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The modern historic preservation movement in the United States is often traced to one galvanizing loss: the demolition of New York City’s original Pennsylvania Station in 1963. Completed in 1910, the original Pennsylvania Station was an architectural marvel and grand transportation hub, featuring soaring columns, huge waiting rooms, and natural light streaming through its glass ceilings. The dismantling of this architectural masterpiece shocked the public and galvanized activists, architects, and policymakers to fight for the protection of historic landmarks. Its destruction inspired legislative action at the city, state, and federal levels, and fundamentally shifted historic preservation from a niche concern to a mainstream political and cultural force.

For over half a century, Pennsylvania Station stood as a majestic gateway to the city and embodied a simple civic ideal: that everyday movement through a city could feel grand. However, by the late 1950s, the station’s owner, the Pennsylvania Railroad, faced financial hardship and sought to capitalize on the valuable Manhattan real estate. In 1963, the Railroad sold the air rights and crews began dismantling the building to make way for a sports arena (Madison Square Garden) and an office complex. New Yorkers watched, dismayed, as the marble and granite came down and a landmark was carted off in pieces. From that wound, preservation as we know it—local, state, and federal—took shape.

No place felt the shock more directly than New York City, and no city did more to ensure it wouldn’t happen again. In 1965, New York City enacted the Landmarks Law and created the Landmarks Preservation Commission (LPC). The law empowered the LPC to designate individual landmarks and historic districts. Almost immediately, the law began to shape development. The SoHo–Cast Iron Historic District preserved hundreds of 19th-century iron-fronted buildings that, only a few years earlier, were slated to be torn down. Brooklyn Heights, Greenwich Village, and other districts across the city were created, anchoring neighborhood identity and reinvestment.

The most significant legal test came with Grand Central Terminal. After the LPC denied a plan to top Grand Central with a large office tower, the owner sued. In 1978, the U.S. Supreme Court upheld the city’s right to protect historic landmarks against redevelopment, thus validating landmark regulation as a legitimate exercise of government power that cities nationwide would adopt.

If Penn Station was the spark, the National Historic Preservation Act of 1966 (NHPA) supplied the national framework. Passed just a year after New York City’s Landmarks Law, the NHPA created the National Register of Historic Places, the Advisory Council on Historic Preservation, and a nationwide network of State Historic Preservation Offices. Crucially, the NHPA required federal agencies to consider the impact of projects on historic sites, a process known as the Section 106 Review.

Later, Congress passed the Tax Reform Act of 1976, which, for the first time, introduced tax incentives for rehabilitating historic buildings, further encouraging preservation. Over the next two decades, Congress further refined federal historic rehabilitation tax incentives, which turned preservation from a regulatory hurdle into a pro-investment opportunity. Across the country, mills, depots, warehouses, schools, and theaters found new life as housing, offices, and cultural venues because the numbers finally worked out.

In 1980, the New York State Historic Preservation Act established the State Register of Historic Places and codified the role of the State Historic Preservation Office. Small cities and rural counties in New York State—far from Midtown Manhattan—could now designate main streets, industrial sites, and farmsteads as historic landmarks, and leverage that status in planning, grants, and tax incentives.

What began as a fight to save monumental buildings has evolved into a broader understanding of what deserves care. Cultural landscapes and traditional neighborhoods, sacred sites and civil-rights landmarks, architectural marvels and charming main streets—all fit under the preservation umbrella. However, the modern preservation movement is not without its critics. Detractors argue that preservation efforts can lead to gentrification, where property values in designated historic districts rise, often displacing original residents. Others point to bureaucratic delays that frustrate developers and homeowners who face restrictions on making improvements to buildings, or how strict preservation laws have been blamed for limiting new housing construction and worsening the affordability crisis.

While there were scattered efforts to save historic buildings before the 1960s, the dismantling of the original Pennsylvania Station served as a powerful wake-up call for a public that had taken its architectural heritage for granted. If the original terminal had survived, it would surely still awe. But its destruction did something remarkable: it created a historical preservation movement that is no longer about nostalgia versus growth, but about channeling growth through the lens of the places people cherish. In that sense, Penn Station’s absence continues to shape the city, the state, and the country—by ensuring the next treasured place has a fighting chance to endu

This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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In a compensation landscape shaped by rising costs and increasing employee expectations, benefits have become not just a perk, but a strategic driver of employee satisfaction and retention. Offering benefits doesn’t have to mean adding expensive coverage or ratcheting up your margins; there are ways to offer value and save on taxes at the same time.

Section 125 Plans: Real Tax Savings for Small Businesses

Section 125 plans, also called cafeteria plans, are IRS-sanctioned programs that allow employees to pay for specific expenses such as health insurance, dependent care, and medical out-of-pocket costs using pretax dollars. In turn, employers reduce their payroll tax liability. Everyone wins.

While these plans have been around for decades, they’re often ignored or misunderstood. Many business owners assume they’re too complex, too expensive, or only make sense if you’re already offering a full benefits package. In reality, Section 125 plans scale well—even down to the smallest teams—and can deliver real tax advantages with minimal cost or effort.

How It Works

Under a Section 125 plan, employees agree to take a portion of their compensation in the form of qualifying benefits instead of cash. Because those benefits aren’t subject to income or payroll tax, the employee takes home more—and the employer pays less.

For employers, that means a 7.65% savings on every dollar processed through the plan. For employees, it can mean 20–40% savings depending on their income and location.

There are a few types of Section 125 structures, and even if you’re not ready to roll out a full, expensive package, there are still ways to bring real value to your employees—without spending a dime out of pocket.

If you’re not offering a health plan—or any benefits at all—you can still put Section 125 to work. One of the most accessible entry points is the Premium-Only Plan (POP). It allows employees who buy their own health insurance to pay their premiums with pretax dollars, reducing their income tax burden. From your side as the employer, any payroll run through a POP is exempt from FICA taxes. You’re not footing the bill for anyone’s coverage—just enabling the tax advantage.

