PRESENTED BY: Don Warrant, CPA Dave Barrett, CPA

Slides:



Advertisements
Similar presentations
AATS LLC Accounting and Tax Solutions The Mortgage Forgiveness Debt Relief Act of 2007 and The Housing and Economic Recovery Act of 2008 Alan Yee Tax Partner.
Advertisements

Like Kind Exchanges: IRC Sec 1031  Sale of real estate Typically substantial amount of gain  Sec 1250: income to extent of accumulated depreciation taxed.
Real Estate Investment Chapter 8 Single-Family Dwellings and Condominiums © 2011 Cengage Learning.
Agenda 4/26 BA 128A Questions from lecture Hand in project
Individual Income Taxes C11-1 Chapter 11 Investor Losses Copyright ©2009 Cengage Learning Individual Income Taxes.
Chapter 16 Federal Taxation and Real Estate Finance © OnCourse Learning.
15-1 Individual Tax Consequences of Investment Activity  Timing issues in income recognition  Expenses related to investment activity  Tax basis of.
Comprehensive Volume C15-1 Chapter 15 Alternative Minimum Tax Copyright ©2010 Cengage Learning Comprehensive Volume.
McGraw-Hill Education Copyright © 2015 by the McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized.
10-1 Taxation of Regular (C) Corporations Distinguishing tax feature relative to other business entities: double taxation  Corporate income is taxed at.
Chapter 16 Federal Taxation and Real Estate Finance.
Real Estate Principles and Practices Chapter 16 Investment and Tax Aspects of Ownership © 2014 OnCourse Learning.
Chapter-10-1A- Property- Acquisition Howard Godfrey, Ph.D., CPA Professor of Accounting ©Howard Godfrey-2015.
Chapter 16 Corporations. Learning Objectives Determine the types of entities that can be classified as a corporation for federal income tax purposes Calculate.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
Real Estate Principles and Practices Chapter 16 Investment and Tax Aspects of Ownership © 2010 by South-Western, Cengage Learning.
McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 11 Chapter 11 Dispositions of.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 11 Dispositions of Equity Interests.
McGraw-Hill Education Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of.
Presented by Walter Copeland, CPA Heather Kovalsky, CPA Brimmer, Burek & Keelan LLP.
 Tax Tips for Real Estate Investors With Allan Madan.
Chapter 5 Introduction to Business Expenses Murphy & Higgins
Chapter 7 Investments.
©2007 Prentice Hall, Inc..
Forming and Operating Partnerships
Individual Income Taxes Copyright ©2010 Cengage Learning
Special Property Transactions
Forming and Operating Partnerships
©2009 South-Western, a part of Cengage Learning
Accounting 6160 Home Slides Howard Godfrey, Ph. D
Tax Consequences of Home Ownership
Forming and Operating Partnerships
Property Dispositions
Special Property Transactions
Principles of Taxation
Chap-11-1A-Property Disposition Cap. Assets, etc. Howard Godfrey, Ph.D., CPA Professor of Accounting ©Howard Godfrey-2015.
Chapter 7 Investments.
Forming and Operating Partnerships
ACEC/MA – Accounting & Finance Forum TAX REFORM TALK
Opportunity Zones Tax Cuts and Jobs Act 2017 October 24, 2018.
Introduction to the Tax Cuts and Jobs Act: Overview of What the New Federal Tax Law Means for Your Business and You Jon Kurrle, VP of Federal Government.
Opportunity Zones Introduction
Qualified Opportunity Zone Rules Initial Guidance Issued by the IRS and Potential Opportunities | November 2, 2018 Mark Leeds
Chapter 7 Investments.
©2010 Pearson Education, Inc. Publishing as Prentice Hall
Tax Reform Basics for the Qualified Business Income Deduction (199A)
Chapter 12 Partnership Distributions
Roth IRA 2/17/2019.
OPPORTUNITY ZONES AND Qualified Opportunity Funds
©2008 Prentice Hall, Inc..
Understanding Qualified Opportunity Zones
Individual / Corporate Tax Update November 15, 2018
Tax Reform Basics about Opportunity Zones
Opportunity Zones: Basic Overview & Key Concepts
Opportunity Zone LIHTC Structure Fund or Business
What are Opportunity Zones?
Small business tax Kumar Consulting CPA
© OnCourse Learning.
Opportunity Zones Overview and Guidance November 2, 2018.
March 27 – 29 Savannah, Georgia (Thank you Beth Mullen!)
Losses - Deductions and Limitations
Opportunity Zones US Federal Tax Rules
Qualified Opportunity Zones
Qualified Opportunity Zones
S Corporation Built-in Gains Tax Rules Summary and Illustrations
Acquisitions of Property
Opportunity Zone “OZ” Incentives
Qualified Opportunity Zones
June 19, 2019 CPA Continuing Education Society of PA
Presentation transcript:

PRESENTED BY: Don Warrant, CPA Dave Barrett, CPA June 6, 2019 Update on the 2018 Tax Act & Opportunity Zones PRESENTED BY: Don Warrant, CPA Dave Barrett, CPA

Don L. Warrant, CPA 30+ years of public accounting experience Specializes in tax planning and incentives for the real estate industry Tax specialty services practice leader State and Local tax practice leader Cost Segregation practice leader

David, R. Barrett, CPA 35+ years of public accounting experience Director in Freed Maxick’s Tax Practice Provides clients with specialized tax research, planning and representation services Frequently quoted in local publications and has made numerous appearances on radio and television programs Named in Money Magazine’s listing of the best tax practitioners in the country

Freed Maxick’s Real Estate Practice Entity structuring and incentive planning (LIHTC, NMTC, HTC, State and local grants, abatements, exemptions, etc.) Financial modeling and due diligence Engineered tax services Cost Segregation Studies Repairs and Maintenance studies Energy efficiency studies Traditional assurance and tax services

AGENDA Depreciation and expensing Qualified Business Income (QBI) deduction Business loss limitations Interest expense limitations Qualified Opportunity Zones

Depreciation & Expensing

Qualified Improvement Property Non-structural improvement to interior portions of nonresidential buildings placed in service after the date the building was first placed in service (COO date). Excludes enlargement of a building, elevators or escalators, or the internal structural framework of a building. Generally includes tenant improvements that are treated as real property. Currently assigned to a 39-year property and not eligible for bonus depreciation, subject to technical corrections to treat as 15-year property and eligible for bonus depreciation.

Bonus Depreciation For property acquired before Sept. 28, 2017: Qualified property is generally tangible property with a recovery period of 20 years or less, including computer software, the original use of which begins with the taxpayer. Includes qualified improvement property (39-year recovery period) 50% of cost basis may be deducted in the year placed in service Can election out class-by-class Can create or increase a tax loss Phases-out over 2-years starting in 2018 (50%, 40%) Excludes property subject to the alternative depreciation system Property is generally treated as acquired no later than the date a written binding contract for the property’s acquisition is first entered into. Special rules determine the acquisition date of constructed property

Bonus Depreciation For property acquired after Sept. 27, 2017: Adds used property (excludes any carry-over basis) Excludes qualified improvement property (pending technical corrections) Excludes the following businesses when average annual gross receipts exceed $25 million: Businesses with floor-plan financing Real property trades or business and farming businesses who elect out of the new limitation on business interest 100% deduction or upon election, 50% for first tax year ending after Sept. 27, 2017 Phases out over 4-years starting in 2023 Guidance provided in proposed regulations

Section 179 Expense Election Property placed in service before Jan. 1, 2018: Qualified property is generally tangible, depreciable, personal property, computer software, and “qualified real property” Cannot create or increase a tax loss $510,000 expense limitation $2.030 million beginning of phase-out Property placed in service after Dec. 31, 2017: Eliminates qualified real property Adds as eligible property: Qualified improvement property; The following improvements to non-residential real property: roofs, HVAC, fire protection and alarm systems, security systems Tangible personal property used predominately in furnishing lodging Beds, furniture, kitchen appliances, equipment $1 million expense (inflation adjusted)

Cost Recovery Periods Effective for property placed in service in taxable years beginning after Dec. 31, 2017, the TCJA made the following changes to recovery periods (in years): Prior Law New Law MACRS ADS MACRS ADS Residential rental buildings 27.5 40 27.5 30 Qualified improvement property 39 40 15 ** 20** ** The Act inadvertently omits language in section 168(e)(3)E and (g) providing a recovery period for QIP for cost recovery purposes.

QBI Deduction

QBI Deduction The Act provides that for taxable years beginning after 2017 and before 2026, an individual taxpayer generally may deduct 20% of QBI from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified REIT dividends and qualified PTP income, under new section 199A. 20% deduction based on the lesser of QBI or adjusted taxable income. Effectively reduces the top individual tax rate from 37% to 29.6% Limitations begin to apply when taxable income exceeds $157,500 ($315,000 for MFJ) Greater of 50% of W-2 wages, or 25% of W-2 wages and 2.5% of the acquisition cost of qualified property. Determined after applying other loss limitations (basis, at-risk, PAL rules)

Business Loss Limitations

Net Operating Loss Losses incurred in tax years beginning after Dec. 31, 2017 Unlimited carry over Limited to 80% of taxable income Losses incurred in tax years ending after Dec. 31, 2017** No carry back **Technical corrections may change to tax years beginning after Dec. 31, 2017.

