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Paycheck Protection Program (PPP) Second Draw Loans

Posted on December 22nd, 2020
Posted by Muhammad Akram, CPA

Congress has passed its spending bill, the “Consolidated Appropriations Act (CAA), 2021” on December 21, 2020 which includes Additional Coronavirus Response and Relief (ACRR). The President Trump has signaled he will sign the bill. ACRR includes a provision that provides $284 billion for paycheck protection program second draw loans. 

Eligibility Criteria for Second Draw PPP Loans

Prior PPP borrowers must meet the following conditions to be eligible for the second draw loans

  • Fewer than 300 eligible employees, on an affiliated company basis (or fewer than 500 eligible employees for businesses with multiple locations).
  • Have used or will use the full amount of their first PPP loan; and
  • Demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Eligible Entities

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Specifically excluded are public companies, lobbying entities, entities with China-based ownership and venue operators receiving aid under the venue grant section of the Act.

PPP Loan Criteria and Improvements

The maximum loan amount an eligible entity can receive is the lesser of $2 million- or 2.5-times monthly payroll costs incurred during the one-year period before the loan is made, or during calendar year 2019 (3.5 times monthly payroll if the entity’s NAICS code is 72: Accommodation and food Services). ACRR maintains the 60% payroll (40% non-payroll) expense requirement of the PPP Flexibility Act.

ACRR also makes the following improvements that can be retroactively applied to all PPP loans:

  1. Tax deductibility of all qualified expenses paid with PPP funds is allowed.
  2. PPP allowable and forgivable expenses are expanded to include operating expenses, property damage costs (caused by acts of civil unrest), supplier costs and worker protection costs (both operating and capital costs).
  3. Borrowers can now choose any 8- to 24-week period as their loan forgiveness covered period.
  4. Economic Injury Disaster Loan (EIDL) grants will no longer reduce PPP forgiveness.
  5. A simplified forgiveness application for PPP loans of less than $150,000 will be limited to borrower certifications.
  6. Forgiven PPP loan funds will be considered tax-exempt income and will increase owners’ basis in pass-through entities.

Application of exemption based on employee availability.

ACRR extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.

CAA also modifies or extends other individual and business-friendly provisions, including the employee retention tax credit, business meal deductions, retirement plan distribution relief and more.


2020 Tax Planning Strategies to Consider

Posted on November 24th, 2020
Posted by Gias Khan, CPA

2020 tax planning strategies have been difficult to advise. The COVID-19 pandemic made 2020 a year of uncertainty. To top it off the election results, on January 5, 2021 for run off senate seats in Georgia, may bring future tax changes. Before the close of the tax year there are effective steps to take now to save on your income taxes. These strategies can help for current and future returns, maximize retirement funds, reduce future estate taxes, and aid in cash flow management.

CARES Act

Firstly, the Coronavirus Aid, Relief, and Economic Security, CARES, Act made changes for both individuals and businesses.

  • Postponement of the required minimum distribution, RMD, in 2020
  • Changes to deductible charitable contributions in 2020
  • Waiver of 10% Penalty for early distribution for anyone under age 59½ for those who are diagnosed with COVID-19 experiencing adverse financial consequences resulting from quarantine, inability to work due to lack of child care, reduction of work, furlough, lay-off, or owner or operation of business forced to reduce hours due to COVID-19
  • Changes to certain retirement plan loans applying to those impacted by COVID-19

SECURE Act

Secondly, Setting Every Community Up for Retirement Enhancement, SECURE, Act also made change.

TCJA

Thirdly, the TCJA brought many changes to individuals and businesses.

Changes for individuals includes:

  • lower tax rates
  • no personal exemptions
  • higher standard deduction
  • reduced alternative minimum tax (AMT)
  • increased child tax credit

Business changes include:

  • reduced corporate tax rate of 21%
  • limits on business interest deductions
  • no corporate AMT
  • overly generous depreciation and expensing rules. A special 20% deduction rate for non-corporate taxpayers who had qualified business income from a pass-through entity

2020 Year End Tax Strategies

For this unusual year 2020 tax planning strategies we advise clients to be aware of the tax uncertainty that is possible. The uncertainty with a new president in office and the senate status left unknown may cause higher tax rates in the coming years than for tax year 2020. Here are other actions to take in order to reduce 2020 tax liabilities.  

