Raising the Bottom Line

Show Me the Numbers: How the New Tax Law Will Affect Business Owners

Posted by Chaim Fine on Thu, Aug 23, 2018 @ 08:10 AM

New Tax Law Comparison blog post

A lot has been written on the new tax law, more formally known as the Tax Cuts and Jobs Act, and how it will affect taxpayers. But really, what most business owners want to know is the bottom line – the actual numbers – and how the TCJA will affect them personally.

There is really no simple way to determine how the tax law will affect you without a comprehensive analysis of your tax situation. (No worries – we can do that for you! Contact us to talk with one of our tax experts.)

We’re going to show you the numbers through a real life example. Let’s take a look behind the curtain, shall we?

Business Owners Have Important Decisions to Make

If you’re a business owner, and not just an individual taxpayer, the TCJA requires you to make some critical decisions in the near future. Let’s look at choice of entity.

For instance, it might be advantageous for an S corporation to change to a C corporation. Also, and this is really important, if the entity is something other than a C corp, you will need to determine if you’ll be eligible for the 20% Qualified Business Income deduction.

As with most business decisions, it’s a smart idea to have a CPA do a thorough analysis of your specific situation in order to choose the best entity type.

A Comparison of Tax Liability: Before and After the New Tax Law

The best way to illustrate how the new tax law will affect business owners is to look at a real-life situation that shows a business owner’s tax liability both before the tax law (2017) and after the tax law (2018).

Let’s set the scene. Alice is the owner of Big Dogs Drywall, a small construction company. The business is an S corp. Alice is the sole owner, married with two children, and takes an annual distribution of $300,000.

The following table shows Alice’s tax liability for both 2017 and 2018, with 2018 reflecting the new tax law’s changes.

Comparison Before After New Tax Law

As you can see, Alice’s tax bill is lower in 2018 compared to 2017, by $27,117, under the new tax law. The reason for the decrease is mainly due to the Qualified Business Income deduction and lower tax rates. When doing your tax planning, it is absolutely critical that you make sure your business qualifies for the full 20% deduction.

Now let’s consider this same scenario, but with Alice’s business changing from an S corp to a C corp as of January 1, 2018.

C Corp After New Tax Law

With Alice’s business as a C corp instead of an S corp in 2018, her tax bill is slightly lower. However, she will need to factor in the dividends paid out, as that amount will be taxed at 15%. That number could be higher or lower depending on an individual’s taxable income. In this scenario, it would not make sense to convert the business to a C corp.

For most small businesses where the owners take distributions/dividends, an S Corp will most likely be more advantageous. Even for large corporations, which might not need to declare dividends, there are still other factors to consider.

More Money In Your Employees’ Pockets?

Most taxpayers have seen increases in their paychecks as employers decreased their withholding due to the anticipation of a tax decrease. However, based on a report from the Government Accountability Office, 30 million taxpayers – that’s roughly 21% of all taxpayers – will have under withheld and will owe money comes April 2019. Even if you believe your tax situation is relatively simple, regardless of whether you are a business owner, it is wise to run a tax projection to avoid unpleasant surprises.

What Will 2019 Look Like for You?

Many taxpayers, particularly business owners, are unclear on what their tax situation will look like in 2019.

Contact us here or call 800.899.4623 to speak with one of our tax advisors, who will explain how you can prepare for 2019, and take advantage of any new tax savings opportunities.

For a broad overview of the tax law, check out our blog post, Here’s How the New Tax Reform Law Will Affect You and Your Business.

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Tags: Manufacturing & Distribution, taxpayers, Chaim Fine, tax, healthcare, real estate, tax planning, construction, business tax planning, business owners, government contractors

REVEALED: 10 Things You Should Know About the New Tax Law

Posted by Matthew Preller on Mon, Aug 20, 2018 @ 08:47 AM

ten things in new tax law blog post

By now, most taxpayers are aware of some of the basics of the Tax Cuts and Jobs Act, including the decrease in individual and corporate tax rates and increase in standard deductions. But there are some aspects of the new law that haven’t gotten nearly as much attention. That’s why we’re going to reveal ten things you might not know about the tax law, but should.