Another underused tool is the Dependent Care Assistance Plan (DCAP). This lets employees set aside up to $5,000 a year for childcare expenses like daycare or after-school programs. These contributions also come out pretax, lowering both the employee’s taxable income and the employer’s payroll tax exposure. Even if only a couple of employees participate, the savings add up quickly.

Setting up either of these plans is relatively simple. Employers need a compliant plan document and a third-party administrator (TPA) to manage contributions and claims. There’s a modest set-up cost, but no ongoing funding requirements. These plans can run quietly in the background, offering measurable tax relief with minimal overhead.

This kind of lightweight infrastructure is especially useful for businesses in growth mode, those that can’t yet afford traditional benefits but want to put scaffolding in place to get there.

Ready to Level Up? FSAs and HSAs

Once an employer offers a group health plan, cafeteria plan options expand significantly. Health FSAs (Flexible Savings Accounts) are the most common add-on. In 2025, employees can contribute up to $3,300 in pretax dollars to cover copays, deductibles, prescriptions, and other medical expenses. The trade-off? The employer must make the full annual amount available on day one—even if the employee hasn’t yet contributed it via payroll. That introduces a modest cash flow risk, particularly if someone quits midyear.

HSAs (Health Savings Accounts), by contrast, are tied to high-deductible health plans (HDHPs) and belong entirely to the employee. The funds roll over from year to year and can even be invested. An employer is allowed (but not required) to contribute. Because of the triple tax advantage—pretax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses—HSAs are especially attractive to younger or higher-earning employees thinking long-term.

Offering either of these options signals to employees that their employer is serious about supporting their health and financial wellbeing. It also sharpens the employers’ tax position: every dollar run through an FSA or HSA arrangement reduces payroll tax exposure. Over time, that can produce significant savings even for a modest-sized team.

Why This Matters

Offering benefits sounds expensive—until you realize that not offering anything is more expensive in the long run. High turnover, poor retention, and unnecessary tax costs add up. If you’re an employer looking for a way to bridge the gap between no benefits and a full benefits package, Section 125 is the answer.

Putting a plan in place—even a modest one—creates structure, builds trust with employees, and lays the groundwork for more robust offerings down the road. It’s a quiet signal that, as a committed employer, you’re investing in people without breaking the bank.

Section 125 plans aren’t flashy, but they’re smart. They’re one of the few moves that save money, reduce friction, and scale with you as your business grows. If you’re looking for a cost-effective way to do right by your team—and your bottom line—this is the place to start.

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A decade into the Great Depression, the U.S. housing market was barely breathing. Credit had evaporated, foreclosures were mounting, and homeownership—once the cornerstone of the American dream—was fading fast.

With the housing market in freefall, President Franklin D. Roosevelt had two options: stand back and watch, or redraw the rules entirely. He picked up his executive pen, and in 1938, Fannie Mae was born.

“Main Street, Broadway, the mills, and the mines will close if half the buyers are broke. I cannot escape the conclusion that one of the essential parts of a national program of restoration must be to restore purchasing power to the farming half of the country.“

Franklin D. Roosevelt, in a nationwide radio address, April 7, 1932, via The American Presidency Project

Not a typical government agency and not quite a private company, it was a strange hybrid—a government-sponsored enterprise, or GSE. Its job: to buy up mortgages, free up bank capital, and restore the flow of home loans.

It worked. Too well, some would say.

By the late 1960s, Fannie Mae had grown into a financial giant, dominating the secondary mortgage market and holding massive sway over U.S. housing finance. Recognizing the risk of an institution that was well-intentioned but growing too powerful, policymakers introduced some healthy competition in the form of a little brother for Fannie: Freddie Mac, launched in 1970 to keep the market balanced and avoid monopolistic control. While not direct rivals, the two GSEs developed slightly different pricing models and operational styles—subtle distinctions that gave lenders reasons to favor one over the other. That quiet competition helped the system stay efficient and responsive.

In building a secondary mortgage market, where loans could be efficiently packaged and sold to investors, they didn’t just solve a Depression-era crisis; they created a system that would go on to anchor the American economy for generations.

The Collapse of Two Titans

During the 2003–2007 housing bubble, private investment banks led the subprime charge—but Fannie Mae and Freddie Mac weren’t far behind. Eager to defend their turf, they loosened underwriting standards and bought huge volumes of securities backed by risky loans. Fannie, in particular, dove deep into subprime territory.

By the time the bubble burst, the GSEs had over $5 trillion in combined obligations and were, according to the Financial Crisis Inquiry Commission, “grossly undercapitalized.”

Foreclosures soared. The market seized up. And suddenly, Fannie and Freddie were the last major buyers still standing—forced to keep purchasing mortgages, even the toxic ones, to keep the system from collapsing.

“Today, the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, has determined that these housing mortgage companies cannot continue to operate safely and soundly and fulfill their public mission, posing an unacceptable risk to the broader financial system and our economy. FHFA has announced that it will place the companies in conservatorship and appoint new leadership.“

George W. Bush, in a televised national address from the White House, September 7, 2008, via The American Presidency Project

In September 2008, the government stepped in. Both GSEs were placed under conservatorship—a legal limbo where they remained technically private but were fully controlled by a federal regulator. Their boards were sidelined, profits rerouted to the Treasury, and key decisions handed over to Congress. The bailout was massive. They ended up drawing $191.4 billion from taxpayers—an extraordinary intervention that few saw coming, and even fewer forgot. Shareholders were not spared; stock values collapsed, dividends were halted, and their equity was effectively wiped out. And yet, despite the scale of the rescue, the companies themselves rebounded. As of today, they have paid $279.7 billion to the Treasury, generating over $88 billion in net gains for taxpayers—not shareholders.