  • Prepaying mortgage payment to accelerate the interest deduction
  • Accelerate purchases of business equipment and place in service for intended year
  • Pay any margin interest, at year end is only deductible if paid
  • Take advantage of the 20% deduction for qualified business income
  • Convert traditional IRAs to Roth IRAs, especially if loss of value with hopes to increase again
  • Best tax use of capital gains and losses, taxable gains apply $3,000 against ordinary income and carry forward the balance
  • Year-end gifts of appreciated property in order to shift taxable gain to lower bracket family
  • Gift money today to reduce future estate tax
  • Maximize health savings account, HSA, by contributing can lower your taxes
  • Dispose of passive activities for suspended losses
  • Increase withholding on salaries and wages to avoid estimated tax underpayment penalties
  • Planning for beneficiaries of qualified retirement plans and IRAs
  • Gift money in 2020 rather than later, probability of eliminating the at-death step-up in the basis of inherited assets, gift and estate tax exemption reduction possible as well
  • Strategize qualified charitable distributions, CARES Act raised limit of charitable donations to public charities from 60% to 100% of AGI
  • Donate proceeds of depreciated investments to offset realized gains, if itemize add to charitable contributions

Conclusion

These planning moves should be made by year-end to achieve maximum overall tax savings for 2020 and later tax years. Please reach out to us before the year end to see how we can help you!


PPP Loan Deductions

Posted on November 23rd, 2020
Posted by Gias Khan, CPA

The IRS provides guidance regarding PPP loan deductions as a tax expenses in relation to PPP loan forgiveness. Recently, the IRS released Revenue Ruling 2020-27 and Revenue Procedure 2020-51.

Revenue Ruling 2020-27 Scenarios of Disallowance

Two scenarios where disallowance can occur. Taxpayers receive the PPP loan and incur eligible expenses within the proper time period previously mentioned.

  1. A taxpayer applies to the lender for forgiveness of the PPP loan. By the end of 2020 the lender does not communicate with the taxpayer the status of the loan’s forgiveness.
  2. A taxpayer did not apply for forgiveness in 2020.  However, the taxpayer expects to qualify in 2021 for forgiveness.

Since both taxpayer situations expect to receive full loan forgiveness in both of the above scenarios. Deduction of the expenses is not allowed in 2020. This is in accordance with the Coronavirus Aid, Relief, and Economic Security, CARES, Act provisions. Taxpayers who receive PPP loans and incur or pay expenses eligible for forgiveness are non-deductible if expect to receive forgiveness of the loan. Does not matter if the taxpayer submitted PPP loan forgiveness application by the end of the table year or not.

Revenue Procedure 2020-51 Provides Safe Harbor

This procedure provides a safe harbor for taxpayers. It allows them to claim those expense as deductions in the following year. On 2021 tax return, if the PPP loan forgiveness is denied. If original income tax return for 2020 is filed in a timely manner, including extensions, the below taxpayers described can deduct some of all of the eligible expenses on the return. To meet the criteria for safe harbor a taxpayer must meet the following requirements:

  1. Eligible expenses the taxpayer incurs or pays in 2020 with no deductions on return because expectation is to receive forgiveness of the PPP loan.
  2. PPP loan forgiveness application submitted prior to end of 2020 or intends to with year end of 2020 in the following year.
  3. In the following year the taxpayer is notified by the lender that the PPP loan forgiveness was denied.

If a taxpayer meets the first two criteria but decides not to apply for PPP loan forgiveness in the following year, they are eligible under the safe harbor. The taxpayer can deduct a portion or all of the eligible expenses for the original 2020 income tax return, amended 2020 or following year return.


PPP Forgiveness Could Impact 2020 Taxes

Posted on November 13th, 2020
Posted by Iris Wang, CPA

The Paycheck Protection Program (PPP) loan forgiveness left many unanswered questions. Businesses were left with questions on how the PPP loan forgiveness will affect borrowers’ 2020 tax obligations. The key challenges are the timing of income recognition and deductibility of expenses.

