Tag: tax

IRS 2018 Tax Myths

Posted by Maria T. Rollins on

With the 2018 filing season in full swing, the Internal Revenue Service offered taxpayers some basic tax and refund tips to clear up some common misbeliefs.

Myth 1: All Refunds Are Delayed

IRS 2018 Tax Myths
The IRS issues more than nine out of 10 refunds in less than 21 days. Eight in 10 taxpayers get their refunds faster by using e-file and direct deposit. It’s the safest, fastest way to receive a refund and is also easy to use.

While more than nine out of 10 federal tax refunds are issued in less than 21 days, some refunds may be delayed, but not all of them. By law, the IRS cannot issue refunds for tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) before mid-February. The IRS began processing tax returns on Jan. 29.

Other returns may require additional review for a variety of reasons and take longer. For example, the IRS, along with its partners in the state’s and the nation’s tax industry, continue to strengthen security reviews to help protect against identity theft and refund fraud.

Myth 2: Delayed Refunds, those Claiming EITC and/or ACTC, will be Delivered on Feb. 15

By law, the IRS cannot issue EITC and ACTC refunds before mid-February. The IRS expects the earliest EITC/ACTC related refunds to be available in taxpayer bank accounts or debit cards starting Feb. 27, 2018, if these taxpayers chose direct deposit and there are no other issues with their tax return. The IRS must hold the entire refund, not just the part related to these credits. See the Refund Timing for Earned Income Tax Credit and Additional Child Tax Credit Filers page and the Refunds FAQs page for more information.

Myth 3: Ordering a Tax Transcript a “Secret Way” to Get a Refund Date

Ordering a tax transcript will not help taxpayers find out when they will get their refund. The IRS notes that the information on a transcript does not necessarily reflect the amount or timing of a refund. While taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications, they should use “Where’s My Refund?” to check the status of their refund.

Myth 4: Calling the IRS or a Tax Professional Will Provide a Better Refund Date

Many people mistakenly think that talking to the IRS or calling their tax professional is the best way to find out when they will get their refund. In reality, the best way to check the status of a refund is online through the “Where’s My Refund?” tool or via the IRS2Go mobile app. The IRS updates the status of refunds once a day, usually overnight, so checking more than once a day will not produce new information. “Where’s My Refund?” has the same information available as IRS telephone assistors so there is no need to call unless requested to do so by the refund tool.

Myth 5: The IRS will Call or Email Taxpayers about Their Refund

The IRS doesn’t initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. Recognize the telltale signs of a scam. See also: How to know it’s really the IRS calling or knocking on your door.

The IRS will NEVER:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill if taxes are owed.
  • Threaten to immediately bring in local police or other law enforcement groups to have people arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

For more information on tax scams see Tax Scams/Consumer Alerts. For more information on phishing scams see Suspicious e-Mails and Identity Theft.

We’ve Got Your Back

A trusted tax professional can provide helpful information and advice about the ever-changing tax code. Check out the New Tax Law Explained! For Individuals page and then contact managing partner Maria Rollins at mrollins@krscpas.com or 201.655.7411 for a complimentary initial consultation.

The Tax Act and the Real Estate Industry

Posted by Simon Filip on

The Tax Act and the Real Estate IndustryTax Cuts and Jobs Act (“TCJA”)

On December 20, 2017 Congress passed the most extensive tax reform since 1986, which was subsequently signed into law by President Trump. Included in the TCJA are changes to the Internal Revenue Code (“Code”) that impact taxpayers engaged in the real estate business, and those who otherwise own real estate.

Individual tax rates

The TCJA lowers the marginal (top tax bracket) tax rate applicable to individuals from 39.6% to 37%. The net investment income tax (NIIT) and Medicare surtax of 3.8% and 0.9%, respectively, remain. The reduction in tax rates is not permanent like the corporate tax rate reduction, and is scheduled to expire after 2025. The tax rates applicable to long-term capital gains of individuals remains at 15% or 20%, depending on adjusted gross income (AGI).

Deduction for qualified business income of pass-through entities

The TCJA creates a new 20% tax deduction for certain pass-through businesses. For taxpayers with incomes above certain thresholds, the 20% deduction is limited to the greater of (i) 50% of the W-2 wages paid by the business, or (ii) 25% of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis, immediately after acquisition, of depreciable property (which includes structures, but not land).