What began as a stopgap intervention has become a long-term arrangement—and their fate has been in limbo ever since.

Trump’s Privatization Push

A few months ago, President Donald Trump announced he was “giving very serious consideration” to privatizing Fannie Mae and Freddie Mac. It wasn’t his first time. He’d pushed for it in his first term but ran into a wall of political resistance, competing priorities, and the sheer complexity of pulling it off. To Trump, the case is simple: the government shouldn’t be in the mortgage business. The longer the GSEs stay in conservatorship, the more they blur the line between public mission and private enterprise.

“I am giving very serious consideration to bringing Fannie Mae (FNMA) and Freddie Mac (FMCC) public. I will be speaking with Treasury Secretary Scott Bessent, Secretary of Commerce Howard Lutnick, and the Director of the Federal Housing Finance Agency, William Pulte, among others, and will be making a decision in the near future. Fannie Mae and Freddie Mac are doing very well, throwing off a lot of CASH, and the time would seem to be right. Stay tuned.“

Donald J. Trump, May 21, 2025, via Truth Social

Now that the GSEs are generating steady profits under federal control, this may be Trump’s window of opportunity. Last week, the Wall Street Journal reported that the Trump administration is exploring plans to start selling stock in the mortgage giants, potentially raising around $30 billion, putting the combined value at over $500 billion.

Moving from government control to private hands is easier said than done. Privatization would require navigating a thicket of legal, political, and structural obstacles: Congressional sign-off, regulatory redesign, housing affordability mandates, and deep questions about who takes on credit risk if the government steps back.

Hedge funds and private investors who hold shares in the GSEs are eager for privatization because it could dramatically increase the value of their holdings, which have been depressed for years under government conservatorship. That includes the federal government, which holds a 79.9% warrant stake in both GSEs—potentially worth hundreds of billions—and, like investors, sees value in monetizing those warrants if the companies are released from conservatorship. Some hedge fund managers, like Pershing Square’s Bill Ackman, have gone as far as suggesting merging the two GSEs, but the roadmap for that would be even murkier.

Potential Repercussions of Privatization

Critics warn that without a federal backstop, the entire mortgage system could become riskier, more expensive, and less accessible.

Start with interest rates. If lenders can’t rely on continuous government guarantees, they’ll raise rates to cover the added risk. Even a one-point spike could make homeownership unaffordable for millions and derail investment math across the board. We’ve already seen a similar surge in recent years. According to data from FreddieMac.com, the Federal Reserve’s benchmark rate climbed by roughly 5.25 percentage points, from near zero to about 5.5%, while the 30-year fixed mortgage rate rose by about 4 percentage points—from around 3.2% to just over 7%.

But the problem isn’t just price—it’s reach. Private lenders, freed from any public mandate, may retreat from borrowers with weaker credit or lower incomes. Communities that rely most on affordable housing could be the first locked out.

That brings us to multifamily. Fannie and Freddie finance about 40% of the apartment market, including a huge share of affordable units. If that lifeline disappears, investors may still finance deals—but at a much steeper cost. A $50 million loan could carry $500,000 more in annual interest. That cost gets passed down, unit by unit, to renters.

The housing market runs on predictability. Shake that too hard, and the ripple effects hit everyone—from first-time buyers to institutional landlords.

The Verdict Is Still Out

Fannie Mae and Freddie Mac were designed to make housing finance work—for lenders, for borrowers, and for the system as a whole. They succeeded, then failed spectacularly, then became something no one quite planned for: profitable, permanent, and politically untouchable.

Privatization could unlock long-term value, restore market discipline, and finally resolve a crisis that’s been dragging on for over a decade. Or it could fracture the system that, according to 2016 data from the Federal Housing Finance Agency’s Office of Inspector General, supports $11 trillion in mortgages and helps finance 40% of America’s apartments.

For borrowers, it’s a question of affordability. For investors, it’s certainty. For the country, it’s a question we’ve dodged since 2008: should housing be treated as a public good or a private risk?

We’re still waiting for an answer.

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On Saturday, March 25, 1911, a fire broke out on the top floors of the Triangle Shirtwaist Factory in New York City. Within just 18 minutes, 146 garment workers—most of them young immigrant women—were dead. This tragedy exposed the horrific working conditions prevalent in the booming industrial age and sparked a movement for reform that permanently altered the role of government in protecting workers. The fire’s legacy lives on today in new workplace safety standards, labor laws, and the fundamental belief that our government has a duty to intervene when private industry fails to protect its workers.

The Triangle Shirtwaist Factory was located on the eighth, ninth, and tenth floors of the Asch Building in Manhattan. It was a typical garment sweatshop of that period: poor ventilation, overcrowded spaces, long hours, and meager pay. Many of the workers were young women, some as young as 14, who had recently emigrated from Central and Eastern Europe.

On that fateful day, a fire erupted on the eighth floor, and the blaze spread with terrifying speed. Fire hoses on-site did not work, and the factory’s only fire escape, flimsy and poorly maintained, quickly buckled under the weight of desperate workers, sending them plummeting to their deaths. To make matters even worse, exit doors had been locked, a common practice to prevent theft and unauthorized breaks. Trapped inside, many workers jumped from the windows to their deaths. Within minutes, 123 women and 23 men perished to burns, smoke inhalation, or blunt force trauma from their desperate leaps.

The tragedy spurred immediate and decisive government action. The sheer scale of the disaster, coupled with the stark realization that it was entirely preventable, shocked the nation. The raw horror of the fire left an indelible mark on public consciousness and, crucially, on the political landscape. Under immense pressure from a grieving populace, the New York State government quickly established the Factory Investigating Commission (FIC).