Forgiveness Application Timeline

Each borrower can choose a covered period of 8 or 24 weeks or a cutoff date between that range. From the end of their chosen covered period, borrowers have 10 months to apply for forgiveness. The entire decision-making progress can take up to 150 days. Then the lender has 60 days to complete the review of the application and issue a decision to SBA. From that point, the SBA has 90 days to remit the forgiveness amount plus any interest accrued through the payment date back to the lender. It’s the lender’s responsibility to notify the applicant of the forgiveness amount received from the SBA. Then the borrower has 30 days to notify the lender that they requested the SBA review. The SBA does not have to accept the application in review, if the forgiveness application is denied by the lender.

It’s possible, considering this timeline, that borrowers will not know until 2021 how much of their loan will be forgiven.

PPP Loan Forgiveness in 2020 & 2021

The IRS issued Notice 2020-32 stated that the allowed expenses funded by PPP loan forgiveness are not tax-deductible because it would create a “double tax benefit”. The 2020 income tax return can reflect these expenses if the PPP loan forgiveness is denied. If you are able to apply and receive forgiveness in 2020, you have nontaxable income and nondeductible expenses in the same period for federal tax purposes. However, If you cannot get your final forgiveness notification before filing your 2020 tax return, questions on when these non-deductible expenses should hit the tax return are still unanswered. If you have deducted those expenses in 2020, you may need to file a 2020 amended tax return when you receive forgiveness as nontaxable income in 2021.

2020 Estimated Tax

In addition, 2020 estimated tax for pass-through entity owners should be based on 110% of their 2019 income taxes. For C Corporations, their 4th quarter estimated tax will be calculated and paid according to the calculated amounts.

We’re Here to Help

Lastly, Akram suggests taxpayers to refrain from filing their tax returns by the original due date. The IRS has not finalize the rule on how non-deductible expenses should be treated. For more information on your tax implications or if you have any PPP questions, please contact us.


2021 IRA Contribution

Posted on October 14th, 2020
Posted by Iris Wang, CPA

If you made 2021 IRA contribution or you’re thinking of making them, you may have questions about IRAs and your taxes. Here are some important tips about saving for retirement using an IRA.

1. You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.

2. You must have taxable compensation for 2021 IRA contribution. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses and alimony. If you’re married and file a joint return, generally only one spouse needs to have compensation.

3. You can contribute to an IRA at any time during the year. To count for 2021, you must make all contributions by the due date of your tax return. This does not include extensions. That means you usually must contribute by April 15, 2022. If you contribute between Jan. 1 and April 21, make sure your plan sponsor applies it to the right year.

4. In general, the most you can contribute to your IRA for 2021 is the smaller of either your taxable compensation for the year or $6,000. If you were age 50 or older at the end of 2021, the maximum you can contribute increases to $7,000.

5. You normally won’t pay income tax on funds in your traditional IRA until you start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.

6. If you contribute to an IRA you may also qualify for the Saver’s Credit. The credit can reduce your taxes up to $2,000 if you file a joint return.


Business Valuation

Posted on September 25th, 2020
Posted by Gias Khan, CPA

How to determine a business valuation? Business owners are knowledgeable of the facts and circumstances surrounding a business interest. They take a close look at what they are buying before they make an offer.

How to apply Discounts for Lack of Control and Marketability?

Like most entrepreneurs, they like to be in charge, and they prefer investments that they can readily convert into cash should they so desire.

Therefore, business owners are generally not willing to pay the pro-rata value for a minority interest in a business when the interest lacks control and marketability.

Is Business Valuation an Art or Science?

To assess appropriate discounts for lack of control and marketability, call Akram Business Valuation Team regarding resources such as those in this discussion, then ensure the selected discounts are appropriate based on the factors specific to the company and interest being valued.


Payroll Taxes Were Deferred by President Trump

Posted on September 10th, 2020
Posted by Annie Kelsey

The IRS issued guidance, (Notice 2020-65) , on August 28, 2020 and  implemented President Trump’s Presidential Memorandum on the deferral of the withholding, deposit and payment of the employee share of social security tax for the period from Sep 1, 2020 through Dec 31, 2020.

We anticipate further guidance from the IRS on the matter of this Notice.

The relief described in the Presidential Memorandum is confirmed by the Notice that it is a deferral, NOT a tax break.