Pass-through businesses include partnerships, limited liabilities taxed as partnerships, S Corporations, sole proprietorships, disregarded entities, and trusts.

The deduction is subject to several limitations that are likely to materially limit the deduction for many taxpayers. These limitations include the following:

  • Qualified business income does not include IRC Section 707(c) guaranteed payments for services, amounts paid by S corporations that are treated as reasonable compensation of the taxpayer, or, to the extent provided in regulations, amounts paid or incurred for services by a partnership to a partner who is acting other than in his or her capacity as a partner.
  • Qualified business income does not include income involving the performance of services (i) in the fields of, among others: health, law, accounting consulting, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or (ii) consisting of investing or investment management, trading, or dealing in securities, partnership interests or commodities.
  • Qualified business income includes (and, thus, the deduction is applicable to) only income that is effectively connected with the conduct of a trade or business within the United States.
  • The deduction is limited to 100% of the taxpayer’s combined qualified business income (e.g., if the taxpayer has losses from certain qualified businesses that, in the aggregate, exceed the income generated from other qualified businesses, the taxpayer’s deduction would be $0).

Interest expense deduction limitation

For most taxpayers, TCJA disallows the deductibility of business interest to the extent that net interest expense exceeds 30% of Earnings before Income Taxes Depreciation and Amortization (EBITDA) for 2018 through 2022, or Earnings before Income Taxes (EBIT) beginning in 2022. An exemption from these rules applies to certain taxpayers with average annual gross receipts under $25 million.

A real property trade or business can elect out of the new business interest disallowance by electing to utilize the Alternative Depreciation System (ADS). The ADS lives for nonresidential, residential and qualified improvements are 40, 30, and 20 years, respectively.  All of which are longer lives, resulting in lower annual depreciation allowances.

Immediate expensing of qualified depreciable personal property

The TCJA includes generous expensing provisions for acquired assets. The additional first year depreciation deduction for qualified depreciable personal property (commonly known as Bonus Depreciation) was extended and modified. For property placed in service after September 27, 2017 and before 2023, the allowance is increased from 50% to 100%. After 2022, the bonus depreciation percentage is phased-down to in each subsequent year by 20% per year.

Expansion of Section 179 expensing

Taxpayers may elect under Code Section 179 to deduct the cost of qualifying property, rather than to recover the costs through annual depreciation deductions. The TCJA increased the maximum amount a taxpayer may expense under Section 179 to $1 million, and increased the phase-out threshold amount to $2.5 million.

The Act also expanded the definition of qualified real property eligible for the 179 expensing to include certain improvements to nonresidential real property, including:

  • Roofs
  • Heating, Ventilation, and Air Conditioning Property
  • Fire Protection and Alarm Systems
  • Security Systems

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different, especially when real estate is involved – so don’t go it alone! Contact me at sfilip@krscpas.com or 201.655.7411 to discuss tax planning and your real estate investments under the TCJA.

2017 Tax Legislation: What Individual Taxpayers Need to Know

Posted by Maria T. Rollins on

2017 Tax Legislation: What Individual Taxpayers Need to KnowThe new Tax Cuts and Jobs Act amends the Internal Revenue Code (IRC) to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. It is the most sweeping update to the U.S. tax code in more than 30 years, and from what we’re seeing, it impacts everyone’s tax situation a bit differently.

What works for one individual or family may not work for another, although their circumstances may appear to be similar on the surface.

Here are some of the key features of the tax reform legislation that you need to know about as an individual tax payer. (I’ll cover the impact on businesses in a separate post.)

Individual Tax Rates

There are still seven tax brackets, however the rates have dropped in all except the lowest bracket. The new maximum tax rate was reduced from 39.6% to 37%, which applies for those earning over $500,000 annually, if single, or $600,000 if married.

Here is a comparison of the old and new tax rates:

Comparison of new and old tax rates

While these changes are likely good for everyone, I do have some clients who are married, filing jointly and when I recalculated their taxes under the new law, the results were not what we expected. The husband and wife both work, and it turns out they’re only going to save $200 in taxes! So that’s why it’s important to work with your accountant and look at your situation individually.

Alternative Minimum Tax

The alternative minimum tax (AMT) is a supplemental income tax imposed by the United States federal government. AMT is a separate tax calculation that is run after the regular tax calculations are done. The taxpayer pays the higher of the two taxes. Although this was supposed to be a tax to ensure that everyone, including the wealthy, pay some tax, in the past it did hit many middle income wage earners.