1. Creation of Qualified Business Income

The Qualified Business Income (QBI) deduction is an entirely new deduction added by the TCJA.

For tax years 2018 through 2025, individuals will receive a 20% deduction for business income reported on their individual tax return.

Here’s a simple example: Kevin is an electrician who reports $100,000 of net income on his 2018 tax return. His QBI deduction would be $20,000 so he would, in effect, only be taxed on $80,000.

This deduction is available regardless of whether a taxpayer decides to itemize on their return. There are many limitations and restrictions to this provision, and a good number of CPAs consider QBI to be the most complicated provision in the tax law. We tackle the QBI deduction in this blog post. To fully understand how the QBI deduction impacts your situation, you should talk with your CPA.

2. Changes in Entertainment Expenses Deductibility

The TCJA repealed the deduction, previously limited to 50%, for business entertainment, which includes expenditures for taking clients to sporting events and shows, and paying for season tickets for various entertainment events. Since these items are no longer deductible, it is essential that you properly identify and segregate those expenses going forward.

3. Increase in Child and Family Tax Credit

The TCJA doubled the child credit for children under age 17 to $2,000. It also introduced a new $500 credit, per dependent, for a taxpayer’s dependents who are not “qualifying children,” but who still meet the IRS’s tests for dependency.

In addition, the phase-out limits for these credits have increased. Under the TCJA, joint filers whose adjusted gross income is less than $400,000 ($200,000 for others) are eligible for the child tax credit. This means that more families will be able to take advantage of the credit.

4. Limitation of State and Local Taxes

The TCJA added a limitation of $10,000 on state and local taxes. There seems to be a misconception out there that the limit is $10,000 per person, when in fact it is $10,000 per tax return.

This means that if you are a single filer you get $10,000 of itemized deductions; if you are married filing jointly, you and your spouse will get a combined $10,000 deduction. This deduction encompasses state and local income taxes, property taxes and sales taxes.

5. Elimination of Miscellaneous Itemized Deductions

One change that will have a particularly big impact is the elimination of miscellaneous itemized deductions. These deductions include investment management fees, accounting fees, and unreimbursed business deductions such as job education, job related travel, union dues, etc. Taxpayers who have historically had a large amount of investment fees, along with some insurance salespeople, could see a significant impact from this.

6. Changes to Mortgage Interest Deductions

Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million). Loans in existence on December 15, 2017 are grandfathered, with a balance up to $1 million still allowed.

Interest on home equity indebtedness, such as a home equity line of credit, is no longer deductible unless the debt is really acquisition indebtedness (used for home improvement). Consider whether the indebtedness was used for business or investment purposes to determine whether an interest deduction may be available in a different category.

7. Changes to Depreciation

Over the past decade, bonus depreciation and Section 179 expensing have been popular tax planning tools for businesses. 

While the rate of bonus depreciation and the amount of the maximum Section 179 limit have varied over the years, business owners have long enjoyed the ability to deduct significant portions (or the entirety) of fixed asset purchases. The TCJA increased the bonus depreciation percentage to 100% until 2023, when it will decrease by 20% until it reaches zero.

Bonus depreciation is now available for both used and new qualified assets. The Section 179 expense limit is now $1 million of allowable expensing with a total purchase threshold of $2.5 million. If you purchase more than $2.5 million in eligible fixed assets in the course of the year, you will see a reduction in the amount you are allowed to expense under Section 179.

These amounts are much higher than they have historically been and, in many cases, well beyond what an average business owner will spend in a given year. However, these higher limits and the availability of bonus depreciation and Section 179 presents some excellent tax planning opportunities.

8. Expansion of Section 529 Plans

Section 529 plans have been a widely used tool to help taxpayers save money for their child’s college education. The funds you put into your 529 plan have to be used for qualified higher education costs, but the TJCA expanded the list of what qualifies as a higher education expense. Depending on your 529 plan, you may be eligible for a state tax deduction for contributions to the plan. The TCJA expanded the opportunities available for education tax planning by allowing $10,000 per year to be distributed from 529 plans to pay for private elementary and secondary tuition.