Payroll Taxes are Deferred until April 30, 2021

The responsibility to pay payroll taxes for wages paid from September 1 – December 31, 2020 are postponed until January 1, 2021 ending April 30, 2021.

The deferred taxes on wages are to be withheld and collected from wages paid, including normal payroll taxes on their wages during the beginning period of 2021.

Penalties, interest, and additions to tax are to begin accruing on May 1, 2021 on any unpaid payroll taxes.  The burden remains on the employer to pay the deferred tax before May 1, 2021.

The payroll tax deferral is applicable to any employee’s pre-tax wages payable on a pay date within the period of September 1- December 31, 2020 for a bi-weekly pay period that is less than $4,000 or equivalent amount with regard to other pay periods.

Eligibility

The eligibility for this deferral is prepared on a pay period-by-pay period basis.  An employee can qualify for one period and not the next. This can occur for instance if an employee receives a bonus that places the employee above the threshold, but can be eligible again in a subsequent period.

It seems employers can regulate whether or not to partake in this payroll tax deferral initiative. It is left unclear if employees can opt out if their employer implements the program.

The Notice, however, is not intuitive of what occurs to employees which leave their employer. If needed, it does note employers can make agreements to collect on deferred taxes from employees.

The Trump administration wants these deferred taxes to ultimately be forgiven, this is reliant on the upcoming Presidential and Congressional election.


The SEC Expands the Accredited Investor Definition

Posted on September 4th, 2020
Posted by Iris Wang, CPA

The Securities and Exchange Commission (SEC) expands the “accredited investor” definition on August 26, 2020. Individual investors who did not meet net worth or income tests, no matter their financial situation, were denied investment opportunities.  

In other words, investors will qualify as accredited investors established on professional knowledgeexperience, or certifications to the existing tests for net worth or income.

These amendments are a way for the SEC’s effort to improve and simplify the investment offering structure. In doing so, the SEC wanted to expand investment opportunities while retaining sufficient investor protections and promote capital formation.

Therefore, expanding the accredited investor definition added new categories to qualifying natural persons and entities. The amendments and order become effective 60 days after publication in the Federal Register.

The amendments revise Rule 215, Rule 501(a), and Rule 144A of the Securities Act.

The amendment to Rule 215 replaces the existing definition with a cross reference to the definition in Rule 501(a).

Amendments to the accredited investor definition in Rule 501(a):

  • new category that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials. Holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the SEC with flexibility to reevaluate or add certifications, designations, or credentials in the future.
  • included natural persons who are “knowledgeable employees” with respect to investments in a private fund
  • added to the list of entities that may qualify were LLCs with $5 million in assets can be accredited investors and add SEC and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs)
  • add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments” in excess of $5 million, and that was not formed for the specific purpose of investing in the securities offered
  • included “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act
  • introduce the term “spousal equivalent” so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

Additionally, the amendments expand the definition of “qualified institutional buyer” in Rule 144A. Now include LLCs and RBICs if they meet the $100 million in securities owned and invested threshold in the definition. 

The Amended Rule will become effective 60 days after its publication in the Federal Register (the “Effective Date”).

In conclusion, hedge funds should update the subscription agreements to reflect the expanded accredited investor definition on the effective date.

Please reach out to your legal counsel for amending the subscription documents.


Home Office Deduction During COVID-19

Posted on August 28th, 2020
Posted by Annie Kelsey

COVID-19 has greatly impacted how we work. Under this new normal, millions of people started working from home. Who Qualifies for Home Office Deduction?

Historically, the home office deduction has been available to anyone who has to work from home. Tax Cuts and Jobs Act (“TCJA”) of 2017 had limited home office deduction.

You need to have self-employment income to take advantage of home office deduction. Home office deduction is not available for W-2 employees.

Some companies are reimbursing their W-2 employees’ home office expense.

There are two basic requirements for your home to qualify as a deduction: (i) used regularly and exclusively for work and (ii) your principal place of business.

The home office must be a separately identifiable space and taxpayer use exclusively and regularly for business and it cannot be used for personal purposes. 

What Qualifies as Exclusive Use & Principal Place of Business?