Under the new law:

  • The amount exempt from AMT increases from $86,200 to $109,400, if married, and from $55,400 to $70,300 if single.
  • The phase-out of the exemption amount begins at $1,000,000 – instead of $164,100 – if married, and $500,000 – instead of $123,100 – if single.

So we expect we will be seeing fewer middle income wage earners subject to AMT.

Deductions, exemptions, and capital gains

The standard deductions have nearly doubled to $24,000 (married) and $12,000 (single), however there is no longer any personal exemptions allowed at any income level.

Individual deductions for state and local taxes (SALT) for income, sales, and property are limited in aggregate to $10,000 for married and single filers and $5,000 for married, filing separately. What this means in a high real estate tax state like New Jersey, where you’re probably paying more than $10,000 a year in real estate taxes, you’re going to be taking a hit starting in 2018.

Most miscellaneous itemized deductions – for example, tax preparation and investment expenses – that had been subject to the 2% of adjusted gross income (AGI) floor will no longer be allowed.

As far as capital gains, there were no changes to the tax rate. The maximum rate on long-term gains and qualified dividend income (before 3.8% net investment income tax) remains at 20%.

As the reform bill was being negotiated, there had been talk of doing away with the medical expense deduction completely, which would have hurt the elderly. Instead, they reduced the floor to 7.5% of AGI for tax years 2017 and 2018.

Fortunately, there were no changes to how securities are treated. You can continue to specify which stocks you’re selling, which means if have a lot of the same stock, you can pick your highest basis so that you have the lowest amount of capital gain.

The child tax credit increases from $1,000 per qualified child to $2,000, with $1,400 being refundable. Phase-out of the credit begins at $110,000 (single) and $400,000 (married).

You will no longer be penalized if you don’t have health insurance. Starting in 2019, the new legislation eliminates the Affordable Care Act’s individual mandate.

Mortgage interest and real estate

Before the tax law changed, you could deduct mortgage interest on mortgages up to $1 million, if you’re married, and $500,000 if you’re single. Interest on a Home Equity Line of Credit (HELOC) could be deducted up to $100,000. Under the new law, individuals are allowed an itemized deduction for interest on a principal residence and second residence up to a combined $750,000. Mortgages obtained before 12/16/17 are grandfathered and new purchase money mortgages may be grandfathered if the purchase contract is dated before 12/16/17.

Refinancing of grandfathered mortgages is grandfathered, but not beyond the original mortgage’s term and amount, with some exceptions for balloon mortgages. Interest on HELOCs is no longer deductible.

The rules for capital gain exclusion for a primary residence remain unchanged, which is good for the real estate market. When you sell your primary residence, you get to exclude $500,000 of gain. As the taxpayer, you must own and use the home as your primary residence for two out of the previous five years. This exemption can only be used once every two years.

You will still be able to do a like-kind exchange on real estate, but no longer on personal property. This type of exchange allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the gain on the sale of the first asset.

College savings plans, estates and gifts

If you have a Section 529 plan, you can now pay up to $10,000 a year per student for high school education. This had always been limited to college, but now if you are paying public, private or religious high school tuition, you can use some of your 529 here.

Under the new tax law, the estate, gift and generation skipping transfer (GST) tax exemptions are doubled to $11.2 million per US domiciliary.  These exemptions sunset after 2025 and revert back to the law in effect for 2017 with inflation adjustments. There’s a possibility for “clawback” at death if the law is not changed.

Pass-through and charitable deductions

If you own a business that is set up as a partnership, S-corporation, or sole proprietorship, income was passed through to your individual tax returns, where it was taxed as ordinary income. There is now a new 20% deduction for qualified business income from a partnership, S-corp, or sole proprietorship. There are some income limitations to this deduction, so be sure you consult your tax advisor on this one.

We still have deductions for charitable contributions. Under the new law, a contribution made to public charities is deductible, as long as it doesn’t exceed 60% of the taxpayer’s AGI – this is up from 50% of AGI.

We’ve got your back

At KRS, we’ve been tracking tax reform legislation closely and are ready to assist you in your tax planning and preparation now that it is finally signed into law. Don’t lose sleep wondering what impact the new law will have on you and your family. Contact me at 201.655.7411 or mrollins@krscpas.com.

 

How Your 1031 Exchange Can Benefit from a “Zero” Deal

Posted by Simon Filip on

In previous blog posts I’ve discussed benefits of entering into a 1031 exchange. Also known as a like-kind or tax deferred exchange, a 1031 exchange affords significant tax benefits to property owners.