The Commission embarked on an unprecedented and exhaustive investigation. It heard compelling and often harrowing testimony from over 200 witnesses, including survivors of the fire, factory workers, and experts in fire safety and public health. Their findings painted a bleak picture of industrial life: locked doors, blocked exits, unsanitary conditions, poorly lit stairwells, overcrowded workrooms, and a general lack of fire safety equipment. It became apparent that the Triangle fire was not an isolated incident, but the inevitable result of systemic failure.

Driven by these shocking findings, the FIC drafted a comprehensive series of legislative proposals. Their efforts led directly to the passage of over 30 new labor laws in New York between 1911 and 1914. These landmark reforms fundamentally transformed workplace safety and worker protections, setting a new standard for industrial regulation. Key among these immediate legislative changes were:

Strict requirements for unlocked exits and accessible fire escapes that opened outwardly, eliminating the death traps that had sealed the fate of so many.

Limitations on working hours and conditions for women and children, recognizing the vulnerability of these populations to exploitation.

The establishment of regular safety inspections and robust enforcement mechanisms, moving beyond mere recommendations to legal mandates with consequences for non-compliance.

Significant building code reforms requiring adequate lighting, ventilation, sanitation facilities, and occupancy limits, ensuring that future structures would be inherently safer.

Mandatory fire drills and the installation of automatic sprinkler systems in buildings above a certain height.

Reorganization and significantly increased funding for the New York State Department of Labor, granting it broader powers and resources to enforce the new regulations and proactively protect workers.

These reforms marked a critical shift in American governance. For the first time, a state government asserted a proactive role in regulating the private sector to ensure worker safety. It also established the precedent that economic profits do not trump human life.

The impact of the Triangle Shirtwaist Factory fire extended far beyond New York City. The comprehensive legislation enacted in its aftermath served as a model for other states and laid the groundwork for national labor protections. Many of these reforms were later incorporated into federal law during President Franklin D. Roosevelt’s New Deal era, with the Fair Labor Standards Act which introduced the 40-hour work week, minimum wage, and child labor prohibitions. Every fire alarm, every clearly marked exit, every fire drill, and every safety inspection in workplaces was all implemented as a direct result of the Triangle fire.

The core belief that government has a responsibility to ensure safe working conditions originated in the post-Triangle reform era. The response from New York State—driven by investigation, legislation, and public advocacy—became a template for how a government can respond to tragedy with transformative policy.

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On July 3, 2025, the House of Representatives narrowly passed President Donald Trump’s sweeping domestic policy package—officially titled the One Big Beautiful Bill Act (H.R. 1)—by a vote of 218–214.

This follows the bill’s passage in the Senate two days earlier, on July 1, by a 51–50 vote, with Vice President JD Vance casting the tie-breaking vote. The legislation overcame strong Democratic opposition and internal Republican dissent in both chambers.

The bill, a cornerstone of President Trump’s second-term agenda, now heads to the president’s desk; he is expected to sign it into law by July 4 at 5PM on July 4th as a part of Independence Day celebrations.

The following are the most notable provisions that we’ve identified:

Business Entities

Research & Development (R&D)

Starting with costs incurred in 2025, anything spent on research performed inside the United States is 100% deductible in the year paid, with no more five-year amortization and no sunset date.
Research work performed abroad must be capitalized and deducted at an equal rate over fifteen years, to encourage domestic labs.
Domestic research expenses forced to capitalize in 2022-24 can be rolled into 2025’s return with a simple method-change election (no income pick-up, no IRS consent required).

Pass-Through Entity Tax (PTET)

PTET workaround survives unchanged. The final bill drops all prior language that would have made the deduction less desirable.
Partnerships or S-corps electing PTET retain the uncapped federal deduction.
Owners still get state credit/refund outside $10,000 SALT limit.
SALT cap lifted to indexed “applicable limitation amount” starting at $40,000/$20,000, but cap applies only to itemized deductions on Schedule A.
PTET credits don’t count toward ceiling.

Employment:

Tips and Overtime

Up to $25,000 of cash tips allowed tax-free annually.
Tips must be from occupations that customarily receive tips, as specified in a future Treasury-provided list.
Up to $12,500 of overtime wages deductible annually ($25,000 for joint filers).
This covers time-and-a-half pay required by Fair Labor Standards Act; straight-time wages and tips don’t count.
Both benefits phase out starting at $150,000 in income.

1099 Reporting

Starting threshold raised to $2,000 annually for payments made after December 31, 2025.

Real Estate

100% bonus depreciation write-off returns permanently, with no phase-down provisions included.
Business Interest Deduction: EBITDA test made permanent for § 163(j) cap, so depreciation and amortization are added back when measuring adjusted taxable income, restoring room for capital-intensive firms.
Opportunity zones program extended seven years forward. Capital gains invested in Qualified Opportunity Fund (QOF) through December 31, 2033, can be deferred to December 31, 2042.

Nonprofit

The final bill swaps the House’s “10 % of AGI or $5 000” formula for a flat dollar-for-dollar credit up to $1,700 per return each year for cash gifts to a state-approved 501(c)(3) SGO; any excess carries forward.
529 plans can now be used to include tuition expenses for K–12 private and religious schools.
Non-itemizers can claim up to a $1,000/$2,000 deduction for cash gifts. This is an increase from $300/$600 in the original version of the bill.
Proposed nonprofit UBTI add-ons for employee parking/transit and name and likeness royalty income in the original bill are now removed from the final bill.
Beginning in 2026, businesses must skip first 1% of taxable-income gifts; individuals must skip first 0.5% of AGI when claiming charitable deductions, with unused amounts carried forward five years.