A home office is the principal place of business. It is possible to have a home office and conduct business at a location outside the home. Taxpayer should conduct all the business activities there.

If you have in-person meetings with customers or clients in your home as a normal course of business, you can deduct your expenses for the part of your home used exclusively and regularly for business.

Home office Expenses

Expenses that are deductible include: real estate taxes, home mortgage interest, mortgage insurance premiums, and casualty losses attributable to a federally declared disaster.

There are two methods you can use to calculate the deduction-Regular Method and Simplified Option.

Regular Method

It is computed based on the “business percentage” square footage used for the business divided by the total square footage of the home.

Simplified Method

$5 will be deducted for every square foot used for business up to 300 square feet under the simplified option.

Conclusion

Sole proprietors and independent contractors report home office deduction on Schedule C and Partners from pass-through entities report on Schedule E.

Remember to keep all records that may help you to calculate your deduction. Consult Akram regarding the specific circumstances.


RMD Relief and Estate Planning Opportunities

Posted on August 28th, 2020
Posted by Muhammad Akram, CPA

We would like to bring to your attention to rollover relief and estate Tax planning opportunity for late 2020.

Time to Maximize Estate Planning Opportunities

Under the Biden presidency, estate tax exemption could be in jeopardy.

According to the proposed plan and the recently issued Biden-Sanders Unity Task Force Recommendations, Biden’s tax regime could:

1. Return estate tax exemption to the historical norm because slashing the gift and estate tax exemption from the current $11.58 million in 2020 down to as low as $3.5 million to 2009 level. Estate tax rates could increase from its current 40% rate to 60% or higher.

2. Eliminate the step-up in basis for inherited assets. Because currently any heir can minimize tax liability when they sell assets they’ve inherited from someone at death due to the step-up in basis rule.

Although taxpayers cannot control the tax climate.

Strategic gifting could have a significant positive effect on the overall tax liability faced by a wealthy taxpayer’s family.

Rollover Relief Provided by CARES Act Extended to 8/31/2020

Taxpayers should take advantage regarding 60-day rollover period for any RMDs already taken this year.

The CARES Act enabled any taxpayer with a RMD due in 2020 from a defined-contribution retirement plan, including an IRA, to skip those RMDs this year.

This includes anyone who turned age 70 1/2 in 2019 and would have had to take their first RMD by April 1, 2020. This waiver does not apply to defined-benefit plans.

IRA owner who has already received a distribution that would have been a RMD in 2020 can repay the distribution to the IRA by August 31, 2020.


The DOL Opens 401(k)s to Private Equity

Posted on August 26th, 2020
Posted by Muhammad Akram, CPA

The U.S. Department of Labor (” DOL”), made it possible for 401(k) contributors to invest in private equity funds. While there are restrictions / limitations and 401(k)s do not have the same access as defined benefit plans, this change opens new opportunities for investors.

401(k) Restrictions

Sponsors of 401(k) plans and other defined contribution plans, prior to the latest DOL guidance, did not allow private equity or hedge funds as investment options.

These types of funds would not meet the fiduciary responsibility standards under the Employee Retirement Income Security Act of 1974.

Investors could only invest money in these funds directly if they met the accredited investor criterions which require that they have a net worth of over $1 million or earned more than $200,000 per year, or $300,000 if married filing jointly.

New DOL Modification

The DOL modified the rules to make private equity funds more available. 401(k) investors can invest in broader funds. The private equity investment must be part of a larger, diversified fund that is more liquid.  Funds that have a private equity component such like:

  • Mutual
  • Target date
  • Asset allocation
  • Funds of funds

Retail investors are more likely to need their cash short-term than institutional investors, so the private equity structure with liquidity limitations could be challenging.

Implementation

The 401(k) plan administrators have to decide whether they will offer these private equity-based funds to their participants. Large brokerage firms will also need to determine whether they will add private equity as part of their menu of funds available to 401 (k) retirement plans.

The total 401(k) market is approximately $5.6 trillion, so even if only a small fraction of investors move into this investment class, it will provide a large new source of capital to the private equity sector.

Hedge Fund Restrictions Remain

The DOL only modified rules for private equity funds. Restrictions still apply for hedge funds. It is still possible that they will re-evaluate the rules for hedge funds and other alternative asset classes in the future.