How 1031 exchanges benefit from zero cash flow dealsSpecifically, a 1031 exchange allows a taxpayer to sell an investment property and reinvest in replacement property(ies) while deferring ordinary income, depreciation recapture and/or capital gains taxes. By deferring tax on the transaction, taxpayers will have more cash available for reinvestment.

What is a zero cash flow purchase?

In a zero cash flow or “zero” deal, the net operating income on a net-leased property matches the debt service, and the loan amortization matches the term of the lease. If the property is retained for the full term of the lease, there is no debt at the end of the term.

Many real estate investors purchase zeros to offset taxable income from other investments through losses associated with depreciation deductions and interest expenses. These transactions are not without drawbacks, as taxable income will occur when the annual loan amortization exceeds the annual depreciation.

Benefits of a zero in a like kind exchange

One of the largest benefits of a zero in a like kind exchange is the pay-down or re-advance feature, whereby the buyer can access cash from the exchange without triggering gain recognition. Once the property is acquired and the exchange is completed, the loan provides the owner an option to refinance a portion of the equity. The options are exercised within the existing loan documents, and there is no renegotiation of terms with the lender. The proceeds can then be deployed to cash-flowing assets.

For example, a taxpayer has a property worth $10 million, comprised of $4 million in equity and $6 million in debt. She found a zero property that can be purchased for $10 million, putting down $1 million as equity and assuming $9 million of debt. The buyer applies $4 million in cash to purchase the replacement, covering the equity requirement of the 1031 exchange. Of that, $3 million (excess of the $4 million of equity from the down-leg over $1 million of equity required for purchase of the property) is used to pay down the debt balance. The interim debt balance is $6 million, fulfilling the debt requirement of the buyer’s 1031 exchange. After closing, the debt is re-advanced from $6 million to the original $9 million, with loan proceeds of $3 million going to the buyer. The exchange has been completed, income deferred and the taxpayer has extracted $3 million in non-taxable proceeds.

We’ve got your back

If you’re interested in structuring a 1031 exchange as a zero cash flow purchase, be sure to consult a real estate broker who specializes in these investments. You’ll also want to coordinate the deal with your tax advisor so that you’re following all the 1031 exchange rules. That’s where the tax experts here at KRS can help and ensure that you receive the maximum tax benefits. For more information, contact me at 201.655.7411 or sfilip@krscpas.com.

IRS Form 5472: What Foreign-Owned Companies Need to Know to Avoid Penalties

Posted by Simon Filip on

Is your company doing business in the US market? If you’re not filing IRS Form 5472, you could face large penalties.

The United States continues to see more investment from foreign companies and individuals who want a business presence here. When a foreign company decides to conduct business in the U.S., not only must it decide what legal entity structure to use, but after the entity is established, it must comply with all applicable U.S. tax laws. Filing the right tax returns and informational forms is critical to avoiding penalties.

IRS Form 5472 for foreign owned companiesFor the purposes of this post, a foreigner is a corporation from outside the U.S. or an individual who is not a U.S. citizen or a resident. Generally, foreigners can use two types of legal entities in the US market to conduct business here: a limited liability company (LLC), or a C-corporation.

Tax filing requirements for foreign-owned corporations

Generally, a corporation doing business in the United States is required to file applicable federal and state income tax returns following each annual tax period. A U.S. corporation with non-U.S. shareholders who own 25% or more of the corporation’s stock are generally required to file Form 5472, which has the long-winded title, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.”

Form 5472 is a separate filing requirement from the U.S. entity’s obligation to file income tax returns under the U.S. Internal Revenue Code (Code). This form must be attached to the reporting corporation’s federal income tax return. It requires certain information disclosures about the corporation’s foreign shareholders and any transactions between it and such shareholders during the tax year.

For example, two shareholders, one from the U.S. and one from Germany, form Reliant Panel, Inc., to manufacture industrial control panels in the U.S. They each own 50% of the company’s shares. Under the Code, Reliant Panel must file Form 5472.

Requirements for LLCs taxed as partnerships

In addition to filing Form 1065 (U.S. Return of Partnership Income), a partnership with foreign partners could be responsible for complying with other filing requirements such as Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), Partnership Withholding, and Nonresident Alien Withholding.