9. Alimony Recognition Rules Changed

Under the prior law, individuals who paid alimony to an ex-spouse received a deduction for the alimony paid, while the individuals receiving the alimony treated those payments as income. Tax reform has eliminated the deduction for alimony paid and the recognition of income for alimony received effective for divorce decrees executed after December 31, 2018.

10. Credit for Family and Medical Leave

A new tax credit was created under the TCJA for employers who provide eligible employees paid family and medical leave. Many employers are already providing paid leave to employees who qualify for this deduction. The credit could be as high as 25% of the compensation paid to the employee while on leave, resulting in large tax savings.

Find Out How the New Tax Law Impacts You

There’s no better time than now to find out exactly how the Tax Cuts and Jobs Act affects you and your tax situation. Contact us here or call 800.899.4623 to speak with one of our tax advisors, who will explain how you can take advantage of any new tax savings opportunities.

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Tags: Manufacturing & Distribution, taxpayers, tax, healthcare, real estate, nonprofit, tax planning, construction, business owners, tax credits, government contractors, Matthew Preller

What Maryland Businesses Need to Know About Mandatory Paid Sick Leave

Posted by Leonard Rus on Mon, Feb 12, 2018 @ 01:52 PM

paid sick leave in Maryland.jpg

A new law, dubbed “mandatory paid sick leave,” will have a substantial impact on many Maryland businesses, starting now.

Despite a last minute attempt by the Maryland Senate to delay the roll out of the new mandatory paid sick leave law until July, the Maryland Healthy Working Families Act took effect yesterday, February 11, 2018.

The core provision of the Act that’s causing Maryland employers to scramble revolves around sick leave. Under the new law, which was hotly debated in the state legislature, some Maryland businesses must provide paid sick leave for employees.

What’s required by the new law?

Whether you are required to offer paid sick leave depends on the number of employees you employ.

Maryland mandatory paid sick leave

Under the new law, employees can earn one hour of sick leave for every 30 hours worked. Employees can earn a maximum of 40 hours (five work days) of sick leave each year.

Sick leave mandated by the Maryland Healthy Working Families Act can be used for an employee’s own illness, to get medical care for a family member, to care for a sick family member and for maternity/paternity leave.

What to do now

If your business hasn’t already taken steps to comply, act now.

Every business owner should review his or her sick leave policy immediately. Once your sick leave policy is updated to reflect the new law’s requirements, distribute it to employees.

Recordkeeping methods need attention as well. Payroll systems, for example, need to account for the accrual and use of sick leave.

Consequences for failure to comply

There are stiff penalties for business owners who fail to comply with Maryland’s new sick leave law. Monetary fines and possible lawsuits filed by employees are a threat to businesses that don’t have compliant sick leave policies in place.

Additional resources for employers

According to Maryland’s Department of Labor, Licensing & Regulation, state officials say they “will work closely with employers and employees to make sure both parties understand the requirements and limitations of the law and resolve any issues as informally as possible.”

Employers can email questions to small.business@maryland.gov.

The state is developing sample policies and a detailed Q&A document. These resources will be posted on the DLLR website when they are available.

The Department of Labor, Licensing & Regulation’s sample employee notice poster offers an easy-to-understand explanation of the new law and how it works.

You can read the full Maryland Healthy Working Families Act here.

Need help?

If you need help determining how your business is affected and the steps to comply, contact us here or call 800.899.4623.

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Tags: Manufacturing & Distribution, Leonard Rus, real estate, nonprofit, construction, Maryland, business owners, government contractors

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

IRS Gives a New Break to Real Estate Bad Boy Investors

Posted by David Goldner on Mon, Jun 13, 2016 @ 04:10 PM

bad_boy_carve_outs.jpgWe are excited to share good news with real estate developers and investors.

Real estate owners can take advantage of a unique tax benefit in that they can deduct losses far in excess of capital invested. That’s because they are credited with investing the value associated with qualified nonrecourse debt.

Many times, a property developer brings in investors who, in addition to the economics from an investment point of view, benefit from sharing losses based on having the property secured by qualified nonrecourse loans.