The fact that hedge funds were not included in this ruling should not be considered as a final decision on their future status as 401(k) plan investments.


Amended U.S. Individual Tax Return can be e-filed

Posted on August 24th, 2020
Posted by Iris Wang, CPA

Form 1040-X (Amended U.S. Individual Income Tax Return) is used to correct Form 1040 and Form 1040NR to make certain elections after the prescribed deadline; to change amounts previously adjusted by the IRS; and to make a claim for a carryback due to a loss or unused credit. 

Taxpayers can now e-file Form 1040-X. Taxpayers will now be able to amend their Forms 1040 by filing Form 1040-X electronically using commercial tax-filing software. For now, only 2019 Forms 1040  can be amended electronically. Form 1040-X is one of the last major individual tax forms that taxpayers couldn’t e-file. About 3 million Forms 1040-X are filed by taxpayers each year.

Taxpayers still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Taxpayers filing their Form 1040-X electronically or on paper can use the “Where’s My Amended Return?” online tool to check the status of their amended return.  


Tax Benefits for Real Estate Professionals

Posted on August 21st, 2020
Posted by Iris Wang, CPA

Real Estate Professionals has the potential for additional tax benefits. Rental real estate activities are considered passive activities. Additionally, a real estate professional is allowed to deduct losses against any ordinary income.

Three (3) Categories of Real Estate Activities

  1. Passive. Firstly, real estate activities are treated as passive activities and can offset losses from a passive activity against passive income.
  2. Active Participation (Rental Real Estate Activities). Secondly, a taxpayer actively participates with at least 10% interest in rental real estate activity may offset up to $25,000 of ordinary income with passive activity loss.
  3. Real Estate Professional. Thirdly, Under Sec. 469 (c) (7), a real estate professional can deduct 100% of all real estate losses against ordinary income. A real estate professional will be treated as nonpassive if  he materially participates in rental activity. Therefore, to materially participate in a real property trade or business, the taxpayer must be involved in the operations of the activity on a regularcontinuous, and substantial basis.

Real Estate Professionals must Meet a Two-part Test

  • Perform more than half of the personal services during the tax year in real property trades or businesses and materially participate. Including, any work performed by an individual in connection with a trade or business is personal service. If an employee owns 5% of the real estate business, his hours should be counted.
  • During a tax year no less than 750 service hours should be performed for the real estate business. The types of real property trades or businesses are real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage. Taxpayers can also informally group together two or more of the activities listed in the statute into one real property trade or business.

Real Estate Professionals Are Not Subject to NIIT

Therefore, rental income is not subject to self-employment tax and Section 1411 Net Investment Income Tax (NIIT) does not apply under safe-harbor rules for real estate professionals. A taxpayer’s net investment income includes interest, dividends, annuities, royalties, and rent. In addition, the NIIT applies at a rate of 3.8% to taxpayers that have income above certain thresholds ($200,000 for single and $250,000 for married filing jointly).

For instance, a real estate professional gross rental income and gain/loss resulting from the disposition of property used in the rental real estate activity will not be included in the net investment income.

Example:

DescriptionPassiveActive Participate*Real Estate Professional
Ordinary Income (W-2)$90,000$90,000$90,000
Dividend & Interest Income$10,000$10,000$10,000
Rental Income/(Loss) After Expenses($50,000)($50,000)($50,000)
Total Taxable Income$100,000$75,000$50,000
Total Federal Taxes$24,000$16,500$11,000

Conclusion

In conclusion, taxpayers should prepare time logs regarding the details of services rendered including the time spent in performing the services and keep other records (credit card expenditures, invoices, and phone records).

Additionally, with the 3.8% surtax on net investment income, taxpayers should focus on their level of participation in real estate activities. Please consult with your tax advisor at Akram to determine if you meet real estate professional criteria.


Master LLC Offers Benefits and Savings

Posted on August 18th, 2020
Posted by Iris Wang, CPA

Series Limited Liability Company (SLLC) : A series LLC allows a business owner to divide multiple investments and debts, while operating each LLC as a separate entity with its own name, bank account, and recordkeeping. Under the master LLC, each separate entity can conduct business independently and segregate membership interests, assets, liabilities, and operations.

