (and thereby substantial interest). The interest deduction would be limited to 30% of adjusted taxable income. If you have less than $25 million in sales it won’t impact your company, but if you are larger it could impact you. It is meant to reduce the tax breaks for companies that finance operations by debt vs those that finance through equity or accumulation of earnings.

4. Research & Development Tax Credit

The good news is that the R&D tax credit remains in place, meaning companies that invest in new and improved processes and products can still generate tax credits. The bad news is that all R&D expenses now have to be capitalized and amortized over five years instead of being expensed in the year they are expended.

5. Depreciation and Expensing of Property

This area could be a book unto itself.

If you are familiar with current law, you know you have to capitalize certain acquisitions of property and depreciate over certain useful lives on formulas prescribed under the tax code. The tax code then allows an election under Section 179 to expense certain assets, up to certain limits, instead of depreciating. It also allows BONUS depreciation on other certain assets where you can “depreciate” 50% of that asset before applying regular depreciation. Oh, and let’s not forget that certain assets like vehicles may have their depreciation limited depending on the type of car it is.

Clear as mud, isn’t it?

Under the new law, depreciation and expensing rules have been expanded to allow for greater expensing and greater depreciation across the board. Figuring out whether or not to expense vs bonus depreciate an asset — and which assets to apply them to — has become a major area of tax planning in itself.

The bottom line: depreciation is no longer a simple process, especially for larger companies.

Another thing to be cautious of is applying the rules to personal property subject to Maryland personal property tax. If you do not follow the rules and instead capitalize and then expense the asset through depreciation accounts, you might run afoul of the personal property tax division that has its own set of rules.

6. Alternative Minimum Tax

The corporate AMT has been repealed but it remains in place for individuals, although the exemption amount has been increased. This is another factor that has to be considered in the C corp vs pass-through evaluation.

7. Net Operating Losses

Although you might have a profitable company now, a few years ago you might have generated net operating losses that you have been carrying forward.

In the past you could use the losses up to 100% of regular taxable income and 90% of AMT taxable income if you were a C corp.

The new law, however, limits the use of those loss carry forwards to 80% of your regular taxable income. This means that you might now owe taxes under the new law, whereas you may still have had losses to utilize to reduce taxable income to zero under the old law.

Was this what they really had in mind or was it an unintended consequence of trying to deal with current operating losses?

8. Technical Corrections

Speaking of unintended consequences … with almost every major bill like the new tax reform law, there follows a “technical corrections bill.”

What is this? When a new law is finally applied in the real world, someone usually realizes that the new law is doing something — positive or negative — that they didn’t anticipate. Usually that bill fixes minor items but in today’s political environment it wouldn’t be unheard of for the technical corrections bill to be held hostage for some other unrelated reason.

You might remember the frantic rush by individuals to pay next year’s property taxes in late 2017 to beat the $10,000 limit in 2018 itemized tax deductions, only to be squashed by IRS releases that limited when you could actually pay ahead of time and take that deduction.

The point is that sometimes the best laid plans go out the window when a technical correction bill gets issued, or when the IRS releases new regulations or clarifications.

The technical corrections bill that’s bound to be issued will be a more formal way of closing loopholes or opening doors that were shut unintentionally.

More to Consider

The new tax law is quite large and sweeping. The related regulation changes are even larger. The points above are just the tip of the iceberg to illustrate how the new tax law impacts manufacturers. For a broader overview of the tax law, check out our blog post, Here’s How the New Tax Reform Law Will Affect You and Your Business.

Also, keep in mind that states will follow with their own regulations, which will either maximize or minimize the impact of the federal law changes.

For Help

Contact our tax department here or call 800.899.4623 to learn more about how the Tax Cuts and Jobs Act affects you and your manufacturing business.


Tags: Manufacturing & Distribution, R&D Tax Credit, tax, Ernie Paszkiewicz, tax planning, manufacturing, business tax planning

2017 Year-End Tax Planning Strategies Amidst Uncertainty Of Tax Reform Bill

Posted by Tom Harvey on Thu, Dec 07, 2017 @ 08:45 AM

year end tax planning tips.png

December is the time of year when many taxpayers take last-minute steps to lower their income tax liability. This year, however, year-end tax planning is proving to be difficult.

As taxpayers think about dotting their I’s and crossing their T’s as 2017 comes to a rapid close, there is one big item up in the air: a major tax reform bill.

The Senate just approved the most comprehensive tax reform proposal in 30 years, and we’re now waiting for the House and Senate versions of the bill to be reconciled before going to President Trump’s desk to be signed into law.

While the changes brought about by the tax reform bill are not expected to apply to the 2017 tax year, there are provisions in the bill that make certain year-end tax planning strategies for 2017 especially important.

Let’s take a look at several steps you can take now to take advantage of current tax laws, and position yourself for the changes that are coming down the pipeline.

Individual Tax Rates

The new Senate tax bill calls for lowering the current individual tax rates to 10%, 12%, 22%, 24%, 32%, 35% and 38.5%. The House tax bill only calls for four individual tax rates: 12%, 25%, 35% and 39.6%.

The following tables, published in a blog post by Business Insider, show current and proposed tax brackets for single and married filers.



The current highest individual tax rate is 39.6%. While we don’t know what the final tax rates will look like and how many brackets there will be, all indicators point to lower tax rates under the new law in future years. With that in mind, it’s advantageous for your income to be as low as possible in 2017. The two most common strategies for lowering your income are deferring income and accelerating deductions.

How to Defer Income

There are numerous ways to defer income. For example, you can:

  • Delay the sale of appreciated assets until 2018
  • Postpone client billing until late December if you are self-employed
  • Wait to take retirement plan distributions other than required minimum distributions if you are retired

These are just a few ways to defer income. If you are unable to defer income to 2018, then you might be able to accelerate your deductions in 2017. Either one of these approaches can help lower your income (thereby reducing your tax liability) for 2017, while looking forward to lower tax rates in 2018. Your CPA can work with you to identify the best strategies for your situation.