However, an issue has arisen. Many loans for real estate would be qualified nonrecourse loans, except that the lenders regularly include “bad boy” provisions, which will make the loan recourse to the developer if he is a “bad boy”!

The purpose of “bad boy” provisions is that they prevent the developing owner from taking certain acts that could potentially hurt the collateral value of the real estate secured by the mortgage.

Examples of the Bad Boy Provisions

  1. The borrower fails to obtain the lender’s consent before obtaining subordinate financing or transfer of the secured property.
  2. The borrower files a voluntary bankruptcy petition.
  3. Any person in control of the borrower files an involuntary bankruptcy petition against the borrower.
  4. Any person in control of the borrower solicits other creditors of the borrower to file an involuntary bankruptcy petition against the borrower.
  5. The borrower consents to or otherwise acquiesces or joins in an involuntary bankruptcy or insolvency proceeding.
  6. Any person in control of the borrower consents to the appointment of a receiver or custodian of assets.
  7. The borrower makes an assignment for the benefit of creditors, or admits in writing or in any legal proceeding that it is insolvent or unable to pay its debts as they come due.

Out With the Old, In With the New

The IRS previously ruled that bad boy provisions give basis only to the developer, and the loans would be considered recourse only to him, and therefore the debt would not be allocable to the investors. This negatively impacts the value to an investor by limiting their ability to share in the losses from an investment.

However, the IRS recently reversed its position and ruled in a Legal Advice Memorandum (2016-001) that “bad boy” clauses will not convert an otherwise nonrecourse loan into a recourse loan and therefore, developers will be able to have investors share in losses based on the loan being qualified nonrecourse debt.

This is a great result for the investor community and developers of real estate.

Read more blog posts for real estate developers and investors here.

For 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 real estate owners and investors, along with high net worth families. Contact David here or call 800.899.4623.

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Tags: IRS, individual tax planning, high net worth, tax, David Goldner, real estate

Top 3 Federal and State Real Estate Tax Credits

Posted by Chaim Fine on Tue, Feb 16, 2016 @ 09:02 AM

Tax Credits You Might Have Overlooked for Your Real Estate Investment

real estate tax credits

Real estate is an important part of any comprehensive financial portfolio, but when it comes to utilizing tax credits, many property owners continue to lose out. Despite the benefits, finding and applying applicable tax credits can be difficult and overly complicated, meaning many property owners often fail to take advantage of credits they may qualify for.

To help, we’ve assembled a list of three top federal and state real estate tax credits.

1. Rehabilitation Tax Credit

As part of a program to encourage private sector investment in the rehabilitation and reuse of historic buildings, this tax credit can be applied to costs incurred for rehabilitation and reconstruction of certain historical buildings.

A 20% credit is available for qualifying expenses paid for the rehabilitation of commercial or residential historic buildings. This does not include a property the owner occupies and qualification is dependent on the award of two certificates:

  • the certification of the structure, certifying that the property is either a certified structure or located in a historic district and contributes to the significance of the district, and
  • the certification of the rehabilitation, as certified by the U.S. Department of Interior and National Park Service.

Although the Tax Cuts and Jobs Act left the 20% credit intact, the new tax law reformed the timing of when the 20% credit can be taken. Under the old rule it was a one-time credit from the time the building was placed in service. However, now the 20% credit is claimed ratably over a five-year period.

However, the Tax Cuts and Jobs Act provides that certified historic structures and pre-1936 buildings that were owned or leased continuously on and after January 1, 2018, can take advantage of the old rule if certain requirements are met. The requirements pertain to the timing of meeting the “substantial rehabilitation test,” which is a whole other blog post.

Prior to the passing of the sweeping Tax Cuts and Jobs Act, a 10% credit was given for qualifying expenses paid for the rehabilitation of non-historic commercial buildings (excluding residential rental properties) placed into service before 1936. The Tax Cuts and Jobs Act eliminated this 10% credit for non-historic commercial buildings for amounts paid or incurred after December 31, 2017. 