Businesses have the option to have different members and managers to operate each entity and may choose to grant each manager different rights and responsibilities.

Each entity can acquire its own contracts, pay its own debts and buy its own assets without altering the other entities under the SLLC.

An SLLC offers significant liability protection. Similar to a corporation with subsidiaries but without having to pay supplementary formation fees. Similar to regular LLCs, series LLCs are also more flexible and easier to form than a corporation. 

Series LLC Formation : Presently, not all states allow the formation of series LLCs. Series LLCs can be formed in:

Alabama, Delaware, The District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wyoming, Wisconsin, and Puerto Rico. In California, you cannot form an SLLC, although you can register an SLLC from another state as a Foreign SLLC.

Forming a SLLC is similar to a traditional LLC and requires to file Articles of Organization with the Secretary of State. In the Articles of Organization, the plans and authorization for subset LLCs should be mentioned. One must create operating agreements to detail the guidelines for the complete operations of the master SLLC. Then create subsequent operating agreements for each entity under the master. Each operating agreement should outline any unique rules applicable to the individual entity.

Series LLC Conversion :  Already own an LLC? You can make the switch to an SLLC. The process will vary by state. The LLC members have to file an amendment to the Articles of Organization declaring the conversion from an LLC to a series LLC.  Additionally, a new operating agreement for the series LLC needs to be prepared specifying how the master LLC will be managed. We recommend to use “SLLC” in the official title.

Tax Filing The master LLC is required to file a tax return including information for all of the series LLC’s.

Akram will guide you to structure, tax treatment at the federal level may be different than at the state level


The IRS Restricts Carried Interest Preferential Tax Treatment

Posted on August 5th, 2020
Posted by Muhammad Akram, CPA

The IRS proposed a guidance (REG-107213-18) under section 1061 often referred as the “carried interest” rules. The IRS proposed regulations restrict preferential tax treatment for hedge fund managers.

Tax Cuts and Jobs Act (TCJA) added section 1061 and re-characterizes partner long term capital gains holds one or more applicable partnership interests as short term capital gains.

A partnership interest which a taxpayer holds in connection with substantial services performed, is an applicable partnership interest (API)

Hedge fund and private equity managers should hold the investments for 3 years to get 20% long-term capital gains rate. Otherwise they would have to pay ordinary income tax rates, which is currently capped at 37%.  However, private equity funds generally hold investments longer than 3 years. They will not have a significant impact under the carried interest rules. 

Gains Excluded From Section 1061

Section 1231 gainSection 1256 gain, and qualified dividends, are not subject to the re-characterization rules of Section 1061

Once an API Always an API

The proposed regulations provide that once a partnership interest is characterized as an API, it remains an API and never loses that characteristic.

If the retired partner continues to hold the partnership interest, it remains an API.

Carried Interest Held by an S Corporation

An API does not include any interest in a partnership directly or indirectly held by a corporation. The IRS notified taxpayers that, for purposes of Section 1061, the term “corporation” does not include an S corporation. Therefore, carried interests held by an S corporation are subject to the 3-year holding period requirement. 

Carried Interest will be Taxed as Ordinary Income

Lastly, it requires an Investment partnership to provide the taxpayer with the information necessary in which a taxpayer holds an API. The proposed regulations provide that this information includes:

  • The API 1 year distributive share amount;
  • 3 Year distributive share amount;
  • Long-term capital gains and losses allocated to the taxpayer that are excluded from IRC Section 1061 under Proposed Reg. Section 1061-4(b)(6); and
  • Capital interest gains and losses allocated to the taxpayer.

Without a doubt, penalties will apply to partnerships that fail to comply with the reporting rules set forth in the proposed regulations.

Conclusion

Proposed regulations amend existing regulations on holding periods to clarify the holding period of a partner’s interest in a partnership that includes in whole or in part an applicable partnership interest and/or a profits interest.

For an API to qualify for long-term capital gain treatment, resulting from the performance of investment services, the carried interest must be held for 3 years.

The proposed regulations clarify how to apply the holding period when a partner holds an API for fewer than 3 years, but the partnership sells an asset it held for more than three years.

Once adopted as final, the proposed regulations apply to tax years beginning on or after said date.


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