How to Accelerate Deductions

Planning for deductions is a little more difficult due to Adjusted Gross Income (AGI) phase-out levels, the alternative minimum tax (AMT) and your tax filing status. Regardless, accelerating deductions can be a highly effective personal income tax planning tactic.

Let’s look at some ways to accelerate your deductions.

Consider making your 2017 fourth quarter state and local estimated tax payments in December 2017 rather than near their due date in January 2018. This tactic may prove especially important in 2017 because both the House and Senate versions of the tax bill include provisions for eliminating the ability to deduct your state and local income taxes paid.

If you do not pay your property taxes through escrow, consider paying your property tax installment in December 2017. Under the new law, property taxes paid may be eliminated or restricted to a maximum deduction of $10,000.

Medical expenses might be another means to accelerate your deductions. Amounts paid for qualifying medical expenses and health insurance premiums are deductible to the extent that they exceed 10% of your AGI. This is a deduction that will most likely be eliminated under the new tax law. Therefore, you should consider incurring all possible medical expenses in 2017. (Side note: the tax proposal also includes a repeal of the individual mandate to buy health insurance.)

The deduction for mortgage interest paid might change under the new law. Under the Senate tax proposal, you would still be able to claim a deduction for interest paid on mortgage debt up to $1,000,000. However, the House’s proposal calls for a reduction of the cap of mortgage debt to $500,000. The Senate proposal also disallows deductions for interest paid on home equity loans. Maximizing retirement contributions and HSA contributions may be an advantageous move to accelerate deductions in 2017 to help lower your income.

Consider making extra charitable contributions before December 31, 2017. Remember that you can make these donations with cash, credit card or even property such as household items, cars and investments. Property donated to charity is deductible at its fair market value at the date of donation. It’s worth noting that the new tax law proposes doubling the standard deduction to $24,000 for married taxpayers filing jointly and $12,000 for single filers.

Carry Back Your Net Operating Loss

If your business incurs a net operating loss (NOL) in 2017, you may carry back that loss against taxable income going back to the two previous years. Depending on the outcome of the reconciliation, the tax law might restrict the NOL carryback provisions beginning in 2018.

What Else Is In the Tax Bill?


Looking ahead to other changes the new tax law might bring, you’ll likely see the elimination of personal exemptions as well as exemptions for dependents. There is a proposal to increase the child tax credit to $2,000 (from $1,000) per child and it would be available for children under the age of 18 (up from 17). This would revert back to children under the age of 17 in 2025. The child tax credit has been greatly expanded under the Senate law proposal to include a new phase out to begin at $500,000 for married tax filers (up from $110,000).

Alternative Minimum Tax

The House tax proposal calls for the elimination of the AMT but the final version of the Senate bill keeps the AMT in place and raises the amount of income exempt from it. The AMT is a topic that will be watched closely while the tax proposal is finalized between the House and the Senate.

Investment Tax

The House and Senate tax bills contain very few changes to the treatment of both short term and long term capital gains. Also, the proposals do not call for the elimination of the net investment income tax. Short term capital gains on property held less than one year would remain virtually the same and be taxed at your ordinary income tax rate, which could be lower under the new law. Long term capital gains on property held for more than one year would most likely remain similar to how it is treated under current law.

Estate Tax

Under current tax law, estates up to $5.5 million are exempt from taxes. The House proposal raises that number to $10 million and would increase the exemption every year and eventually eliminate the estate tax after six years. The Senate proposal leaves the tax in place for estates over $11 million with no date to repeal the tax.

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

Business Tax

The House and Senate versions of the bill both call for significant reductions in the corporate tax rates. The new proposal calls for a reduction in the top rate of 35% down to 20%. The 20% rate would not take effect until 2019 under the Senate proposal. Both versions of the bill also call for the elimination of corporate AMT.

Under current law, the tax rates for pass-through entities (partnerships, S corporations and sole proprietorships) are calculated at the individual’s tax rate, with the highest rate being 39.6%. The House bill drops the top income tax rate on pass-throughs to 25%, while prohibiting anyone providing professional services (attorneys, CPAs, etc.) from taking advantage of the lower rate. The Senate bill proposes lowering the top income tax rate to 23% and also prohibits the new rate for anyone in a service business, except for those with taxable incomes under $500,000 if married ($250,000 if single).

Both versions of the tax bill allow for more generous expensing rules. The Senate proposal would allow businesses to immediately and fully expense the cost of equipment, except structures, for at least five years. After that, the provision would be phased out by 20% for the next five years. The House proposal calls for the new expensing rules to be eliminated after five years rather than phased out.

What To Do Now

As you can see, year-end tax planning for individuals and businesses in 2017 is especially complex due to the major tax reform bill that is working its way through the legislative process. Regardless of which provisions of the tax reform proposal get passed into law, we recommend working with your CPA to identify ways to reduce your 2017 tax liability.

Our tax team is ready to help. Contact us online or call 800.899.4623 to get help with year-end tax planning.

New Call-to-action

Tags: tax planning, Tom Harvey

6 Resources Everyone in the Maryland Manufacturing Industry Should Know About

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


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.


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


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.

Subscribe to our blog to get articles like this delivered straight to your inbox.

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.

Subscribe to the Gross Mendelsohn blog

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

Trump Blog Post.png

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.

estate planning scorecard


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

concentrated stock positions blog post.jpg

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.

New Call-to-action

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


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.

estate planning consultation

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.


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.

estate planning consultation

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.


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.

New Call-to-action

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