 2. Americans with Disabilities Act (ADA) Tax Credit

To assist property owners with ADA compliance, tax credits are available for businesses.

For small businesses, an ADA tax credit (Section 44 of the IRS Code) is available to businesses that had less than $1 million in revenue or employed 30 or fewer full-time employees in the previous tax year. Covering 50% of the eligible access expenditures in a year (up to $10,250, with a maximum credit of $5,000), this tax credit can be used to offset the cost of:

  • making property alterations to improve accessibility;
  • providing accessible language formats such as Braille, large print and audio tape;
  • employing a sign language interpreter or a reader for customers or employees, and
  • purchasing certain adaptive equipment.

For all businesses, an ADA tax credit (Section 190 of the IRS Code) allows a tax deduction of $15,000 per year, to be claimed for expenses incurred in making alterations to the business’ property to improve accessibility. Amounts exceeding $15,000 must be capitalized.

3. Low-Income Housing Tax Credit (LIHTC)

The LIHTC program was created by the Tax Reform Act of 1986 as an alternate method of funding housing for low- and moderate-income households, and has been in operation since 1987. For credits to be applicable, they must be used for new construction, rehabilitation, or acquisition and rehabilitation of a residential property, meeting the following qualifications:

  • more than 20% of the residential units in the project must be rent restricted and occupied by individuals whose income is 50% or less than the area’s median gross income; or
  • more than 40% of the residential units in the project must be rent restricted and occupied by individuals whose income is 60% or less than the area’s median gross income.

Properties that receive tax credits are required to meet these qualifications and maintain eligibility for a minimum of 30 years.

With heavy IRS regulations and program restrictions, many property owners have difficulty obtaining the full benefits of the LIHTC program. As a result, most LIHTC properties are owned by limited partnership groups that have been put together by syndicators.

Using this method, a variety of companies and private investors participate within the LIHTC program, investing in housing development and receiving credit against their federal tax liability in return. The credits are administered by individual states and each state has its own rules and nuances on how it calculates credit eligibility and amount.

Need Help?

Federal and state tax laws are always changing. At Gross Mendelsohn, we can help you develop a comprehensive plan to achieve the best financial positioning for you and your real estate investments. For help, contact us online or call 800.899.4623. 

Editor’s note: This post was originally published in January 2014 and has been updated to reflect new insights and information, particularly changes brought about by the Tax Cuts and Jobs Act.

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Tags: IRS, Chaim Fine, tax, real estate, tax planning, construction, tax deduction, tax credits

To Sell or Refinance? Managing Real Estate in 2016

Posted by David Goldner on Tue, Feb 02, 2016 @ 09:04 AM

Why Refinancing Could Mean More Money in the Long Run

sky_top.pngAfter years of slow growth, the real estate market is showing signs of rekindling. With all areas of the market showing development, particular sectors are seeing rapid gains, specifically the residential rental market. But, what does this growth mean for real estate owners?

A Changing Market

For one, real estate values are increasing, especially for cash flowing rental properties, with more capital coming into the market looking to make real estate purchases. Also, the growth of the market has been matched by all-time low interest rates, meaning that, while getting a loan is more difficult than ever, an owner that qualifies for financing has an opportunity to lock in exceptionally low rates.

Before the jump in capital gains and the 2.9% Obama Medicare tax, we encouraged property owners to sell when they got a good offer in order to move on to new opportunities. However, with tax rates having doubled to a high of nearly 40% on a combined basis, property owners must consider alternatives.

One key alternative to selling is to take advantage of the current low interest rates through refinancing, allowing real estate owners to retrieve cash value while deferring tax.

To Sell or Refinance?

Making the most comprehensive financial decision as to whether to sell or refinance requires determining the following four factors:

  1. What the property would sell for and projected expenses of the sale
  2. Tax basis in the property
  3. The balance of any loans on the property
  4. How much of a new loan could be put on the property

As an example, consider the following:

John Smith has owned a rental property for the past ten years, but circumstances have led him to lean towards selling. The property is worth $1 million and has a net income of $75,000 per year. The original cost of the property was $800,000, and depreciation to date is $300,000.