A partnership that has income effectively connected with a U.S. trade or business is required to pay a withholding tax on the effectively connected taxable income that is allocable to its foreign partners. A foreign partner is anyone who is not considered a U.S. person, which includes nonresident aliens, foreign partnerships, foreign corporations, and foreign trusts or estates.

The partnership must pay the withholding tax regardless of the foreign partner’s U.S. income tax liability for the year and even if there were no partnership distributions made during the year. Withholding tax must be paid on a quarterly basis.

Form 5472 for LLCs with a single foreign owner

When a U.S. LLC has a single owner (defined in U.S. law as a “member”), it is disregarded as an entity separate from its owner (“disregarded entity”). Newly issued regulations treat such disregarded entities as domestic corporations rather than as disregarded entities for the purpose of the foreign reporting requirements. Under these new rules, such disregarded entities are required to file Form 5472.

For example, Forco, Inc., a Polish corporation, forms Domeco LLC in New York, a wholly-owned LLC that is treated as a disregarded entity for income tax purposes. Under prior IRS rules, Domeco had no foreign reporting obligations. However, under the new regulations Domeco is required to file Form 5472.

Form 5472 requirements

Form 5472 requires the disclosure of the foreign shareholders’ names, address and country of citizenship, organization or incorporation, principal business activity, and the nature and amount of the reportable transaction(s) with each foreign shareholder.

Whether a reportable transaction has occurred is a complex determination. For example, a loan to a U.S. LLC by the foreign shareholder is considered a “reportable transaction” and requires the disclosure on Form 5472. In general, a reportable transaction is any exchange of money or property with the foreign shareholder, except for the payment of dividends.

Filing deadlines for Form 5472

Form 5472 is filed with the U.S. Corporation’s federal income tax return, including any extensions of time to file same.

Why is filing Form 5472 is so important?

Penalties for failure to file information returns are separate from payments relating to underpayment of income taxes. Under certain circumstances, the penalties for failure to file information returns can be significantly greater than the U.S. income tax liabilities. Failure to maintain the proper records, failure to file the correct Form 5472, or failure to file a required Form 5472 may result in a $10,000 penalty for each failure per tax year.

Additionally, if a failure to file continues for more than 90 days after notification of a failure to file by the IRS, an additional $10,000 may apply for each 30-day period, or fraction thereof, that the failure continues.

These fines can’t be appealed to the IRS! That is why foreigners doing business in the U.S. are strongly encouraged to consult with their tax advisors and ensure compliance with all U.S. tax and reporting obligations.

We’ve got your back

Whether you’re new to investing in U.S. companies or quite experienced, it is always important to have knowledgeable CPAs behind you to ensure that you are making the right moves when it comes to complying with the often confusing U.S. tax code. The experts at KRS CPAs are here to guide you through tax season and beyond. For more information or to speak to one of our partners, give us a call at 201.655.7411 or email me at SFilip@krscpas.com.

 

Special thanks to attorney Jacek Cieszynski for his assistance in developing this post.

Prepare Now for Easier 1099s in January ’18

Posted by Marika Dugan on

Now is the time to contact vendors for any missing W-9 forms, so that you have a less frenetic year-end.

In fact, we recommend that you obtain a vendor’s W-9 before you pay any of their invoices. Don’t wait to the end of the year to begin the process.

Prepare Now for Easier 1099s in January '18If your company uses  independent contractors, you need to send them a 1099 form for their taxes.The IRS requires anyone providing a service who is not an employee and was paid $600 or more during the year, to be issued a 1099. There are exceptions for attorneys who have no dollar threshold, and payments to corporations, which are exempt from 1099 reporting.

Get detailed instructions for completing Form 1099-MISC.

Important deadlines for filing 2017 Form 1099-MISC

Copy B and Copy 2 of the 1099-MISC form (recipient’s copy)                     January 31, 2018

File Copy A of the 1099-MISC form (IRS copy)                                          February 28, 2018

If filing electronically                                                                                            April 2, 2018

Electronic filing requires software that generates a file according to IRS specifications. When reporting nonemployee compensation payments in box 7 of Form 1099-MISC, the due date remains January 31, 2018.

Recommendations

It is much harder to contact independent contractors for information if their services were used sparingly, or if they no longer provide services. That’s why we recommend that you:

  • Withhold payment to any vendor who has not provided your company with an updated Form W-9.
  • Keep an electronic file of all W-9 forms received.
  • Accept W-9 forms from all vendors – even if you believe the entity may be exempt from 1099 reporting. (Better safe than sorry!)
  • Incorporate the Form W-9 requirement in your initial vendor setup and contract agreements.