Excess Business Losses The Act provides that, for any taxable year beginning after 2017 and before 2026, any excess business loss of a taxpayer other than a corporation is not allowed for the taxable year and excess business losses not allowed are carried forward and treated as part of the taxpayer’s net operating loss under the NOL rules. Applies when the combined losses allowed from all business activities for the tax year exceed $250,000 ($500,000 for married couples filing jointly). Example: Single Taxpayer has $300,000 of investment income and $300,000 of business losses. Before the TCJA, the taxpayer could offset the $300,000 of investment income by the $300,000 of business losses. After the TCJA, the taxpayer owes tax on $50,000 of investment income and the $50,000 excess business loss carries forward as a business net operating loss.

Interest Expense Limitations

Business Interest Expense Business interest expense is limited to the sum of Business interest income, 30% of adjusted taxable income, and Floor plan financing interest paid by certain vehicle dealers. Addback depreciation, amortization and depletion before 2022 Unlimited carry forward Small business exception. Average annual gross receipts are $25 million or less for the three-tax-year period ending with the preceding tax year and not a “syndicate”. Electing real property trade or business exception. Businesses that develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease, and/or broker real property can elect out but must use the ADS method to depreciate their non-residential real property, residential rental property, and qualified improvement property.

Qualified Residence Interest Principal residence and one other residence selected for the year Includes a house, condominium, cooperative, mobile home, house trailer, or boat. Home acquisition indebtedness Indebtedness incurred to acquire, construct, or substantially improve a qualified residence that is secured by the residence. Maximum indebtedness is $750,000 ($375,000 for single filers) for indebtedness incurred after Dec. 14, 2017. Exceptions: 2017 binding contracts that closed by March 31, 2018 Refinancing indebtedness incurred before Dec. 15, 2017 up to the outstanding loan balance as of the time of refinance.

Qualified Home Equity Indebtedness Indebtedness other than home acquisition indebtedness secured by a qualified residence. No deduction for alternative minimum tax purposes No deduction for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026 (previously, up to $100,000 of indebtedness could be treated as qualified home equity indebtedness). Election to apply interest tracing rules Reduces self-employment income, self-employment tax, and AGI Election is made by reporting the interest on the appropriate line of the tax return. Reg. § 1.163-10T(o)(5) Advisable to include an election statement with the return, but not required

Qualified Opportunity Zones

Overview New tax incentive program to promote investment in certain low-income communities designated by the IRS as Qualified Opportunity Zones (QOZ) Listed in IRS Notice 2018-48 https://www.cdfifund.gov/pages/opportunity-zones.aspx Three tax incentives: Defer paying taxes on capital gain from the sale or exchange of appreciated assets by investing such gain in a Qualified Opportunity Fund (QOF) within 180 days following such sale or exchange. Such gain may be deferred until the earlier of (i) when the investment is sold or exchanged, or (ii) December 31, 2026. Investors receive a step-up in basis equal to 10% of the original deferred gain if the QOF investments is held for at least 5-years, with an additional 5% basis step-up if the investment is held for 7-years. These basis step-ups can result in permanent exclusion from taxation of up to 15% of the originally deferred gain If the investor holds the investment in a QOF for at least 10-years, an elective basis adjustment provides a permanent exclusion from taxation for any appreciation in excess of the deferred gain.

QOF Any investment vehicle organized as a corporation or a partnership for the purpose of investing in QOZ property (other than another QOF) that holds at least 90% of its assets in QOZ property. Self certification as a QOF 90% asset test Determined by the average percentage of QOZ property on the last day of the first 6-month period of the taxable year of the fund, and the last day of the taxable year of the fund. Monthly penalty for failing the 90% asset test Based on the IRC Section 6621(a)(2) underpayment rate Distributed to each partner when organized as a partnership Penalty is waived upon showing of reasonable cause

QOZ Property QOZ stock. Any stock in a domestic corporation that is acquired after Dec. 31, 2017, at original issue in exchange for cash, and either was a QOZ business or is being organized as a QOZ business. QOZ partnership interest. Any capital or profits interest in a domestic partnership acquired after Dec. 31, 2017 solely in exchange for cash, and either the partnership was a QOZ business or is being organized as a QOZ business. QOZ business property. Tangible property used in a trade or business of a QOF, acquired after Dec. 31, 2017 by purchase from an unrelated person, and either the original use originates with the QOF, or the QOF substantially improves the property over a self- selected 30-month period.