If he sold the property, he would pay 5% in expenses and commissions. The tax basis of the property is $500,000 and he would have to pay off the $500,000 outstanding loan on the property, Alternatively, John could refinance and get a new loan of $750,000.

If the property is sold, the net cash flow after tax liabilities would be calculated as follows:

Graph1_-_DAG_Refinance.png 

On the other hand, if John refinanced the property: 

Graph2_-_DAG_Refinance.png 

For John, and many real estate owners, the best solution to a situation like this may appear to be to sell the property without even considering refinancing and the full effect of the taxes on a sale. However, failing to consider the underlying benefits of refinancing can often mean losing out in the long-term.

Long-Term Cash Flow

By selling his property, John would have cash flow of $40,000 more from a quick-fire decision to sell rather than looking into refinancing. However, what many real estate owners fail to consider is that by refinancing they would lock in a stream of cash flow now and in the future. In John’s case, he would benefit from $21,000 of net cash flow per year by continuing to own the property and refinancing.

Graph3_-_DAG_Refinance.png 

By choosing to refinance, John may lose the immediate access to only $40,000 of net cash he would have made from selling but will instead benefit from the net $21,000 he will earn on his property each year, well into the future. In only two years, he will break even on the $40,000 he lost by not selling.

Plus, refinancing means that a property owner, like John, continues to control the property and potential future appreciation along with tax sheltered income. In addition, if John is still holding the property when he dies, he never pays any of the taxes deferred by the refinancing – tax planning at its best.

In the end, while the market continues to heat up, property owners need to keep a cool head when it comes to making the right financial choices. While selling could mean cash now, refinancing can ensure a stream of cash flow for years to come. Real estate owners must determine their total tax liabilities before locking themselves into a decision to sell, ensuring the best positioning for their finances now and in the future.

Need Help?

If you’re considering selling or refinancing your property, our Construction & Real Estate Group is here to help. Contact us here or at 800.899.4623.

Tags: tax, David Goldner, property owners, real estate, construction

House and Senate Compromise on $680 Billion Package of Tax Extensions

Posted by Leonard Rus on Mon, Dec 21, 2015 @ 10:53 AM

President Obama Signs New Tax and Spending Legislation into Law

iStock_000002675202Small_cash.jpgA $680 billion package of tax extensions has been approved by the House and Senate and was signed into law by President Obama. As one of the closest to a bipartisan tax bargain in years, the package will extend billions in tax assistance to businesses and individuals.

The legislation will make some popular tax breaks permanent and extend others, including:

  • Research credit modified and made permanent
  • Bonus depreciation extended and modified through 2019
  • Increased §179 expensing limitations made permanent
  • Temporary exclusion of 100% gain on certain small business stock made permanent
  • Exclusion from income of discharge of qualified principal residence indebtedness modified and extended through 2016

How am I affected?

Provisions of the legislation are numerous, affecting taxes for: individuals and families; health and compensation planning; general business, S Corporations, regulated investment companies, qualified small business stock; estates, gifts and trusts; real estate investment trusts, the IRS, tax court, international and payroll.

What’s next?

At Gross Mendelsohn, we can help ensure that you make the best financial choices when filing. To find out how these provisions affect you, contact us here or 800.899.4623.

Tags: IRS, individual tax planning, Leonard Rus, taxpayers, tax, real estate, tax planning, business tax planning, accounting, business owners

Avoid the Self-Rental Trap: Tax Solutions for Self-Renters

Posted by Scott Handwerger on Mon, Aug 17, 2015 @ 01:56 PM

Save Thousands Each Year with Proper Tax Planning and a Group Activities Election 

Without proactive tax planning, self-renting can end up costing a taxpayer more in taxed inflated income than they may have spent renting from a third-party. This trap, known as the “self-rental trap,” trips up many business owners each year despite the preemptive measures that can be taken to avoid it.

Self Rental Trap resized 600

In theory, self-renting seems simple. John Smith owns LLC A and LLC B. Company A owns a computer company and Company B owns a building that rents office space to Company A’s company. Company A rents from Company B; and at first, it seems like the perfect setup, with the money never leaving John’s hands. However, what self-renters often fail to realize is that this plan is far from ideal, with passive activity rules leading to many business owners paying taxes based on an overinflated net income.