Remember, taxpayers may be subjected to fines for late 1099 forms, missing forms, or wrong/omitted taxpayer information. To ensure a stress-reduced year end, start collecting any missing taxpayer information during these summer months.

We’ve got your back

From 1099s to 1040s and more, we believe in making tax season as stress-less as possible for our clients. Contact me at mrollins@krscpas.com to learn more about our proactive tax planning and preparation services.

 

What Is an UPREIT ?

Posted by Simon Filip on

Real Estate Investment Trust basics

An Umbrella Partnership Real Estate Investment Trust (UPREIT) can provide tax deferral benefits to commercial property owners

Real Estate Investment Trusts (REIT) are comparable to mutual funds for real estate investors.

REITs provide an opportunity to invest in large-scale properties and real estate portfolios in the same manner mutual funds offer diversification and professional management to investors in stocks and bonds. REIT investments are touted for diversified income streams and long-term capital appreciation.

Many REITs are traded on major stock exchanges, but there are non-listed public and private REITs as well. REITs are generally segregated into two core categories: Equity REITs and Mortgage REITs. While Equity REITs generate income through rental income streams and sales of the real estate portfolios, Mortgage REITs invest in mortgages or mortgage backed securities tied to commercial and/or residential properties.

Similar to sector-focused mutual funds, REITs have been created to invest in specific real estate asset classes. Some REIT offerings targeting specific asset classes include student housing, nursing homes, storage centers and hospitals.

REIT shareholders receive dividend distributions

Shareholders receive their share of REIT income via dividend distributions. REIT dividend distributions are allocated among ordinary income, capital gains and return of capital, each with a different tax consequence to the recipient.

Most dividends issued by REITs are taxed as ordinary dividends, which are subject to ordinary income tax rates (up to a maximum rate of 39.6%, plus a separate 3.8% surtax on net investment income). However, REIT dividends can qualify for lower rates under certain circumstances, such as in the case of capital gain distributions (20% maximum tax rate plus the 3.8 % surtax on net investment income). Additionally, the capital gains rate applies to a sale of REIT stock (20% capital gains rate plus 3.8% surtax).

What is an UPREIT?

An Umbrella Partnership Real Estate Investment Trust (UPREIT) provides tax deferral benefits to commercial property owners who contribute their real property into a tiered ownership structure that includes an operating partnership and the REIT, which is the other partner of the operating partnership. In exchange for the real property contributed to the UPREIT, the investor receives units in the operating partnership.

When the UPREIT structure is used, the owner contributes property to the partnership in exchange for limited partnership units and a “put” option. Generally, this contribution is a nontaxable transfer.

The owners of limited-partnership units can exercise their put option and convert their units into REIT shares or cash at the REIT’s option. This is generally a taxable event to the unit holder.

Tax deferral opportunities

When a taxpayer sells depreciable real property in a taxable transaction the gain is subject to capital gains tax (currently a maximum of 20%) and depreciation recapture tax (25%). The capital gain tax and depreciation recapture remain deferred as long as the UPREIT holds the property and the investor holds the operating partnership units. The advantage of this structure is that it provides commercial property owners, who might have significant capital gain tax liabilities on the sale of appreciated property, an alternative exit strategy.

It is common for taxpayers to negotiate some sort of standstill agreement where the REIT agrees not to sell the property in a taxable disposition for some period of time, usually five to ten years. If the REIT sell the property in a taxable disposition, it triggers taxable gain to the taxpayer.

The taxable gain is generally deferred when the real estate is transferred to the UPREIT. Generally, the tax deferral lasts until the partnership sells the property in a taxable transaction. However, a taxable event is triggered if the taxpayer converts the operating partnership units to REIT shares or cash.

We’ve got your back

If you have questions about UPREITs or their tax implications, we’re here to help. Contact Simon Filip at SFilip@krscpas.com or 201.655.7411.

Consider Converting to an S Corporation to Avoid Taxes

Posted by Simon Filip on

Consider Converting to S Corporation to Avoid Taxes

For closely held corporations still taxed as C corporations, the opportunities to avoid future taxes should be considered.

When converting a C corporation to an S corporation there are a number of tax issues that must be addressed.