Other Important Provisions

Starting in 2025, each qualifying child automatically receives a federally-funded “Trump Account” seeded with a one-time $1,000 deposit, operating like a child’s IRA with up to $5,000 annual contributions allowed.
Electric-vehicle credits, home-efficiency incentives, and wind/solar eligibility ending between 2025-2027. Limited window remains to utilize existing rebates.
Child tax credits are permanently increased to $2,200 per child with standard income phaseouts.
Lifetime exemption on estate and gift taxes are permanently raised to $15 million per individual.

As always, we are closely monitoring developments and will be distributing thorough reviews of each of these topics in the coming weeks.

Correction (July 4 2025): An earlier version cited an outdated draft of the bill and stated the Scholarship-Granting-Organization credit was “10 % of AGI or $5,000.” The final bill instead provides a flat $1,700 credit per return.

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In a bold legislative move fulfilling one of his core campaign promises, President Trump has unveiled his ambitious “One Big Beautiful Bill” — a sweeping piece of legislation packed with tax cuts, credits, deduction adjustments, and policy extensions. Despite Republican leadership’s determined efforts to advance the bill through Congress, it is encountering substantial opposition from Democrats and even some resistance from within Republican conservative ranks. Nevertheless, we expect that a significant portion of the bill will ultimately become law and will have a substantial impact on our tax landscape.

The proposed legislation’s remarkably broad scope addresses an eclectic range of groups, including taxpayers, businesses, immigrants, seniors, students, and aliens in both rural and urban America. Its provisions touch on fuel and energy, schools and foundations, healthcare, childcare, Medicare, and Social Security. Additional areas covered include artificial intelligence, adoptees, tribal governments, and national security concerns.

We’ve reviewed the bill, and here are our highlights: the key points that matter most to us and our clients.

Make American Families and Workers Thrive Again

The bill includes an increase to the Qualified Business Income (QBI) deduction from the current 20% to 23%. This change to the QBI deduction will be significant and will provide more favorable tax treatment for pass-through businesses.

Itemized deductions for high-income taxpayers would be capped at a 35% marginal tax rate for taxpayers in the top income bracket.

Make America Win Again

The new bill proposes a substantial increase to the estate and gift tax exemption to $15 million per individual, starting in 2026. The doubling of the exemption amount will significantly reduce the number of estates subject to federal estate taxes and will allow more wealth to be passed on to heirs without incurring steep tax liabilities.

Make Rural America and Main Street Grow Again

The bill reinstates immediate expensing for domestic R&D costs (2024–2029), including software development. Foreign R&D costs require 15-year amortization. Companies can choose 60-month amortization, benefiting U.S. firms but impacting multinational strategies.

The proposed tax bill extends 100% bonus depreciation for qualified property acquired after January 19, 2025, and placed in service before January 1, 2030. This will allow a full-cost deduction in the year of purchase.

Additional Tax Relief for American Families and Workers

The bill introduces a tax credit capped at 10% of a taxpayer’s income for contributions to scholarship-granting organizations, effectively enabling taxpayers to allocate a portion of their Federal tax liability toward K-12 education costs, including private schools, religious institutions, homeschooling, and public school expenses.

A proposed extension of Opportunity Zone (OZ) Provisions through 2033. The extension aims to reinstate step-up in basis benefits for long-term investments and implement stronger reporting requirements to enhance transparency.

Other notable provisions of the proposed bill include:

Tax Rates & Credits

Reduced Tax Rates - Caps maximum at 37%.

Alternative Minimum Tax (AMT) - Extends higher thresholds and exemptions permanently.

Child Tax Credit - Increases to $2,500 per child from 2025 through 2028, then reverts to $2,000.

Green Energy - changes and limitations to several green energy-related tax credits.

Deductions

Standard Deduction - Permanently increases after 2025 personal exemptions repeal.

Eliminated Deductions - Ends miscellaneous itemized deductions.

Tip Income - Adds special deduction for tip earnings if the gross receipts from the business exceed the cost of goods sold and other deductible expenses.

“Pease Limits” - Repeals these limits while capping itemized deductions at 35% for the highest bracket.

SALT Deduction – Increases to $40,000 cap for individuals earning up to $500,000, with a phase-out for higher incomes.

Property & Interest

Car Loan Interest - Creates above-line deduction (2025-2028) capped at $10,000 per taxable year.

Mortgage Interest - Limits deduction to first $750,000 of acquisition debt.

Casualty Losses - Restricts losses to federally declared disaster areas only.

Business & Reporting

Bonus Depreciation - Raises thresholds to $2.5M/$4M in 2025 with inflation adjustments.

1099 Reporting - Raises minimum threshold to $2,000.

As the new legislation moves through Congress, individuals and businesses should consult with their financial advisors to assess how its potential changes may impact their specific circumstances. Although the bill includes many promising provisions, the timeline and details of their implementation remain uncertain. Maximizing the potential benefits of the bill while managing associated risks will require skill and adaptability, no matter if, when, and in what form the legislation ultimately passes.

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The US real estate market offers abundant investment options and attractive opportunities for foreign investors. However, achieving success in US inbound investments requires a clear understanding of US tax law and its implications.

All income related to an underlying US real property asset is taxed in the US. To ensure maximum returns, investors must be knowledgeable about potential tax liabilities before committing to an investment.

Rentals

Rental income from properties located in the US is subject to a 30% withholding tax on gross rental income. If the rental income is sourced from rental activity classified as “active rental income” it is taxed within the US, but not on the gross amount. Rather, it is taxed on the net income amount, at the graduated marginal tax rates applicable to the taxpayer based on their income bracket.

If the rental activity does not meet the “active rental” income threshold, there is an option for the foreign owner to elect to treat the activity as active in order to obtain the benefit of the reduced tax rate. The impact of such election would have to be considered prior to making the election.