QOZ Business At least 70% of all tangible property owned or leased is QOZ business property At least 50% of the total gross income is derived from the active conduct of a trade or business At least 40% of the intangible property is used in the active conduct of any such business Less than 5% of the average unadjusted basis of property is attributable to nonqualified financial property Stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property Excludes golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, or other facilities used for gambling, or any store whose principal business activity is the sale of alcoholic beverages for consumption off premises

IRC Section 1031 Comparison Description IRC Section 1031 QOZ Eligible property Real property only, no P/S interests, stock, or personal property QOZ business property (P/S interest, corporate stock, and tangible property) Identification of replacement property Required within 45 days No requirement Timing of investment Within 180 days of sale Reinvestment proceeds Entire sale proceeds Gain, or portion thereof Deferred gain recognition Upon sale of replacement property Dec 31, 2026 or year investment is sold if earlier Tax basis step-up None Upon meeting 5, 7, and 10-year holding periods for the QOF investment Related party sales No gain deferral unless a 2-year holding period is met No gain deferral unless sale to unrelated party

EXAMPLE OCT 1, 2019 - Susie sells AAPL stock for $1,500,000 - Cost basis = $500,000, Gain = $1,000,000 WITHIN 180 DAYS - Susie invests the gain (i.e. $1,000,000) into an QOF OCT 1, 2024 - $100,000 of Susie’s gain on the AAPL stock sale is “forgiven” OCT 1, 2026 - An additional $50,000 of Susie’s gain is “forgiven” DEC 31, 2026 - The remainder of Susie’s gain on the AAPL stock sale is (i.e. $850,000) “triggered” DEC 31, 2028 - Susie sells her interest in the QOF for $2,500,000 - No federal income tax is owed on $1,500,000 of appreciation

EXAMPLE (cont.) SUMMARY - Total gain realized = $2,500,000 - Amount subject to federal tax = $850,000 - Federal tax paid = $202,300 (23.8% x $850,000) - Federal tax avoided = $392,700 (23.8% x $1,650,000) NOTE If the FMV of the original $1,000,000 investment had decreased by $100,000 to $900,000 as of Dec 31, 2026, then tax is due on $900,000 minus Susie’s tax basis of $150,000 = $750,000. OBSERVATION If New York follows federal law, then the New York tax paid on Dec 31, 2026 = $74,970 (8.82% x $850,000) and the New York tax avoided = $145,530 (8.82% x $1,650,000). The combined federal and New York tax avoided = $538,230 ($392,700 + $145,530).

Illustrative QOZ Tax Deferral Timeline and Tax Benefits Capital gains proceeds (2) For gains invested by 12/31/2021 (3) For gains invested by 12/31/2019 (4) Assumes long-term capital gains tax rate of 23.8%

Quantifying the OZ Program federal tax benefits HYPOTHETICAL COMPARISON OF A FULLY TAXED INVESTMENT TO A QOF INVESTMENT Assuming investor has realized capital gain of $1,000,000 and can reinvest it in QOF within 180 days. Fully-Taxed Non-QOF Investment QOF Investment Duration 10 year hold Pre-Tax IRR 12.0% Federal Gains Tax Rate (1) 23.8% Original Capital Gain $ 1,000,000 Tax Liability (23.8%) 238,000 Net Cash to Invest $ 762,000 Original Capital Gain $ 1,000,000 No Tax Payable - Net Cash to Invest $ 1,000,000 Value at Year 10 $ 2,366,656 Value at Year 10 $ 3,105,848 Tax on Appreciation (23.8%) 381,908 Tax on Deferred Original Capital Gain (23.8%) (2) 202,300 After Tax Funds Returned $ 1,984,748 No Tax on QOF Appreciation - After Tax Funds Returned $ 2,903,548 After-Tax Gross IRR 7.1% After-Tax Gross Equity Multiple 2x Investable Proceeds $ 762,000 Peak Equity Outlay (incl tax payments) $ 1,000,000 Profit $ 984,748 Total Taxes Paid $ 619,908 After-Tax Gross IRR 11.2% After-Tax Gross Equity Multiple 2.9x Investable Proceeds $ 1,000,000 Peak Equity Outlay (incl. tax payments) $ 1,202,300 Profit $ 1,903,548 Total Taxes Paid $ 202,300 QOF INVESTMENT ECONOMIC ADVANTAGES: IRR Increase: +4.1% | EM Increase: +0.9x | 93% increase in profit | 67% tax savings | $417,608 tax saved Assuming 100% long-term capital gains at rate of 20% + 3.8% NIIT. Excludes state income tax. (2) $850,000 x 23.8% (1) Blended rate assuming 50% long-term capital gains of 23.8% and 50% short term capital gains at 39.6%. Excludes state income tax and the additional 3.8% tax on net investment income; (2) At a 15% step-up in basis, paid 12/31/2026 per OZ tax legislation; (3) Gross after-tax return before QOF General Partner compensation and fund overhead

Thank You This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. Freed Maxick CPAS, P.C., its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.