C corporation vs. S corporation tax rates

A C corporation is taxed on its taxable income at federal rates up to 35%. Distributions of qualified dividends to individual shareholders are taxed again at a federal rate as high as 23.8% (the tax rate on qualified dividends is 15% or 20%, depending on certain adjusted gross income thresholds with an additional 3.8% surtax on net investment income for taxpayers with adjusted gross income over certain thresholds).

If a business elects to be taxed as an S corporation, there is only one level of taxation, at the shareholder level.

Generally, items of income, deduction, gain or loss from a pass-through entity pass through to its owners, while the entity itself is not subject to tax. The S corporation may therefore be favorable as it avoids double taxation.

Not every C corp is eligible

Not every C corporation is eligible to elect to be taxed as an S corporation. The current S corporation eligibility requirements are as follows:

  • No more than 100 shareholders
  • Shareholders who are all individuals (there are exceptions for estates, trusts and certain tax exempt organizations)
  • No nonresident aliens as shareholders
  • Only one class of stock

Mechanics of election

The S election requires the unanimous consent of the shareholders and is effective for any year if made in the prior year or on or before the fifteenth day of the third month of the year. Some states, such as New York and New Jersey, require a separate election be filed, while some states follow the Federal tax classification.

Built-in gains

The excess of the fair market value of the assets over their adjusted basis at the time of the S election is considered “built-in gain.” If any of this built-in gain is recognized during the 5-year period beginning with the first tax year for which the corporation was an S corporation, such gains remains subject to corporate-level tax. Any appreciation of assets that occurs post-S corporation election, is subject to only one level of taxation.

Here’s an example:

XYZ, Inc., a C corporation, was converted to an S corporation on January 1, 2017. On the date of the conversion, it owned real estate with a fair market value of $3 million and an adjusted basis of $2 million. The corporation’s net unrealized built-in gain would be $1 million. If the corporation had taxable income of $1.5 million and sold the real estate asset in 2019, the corporation would be subject to the built-in gains tax of $350,000 ($1 million x 35%). However, if the built-in gain assets were sold in 2023, the built-in gains tax would be a non-issue (zero built-in gain tax), since the fifth year of the recognition period passed.

For more about real estate and C corps, see my post Do You Hold Real Estate in a C Corporation?

Excess passive investment income

If an S corporation was previously a C corporation, it may have accumulated Earnings & Profits (“E&P) from years when it was a C corporation. A potential problem for an S corporation with E&P is the passive investment income tax.

If gross passive investment income (which includes income from interest, dividends, and certain rents) exceeds 25% of gross receipts, the corporation may be subject to tax on its net passive investment income. This is fairly common when a taxpayer makes an S election for a C corporation that owns rental real estate. In a year where an S corporation has both E&P and excess passive investment income, some of the excess net passive investment income may be subject to the tax at the highest corporate income tax rate. This does not apply to a year in which there is no taxable income.

The S corporation will still have a problem if there is no taxable income and the passive investment income tax does not apply. If the S corporation has both E&P and excess passive investment income for three (3) consecutive tax years, the S corporation status is revoked on the first day of the fourth year.

Tax planning can help minimize your taxes

The double taxation of C corporation income is very tax inefficient. With proper tax planning, the owners of a C corporation can minimize their total taxes by converting the corporation to S corporation status. As always, KRS CPAs is here to help you. Contact me at sfilip@krscpas.com or 201.655.7411 for assistance with C corporations and tax planning.

Key Features of the Proposed Trump Tax Plan

Posted by Maria T. Rollins on

KEY FEATURES OF THE PROPOSED TRUMP TAX PLANPresident Trump has proposed a detailed tax plan that will revise and update both the individual and corporate tax codes.

Here are some of the key plan elements that could affect individuals and small business owners, if enacted into law.

Top tax rates decrease

Currently the 2017 top tax rate on ordinary income is 39.6%. Under the Trump Tax Plan, the top rate on ordinary income will drop to 33%. He has also proposed lower rates throughout all tax brackets.

More taxpayers will pay the 20% tax capital gains. This 20% rate will kick in for all taxpayers in the top bracket ($127,500 if single and $255,000 if married filing jointly). Currently this rate doesn’t kick in until you earn more than $425,400 if single and $487,650, if married filing jointly.

One tax rate for businesses

Trump plans a single 15% tax rate for business income, whether the business is an S-corporation, partnership or Schedule C. Because sole proprietorships qualify, we may see more wage earners become self-employed business owners.

Under the Trump plan we would also see a 100% expensing of all asset acquisitions, with no limitation.