Sales

Sales of US real property results in capital gains income that is subject to US tax. At the time of the transaction proceeds from the sale of US real property are subject to 15% withholding of the gross amount. This amount withheld could far exceed the actual tax liability due because the withholding is on the total proceeds not the gain. In a case where the tax withheld exceeds the actual amount due, the foreign investor would have to file an income tax return to claim a refund for the excess taxes withheld. There is an option to obtain a withholding exemption from the IRS, but this process can take up to several months and delay a transaction.

If the foreign seller is an individual, then the capital gains income may be taxed at the lower long term capital gains tax rate available to individuals.

Indirect investment

Foreigners do not usually invest in US real property directly. Typically, they choose to invest through a legal entity, like a partnership or an LLC. Partnerships and LLCs are transparent for US tax purposes; they are considered pass-through for U.S. tax purposes, where income is taxed at the investor level rather than at the entity level. Therefore, if foreign individuals invest directly in a partnership or LLC whose underlying asset is US real property, they will be required to file individual income tax returns in the US and pay their US taxes related directly to this income.

A key consideration for structuring an investment would be to ensure that the rental income would be taxed as low as possible in the US considering the benefits of various available elections. Another key consideration is to make certain that any taxes paid in the US related to income in an LLC or partnership structure, would be creditable in the investor’s home country.

Go corporate

Investing in the US real estate market through a partnership or LLC offers certain protections but can be less efficient and may create delays in cash flow due to the withholding rule that would apply. Another alternative is to invest in the US through a corporate vehicle. This can be through a foreign country holding company or through a US holding company. If the real estate is held through a corporation, whether it is domestic or foreign, the income will be taxed at the standard corporate tax rate of 21% plus any state and local income taxes that would apply in the district where the real estate is located.

Investing in US real estate through a corporate vehicle introduces an extra level of tax in the form of a dividend withholding tax. The real estate tax is taxed at the corporate level at a rate of 21%, and then it is subject to a 30% withholding when the earnings are distributed (or deemed distributed in the case of a foreign corporation). If there is a treaty in place between the US and the country of residence of the foreign investor, then this dividend withholding tax can be significantly reduced or, in some circumstances, even eliminated entirely.

US vs foreign corporation

When comparing the benefits of investing through a US Corporation or a foreign corporation there are several factors to consider. From a cash flow perspective, it is usually beneficial to structure the investment through a US corporation because:

There would be no withholding at source
The investor has more control over the timing of tax submission
The investor would avoid having taxes over withheld

Alternatively, the benefit of using a foreign corporation as an investment vehicle is that the stock in the foreign corporation is not considered US situs property and would avoid US estate taxes. Conversely, stock in a US corporation, even when held by a foreign person, would be considered US situs property and be subject to the US estate tax.

As demonstrated, in addition to the income tax implications, there are oftentimes estate tax implications to consider when designing a structure for US investment. Another factor that is often considered is the foreign investor’s ability to easily and efficiently reinvest earnings in the US market.

Do it through debt

After considering these complexities, it is no wonder that some investors choose to go a more simplified route by investing in US real property through bona fide debt instruments. This method is efficient and often does not attract US taxes. However, this approach limits the investors’ profit potential because in order to be considered debt, and possibly exempt from US taxes, the nature of the transaction must be true debt with a fixed rate of return.

Compliance

Once a structure is implemented, it is essential to understand the US tax compliance requirements. The IRS has robust requirements related to reporting entities and activities with foreign owners. Failure to comply with these requirements can result in significant penalties of $25,000 or more. Thus, even when an efficient structure is in place, inadequate compliance could ultimately lead to significant and unnecessary costs.

Back to industry updates

Americans are on the move. Retirees migrate towards warmer climates, job seekers move to areas with high job availability, cities with growing tech industries draw professionals, and post-pandemic remote employees have relocated from urban to suburban areas. As the demand for living space constantly shifts and readjusts, the real estate industry responds in kind.

Migration drivers

Americans’ migration patterns significantly impact the real estate market by influencing the supply and demand for housing. The continuing trend towards remote work means more people are searching for space in suburbia. Retail businesses are following migrating employees and moving to more suburban areas. There is less need for traditional office spaces – resulting in higher urban vacancy rates and declining rental rates.

Additionally, the growth of e-commerce has boosted the demand for industrial spaces needed for warehouses and distribution centers. Vacant office and retail spaces are being repurposed into residential, healthcare, or mixed-use properties to meet changing market demands.

The US Census Bureau reports that, over the next decade, the U.S. population aged 25–54 will grow by 12 million, while age 70+ population will increase by 15 million. This growing and aging population will expand and influence migration patterns, consumer spending, and health care needs. It will spur increased demand for related local amenities that have their own real estate needs – like retail and service-oriented real estate for restaurants, entertainment, or healthcare. Conversely, commercial real estate in areas experiencing ‘negative migration’ will suffer when a populace declines, experiencing a decline in foot traffic, increased vacancies, lower rent rolls, and lower property values.

Rental stats

The growing demand for affordable housing has intensified, exacerbated by the high cost of homeownership and weak single-family home inventory. The steep rise in the cost of purchasing a home has kept many households renting, by either choice or necessity. “Although it is the epitome of the American dream, it may no longer make sense to own a home,” says Shulem Rosenbaum, CPA/ABV, partner of Advisory Services and a member of Roth&Co’s real estate leadership team. “It is prudent to calculate the cost of owning a home versus renting, especially with the current limitations on the tax deductions on mortgage interest and a higher standard deduction.”

The U.S. Census Bureau calculates that almost half of renter households are considered “cost-burdened,” spending more than 30 percent of their income to keep a roof over their heads. A quarter of renters pay at least half of their income on rent. Not only does this high rent burden leave little for other necessities; it effectively locks households into a state of permanent rental because they cannot save for the downpayment and purchase of a home.