What is a passive activity?
According to the passive activity rules in Code Section 469, a passive activity is any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate, including any rental activity. In the case of John Smith, when Company B rents office space to Company A’s computer company, Company B is engaged in a passive activity.

Revenue losses from passive activities, like renting, cannot be deducted from income from non-passive activities. So while an individual may generate non-passive income, any passive losses will be nondeductible and therefore suspended and carried to future tax years.

For example, John’s computer company earned $200,000 in non-passive income last year. His building, however, lost $50,000 in passive income through renting. Despite this loss, John’s taxable income will remain $200,000, while the loss of $50,000 will be suspended and carried forward to be used in the future when he has other passive income. This situation, an all too common mistake by self-renters, is the self-rental trap.

How do I avoid the self-rental trap?
The self-rental trap can be minimized with proper tax planning. A taxpayer, like John, can plan ahead and minimize the rental loss by adjusting the rent between the two entities.

This planning can include making a “group activities election” when filing.

Though rental and business activities are usually not allowed to be grouped, if both activities form an appropriate economic unit and meet grouping stipulations then grouping is permitted. To determine whether a group constitutes as an appropriate economic unit, the following factors must be considered: similarities/differences in types of business, extent of common control, extent of common ownership and geographical location.

If both the rental and business activities qualify as an appropriate economic unit, the following grouping stipulations must also be met before grouping can be elected:

1) The rental activity is insubstantial in relation to the trade or business activity,
2) The trade or business activity is insubstantial in relation to the rental activity, or
3) Each owner of the trade or business activity has the same ownership interest in the rental activity.

In John’s situation, both activities (the renting and computer company) form an appropriate economic unit, the rental activity is insubstantial to the computer business, and John owns 100 percent of both activities. This means that John can elect to group the activities when filing his taxes. As a result of this grouping, the $50,000 loss from the renting will now offset the $200,000 in income earned by John’s computer company. This means that John’s new net taxable income will be $150,000, putting John and both his companies in a much better financial position than if he had not elected to group.

In the end, passive loss, self-rental and grouping rules are complex and intertwined. Tax ramifications and complexities can result in many self-renters losing thousands of dollars each year. The only way for business owners to avoid self-rental loss is to work with their CPAs to plan ahead, ensuring that both they and their businesses are in the most advantageous financial position and making the most of their income.

Need Help?
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Tags: income tax, taxpayers, tax, Scott Handwerger, property owners, real estate, tax planning, for-profit, accounting

Construction Company Scores Big Win in Tax Court Over Use of Completed Contract Accounting Method

Posted by Steve Ball on Tue, Feb 18, 2014 @ 01:46 PM

Homebuilders’ and Developers’ Use of Completed Contract Method Can Help Defer Taxes

homebuilderA recent ruling by the Tax Court has very favorable ramifications for construction contractors, particularly homebuilders and developers.

As we reported last summer in our blog post, “Four Ways for Construction Contractors to Minimize Their Chance of an IRS Audit,” the completed contract method has long been under the scrutiny of the IRS.

Many long-term contracts are subject to the percentage-of-completion method, which requires contractors to pay taxes each year on the portion of the contracts that were finished in that year. Some smaller contractors are allowed to use the completed-contract method, though, which lets them put off paying taxes until projects are done.

Recent Tax Court Case Shows Bright Spot for Deferment of Taxes

In the recent case Shea Homes, Inc. and subsidiaries et al v. Commissioner of Internal Revenue, the taxpayer, a California home builder, prevailed when the Tax Court found the company’s use of the completed contract method to be acceptable. The court approved Shea Homes’ deferment of tax payment on home sales until 95 percent of homes in its large community were sold. Read more about the case here.

This Tax Court case is significant for home builders and developers. It points to more acceptance of the completed contract method, which delays the payment of taxes until a project is complete. This is a major opportunity to defer taxes.

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Tags: tax, real estate, Steve Ball, construction, business tax planning