Capped deductions

For individual taxpayers, Trump is planning an overall limit on itemized deductions of $100,000 if single, and $200,000 if married filing jointly. Currently, itemized deductions are reduced by 3% for every dollar the taxpayer’s income exceeds $250,000 if single, and $300,000 if married filing jointly.

Elimination of the estate tax

Trump has proposed eliminating the estate tax. Still up for discussion is the gift tax or whether the estate tax will be eliminated all at once or phased out over time. Also, there would be no step-up in basis. It is unclear if under Trump’s plan the heirs would take the assets at the decedent’s basis or if appreciation on the assets is taxable at death.

Other key plan features for individuals

The Trump Tax Plan also eliminates:

  • Head of household filing status for single parents
  • Net investment income tax
  • Alternative minimum tax (AMT) for individuals

The plan increases the standard deduction from $6,300 to $15,000 for singles and from $12,600 to $30,000 for married couples filing jointly. It also taxes carried interest as ordinary income.

Other changes impacting businesses

Businesses will need to pay attention to these proposed changes as well:

  • Reduction in the corporate income tax rate from 35% to 15%.
  • Elimination of the corporate AMT.
  • Elimination of the domestic production activities deduction (Section 199) and all other business credits, except for the research and development credit.
  • Implementation of a deemed repatriation of currently deferred foreign profits, at a tax rate of 10%.

We’ve got your back

Of course, these were campaign proposals and we don’t know if they will become law. KRS CPAs will keep you updated on important revisions to the tax code via email radar and blog posts. If you aren’t already registered for our email radars and newsletter, sign up here.

 

2017 NJ Tax Changes Business Owners Need to Know

Posted by Maria T. Rollins on

NJ Taxes

In my last post I reported on key federal tax changes that small business owners need to know about. This post covers three significant tax changes in New Jersey.

NJ sales tax rates reduced

The New Jersey Sales and Use Tax will be reduced in two phases between 2017 and 2018. The rate decreased from 7% to 6.875% on and after January 1, 2017. The tax rate will decrease to 6.625% on and after January 1, 2018.

Transition rules do apply:

  • For items sold before 1/1/2017 but delivered after 1/1/2017, use the 6.875% rate
  • Leases in excess of 6 months entered into before 1/1/2017, use 7%.
  • Lease extensions or renewals after 1/1/2017, use 6.875%.
  • If an agreement is less than 6 months – use 6.875% for all periods that begin after 1/1/2017.
  • Construction materials delivered after 1/1/2017, use 6.875%.
  • If the construction materials are for use in unalterable building contracts entered into before 1/1/2017, the seller must collect 7%.
  • Service or maintenance agreements entered into before 12/31/2016, seller must charge 7%. This is regardless of whether or not the agreement covers periods after 1/1/2017, unless the bill for such services was issued after 1/1/2017.

KRS Tip: Check all your vendor invoices to ensure you’re being charged the correct amount, before you pay the invoice. If it is the incorrect amount, have the vendor revise the invoice. If you go ahead and pay the incorrect amount, it is your responsibility to go back to the state – not the vendor – to get a refund.

Urban Enterprise Zone designation expires for 5 NJ cities

Under the UEZ designation, businesses in certain economically distressed areas are eligible for incentives, including tax free purchases on capital investments, tax credits to hire local workers and the ability to charge just half the statewide 7% sales tax.

The UEZ designations for Bridgeton, Camden, Newark, Plainfield and Trenton were permitted to expire. These zones can no longer collect sales taxes at reduced rates.

Changes to New Jersey estate tax

A NJ resident who dies and has assets worth more than $675,000 has had his or her estate subject to NJ estate tax. That may sound like a lot of money, but if you own even a modest home in the northern part of the state, you’ll probably hit the $675,000 threshold.

As part of the bill that raised the gas tax in the state, the exemption will increase from $675,000 to $2 million for estates of residents dying on or after 1/1/2017 and before 1/1/2018.

We expect that the increased exemption will change if there is a democratic governor elected this year.

We’ve got your back

New Jersey tax regs grow increasingly complex and it can be hard for business owners to know how to save taxes. At KRS we assist our clients in minimizing tax liabilities by providing them with comprehensive tax planning, preparation and compliance services.

Contact partner Maria Rollins at 201.655.7411 or mrollins@krscpas.com if your company needs expert advice and assistance with its 2016 taxes.