Additionally, an enormous number of baby boomers will soon need housing to transition into. The population of individuals ages 20 to 34, the prime renter age, will rise through 2030, then level off. The population in the 65-and-older cohort is also rapidly rising, and this group is increasingly choosing to rent multifamily and single-family units.

Supply growth plays a pivotal role in shaping the multifamily sector’s outlook. More supply tends to drive rents down, while limited supply pushes rents up. We believe that, over the medium term, the anticipated decline in new construction will help stabilize over-supplied markets. The resulting recovery in rent growth will bolster investor confidence and revitalize the sluggish transactions market.

Cap Rates

Capitalization rates in different geographic areas reflect migration patterns and are influenced by demand. Cap rates are lower in healthy, high-demand areas and higher in markets struggling with negative-migration. These fluctuations illustrate how the trends in migration influence investors’ perception of risk.

Areas experiencing growth and increased demand for real estate, such as the southern states of Florida, Texas, and Arizona, are showing lower cap rates. The strong demand and potential for profit offers the investor low risk opportunities. Conversely, areas losing populace, like New York City or San Francisco, show higher cap rates as demand for office, retail, and even some residential spaces decline.

Although many claim that real estate investment is suffering, due to the high interest rates and the changing landscape and migration patterns, there may be opportunities for prudent investors seeking to capitalize on these trends. Specifically, markets with higher cap rates may offer opportunities to acquire undervalued assets, provided investors are equipped to address the risks associated with negative migration.

Risk

Real estate has often been considered a passive investment with less risk than traditional businesses. However, recent trends have demonstrated that real estate must be approached as an active business. The competitive landscape, rapidly shifting dynamics, and the risk of product obsolescence demand a more strategic approach.

Real estate investors should operate their portfolios with the same innovation and agility as traditional businesses. “It’s not enough to rely on past performance or location value,” Rosenbaum notes. “Investors need to focus on calculating ROIs, monitoring market trends, and leveraging traditional business metrics to remain competitive and profitable.”

This business-like approach requires that investors continuously evaluate opportunities for redevelopment, adapt to changing market demands, and proactively manage assets to optimize returns. Whether it’s repurposing a property for new uses, investing in technology to enhance operational efficiency, or diversifying to mitigate risk, treating real estate like a business is essential in today’s market. “The key is to think ahead and be ready to pivot,” says Rosenbaum, “because in real estate, just like in business, staying stagnant is not an option.”

Basic Economics

Our client base and the broader real estate landscape have taught us one thing: Real estate is not immune from the most fundamental principle in economics – it’s always about supply and demand. Increased demand drives up property values and lowers cap rates, while properties that lose residents see less demand and higher cap rates. For investors, staying attuned to migration patterns and ready to capitalize on them is key to making decisive and profitable investment choices.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. In the episode below, we discuss two major tax benefits of adopting energy-efficient practices. Click below to watch.

As a real estate investor, you can take advantage of government rewards by adopting energy-efficient technologies and practices. Two incentives investors should know about are the Section 179D deduction and the 45L Tax Credit. Here’s what you need to know:

Section 179D: The Energy-Efficient Building Deduction

This deduction is for building owners who install energy-efficient systems in their commercial properties. This includes interior lighting, mechanical systems and the building envelope. For government and nonprofit buildings, this deduction extends to designers, architects, and contractors.

For properties placed in service before January 2023: The deduction is up to $1.80 per square foot, indexed for inflation.
For Properties Placed in Service Between January 2023 and December 2032: The deduction is up to $5.00 per square foot -indexed for inflation.

However, projects initiated after January 2023 may require adherence to prevailing wage standards to qualify for the higher deduction amount.

45L Tax Credit

This credit is designed for multifamily developers and homebuilders who construct or reconstruct qualified energy-efficient homes, and then sell or lease them.

To qualify, developers must undergo a pre-certification process and regular building inspections, as well as pay prevailing wages.

This credit can be worth up to $5,000 per dwelling unit, depending on the type of home and energy-efficient measures implemented. For example, a developer with a one-hundred-unit development could receive a credit of 500,000!

If you believe your projects might qualify for these credits and deductions, consult with your financial advisor or tax professional to explore your eligibility and maximize your tax benefits.

This material has been prepared for informational purposes only and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

Back to industry updates

On September 18, 2024, for the first time in over four years, the Federal Reserve cut interest rates by 0.5%. Will this cut relieve the borrowing chokehold crippling the commercial real estate (CRE) industry? Opinions are mixed. Some say that it buys time for CRE holders, and that with the additional future cuts alluded to by the Fed, they will be able to hold out until refinancing becomes viable. Others claim that a rate cut will barely make a dent in the challenges that highly- leveraged CRE holders and investors are facing, and that banks will no longer wait patiently for them to address their debts.

According to CRE data firm Trepp, an estimated $2.2 trillion in commercial-property debt will be maturing between this year and 2027. CRE holders that invested using the artificially low, pre-pandemic interest rates are now seeking refinancing and find themselves in a very tight spot. The inevitable result is defaults and receiverships. Jeff Krasnoff, CEO of Rialto Capital, a real estate investment and asset management firm based in Florida, recently brought over fifteen foreclosure suits against borrowers from Signature Bank, which collapsed in 2023, alleging defaults exceeding $300 million. Other examples include investment firm Ashkenazy Acquisitions, multifamily syndicator GVA, and landlord Steve Croman, who account for approximately $751 million in defaults in 2024.

Until now, banks have been resorting to the “extend and pretend” game, where they’ve extended loan terms for struggling borrowers to help them avoid default, while waiting and hoping to see property values rebound. This unsustainable strategy is wearing thin, and, according to the Federal Reserve’s senior loan officer opinion survey released in May 2024, banks reported tightening their CRE lending policies during the first quarter of 2024. Banks are making efforts to reduce their exposure and have been quietly divesting troublesome portfolios of CRE loans in order to cut their losses – a reasonable move in light of 2023’s collapse of First Republic and Signature Bank, both of which were major commercial real estate lenders.

An analysis by S & P Global found that approximately 10% of the CRE mortgages maturing in 2024 are office properties. The post-pandemic shift toward remote and hybrid work arrangements have hit the office sector hard, generating vacancies and delinquencies. Trepp estimates that the U.S. office market has lost nearly a quarter of its value since the Federal Reserve began raising rates. Many of these office space owners are highly- leveraged or locked into floating rate debt and are struggling to stay viable. According to Shulem Rosenbaum CPA/ABV, Partner and business valuation expert at Roth&Co, the takeaway is that “overleveraging can be beneficial in stable markets, but carries significant risks in more turbulent times.”

What can we expect for the future? In a September 2024 press conference, Federal Reserve Chair Jerome Powell indicated that the Fed would consider additional cuts, by, “making decisions meeting by meeting, based on the incoming data, the evolving outlook, the balance of risks.”

Powell expects that the economy will continue its trend towards falling inflation and rising unemployment – a trend that prompted this first rate cut. The consensus among analysts and central bank officials is that more interest rate cuts will be forthcoming in 2024 and into 2025. A drop in the interest rate means that borrowing costs will ease and capital will free up. This will make financing new deals more attractive to investors and developers. More transaction activity will spur competition, and increased demand will bring up property prices. While many analysts believe most lenders and real estate owners can hold out until rates drop enough for refinancing, the support from the Fed won’t be sufficient for some of the country’s most heavily leveraged property investors.

Will rate cuts pull the CRE industry out of its pandemic-induced coma? U.S. economist and Nobel laureate Milton Friedman was no fan of central banking practices and its manipulation of interest rates. He believed, “cutting interest rates doesn’t create capital” nor increase real wealth, “it just shifts it around,” redistributing existing capital within the economy.

Rosenbaum asserts, “We have yet to see the positive effects of the Federal Reserve’s recent rate cuts on the CRE industry.” Initial rate increases occurred during a period when the CRE sector was already grappling with high vacancies and rent forbearances, while key COVID relief programs, such as the Paycheck Protection Program (PPP) were unavailable to many landlords. Other resources, like the Employee Retention Credit (ERC), were limited to businesses with small workforces. “While the Fed’s current actions may provide some temporary relief,” Rosenbaum contends, “we believe it is unlikely to deliver the comprehensive solution that the CRE industry urgently requires.”

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities, and how you can make the most of them. Below, we talk about the benefits of investing in a Self-Directed IRA (SDIRA).

If you’re an independent-minded investor looking to diversify, an SDIRA, or Self-Directed IRA, might be the way to go.

An SDIRA is an individual retirement account that can hold alternative investments. Besides for standard investments – like stocks, bonds, cash, money market funds and mutual funds, an investor can hold assets that aren’t typically part of a retirement portfolio, like investment real estate. A custodian or trustee must administer the account, but SDIRAs are directly managed by the account holder, which is why they’re called self-directed.

SDIRAs come with complex rules and carry some risk, but they offer the opportunity for higher returns and greater diversification.

Self-directed IRAs are generally only available through specialized firms, like trust companies and certain banks. As custodians, these entities are not allowed to give financial or investment advice about your SDIRA. The account holder is responsible for all research, due diligence, and asset management within the account. Some downsides of maintaining an SDIRA include custodial fees and – if you’re not a savvy investor – exposure to fraud.

When investing in real estate through an SDIRA, the IRA’s funds are used to purchase the property. That means that the IRA will own the property, and it can only be used for investment purposes. Know that there are potential tax consequences when an SDIRA carries debt – like a mortgage – and the SDIRA will probably get taxed at a higher rate.

The upsides of investing in an SDIRA are its flexibility, diversification and the control it gives to the investor. SDIRAs offer a wide range of investment options, so the investor is not limited to stocks, bonds and mutual funds. SDIRA holders may also invest in real estate, private debt, privately held companies or funds, or even cryptocurrency. SDIRAs give the investor control to choose which specific assets he believes will perform the most advantageously based on his own research, due diligence and risk tolerance. And similarly to any IRA, investors benefit from tax-deferred or tax-free growth on their investments.

There are a number of rules an investor must be aware of when considering investing in real estate through an SDIRA, like steering clear of “prohibited transactions” and not engaging in transactions with “disqualified persons.”

Disqualified persons are people or entities that cannot be involved in any direct or indirect deals, investments, or transactions with the SDIRA. These persons include the investor, any beneficiaries of the IRA, all family members, any of the IRA’s service providers, any entities (corporations, partnerships etc.) that are owned by a disqualified person, or officer, shareholder or employee of those entities. The investor cannot transfer SDIRA income, property, or investments to a disqualified person, or lend IRA money or to a disqualified person.

Prohibited transactions are those that earn the investor personal financial gain on the investment. The investor may not sell, exchange or lease their personal property to the SDIRA as an investment (a.k.a “double dealing”). Moreover, the investor cannot supply goods, services or facilities to disqualified persons or allow fiduciaries to use the SDIRA’s income or investment(s) for their own interest. In practicality, this means that if you own a construction company or are another type of service provider, the SDIRA cannot contract with your company to do work on the property or provide it with any service. All income from SDIRA assets must be put back in the IRA and the investor must make sure that all rental income from an investment property owned by the SDIRA is deposited in the SDIRA account, and not in his personal account. The investor is not even allowed to spend the night in their SDIRA-owned rental property.

The consequences of breaking these rules are immediate. If an IRA owner or their beneficiaries engage in a prohibited transaction, the account stops acting as an IRA as of the first day of that year. The law will look at it as if the IRA had distributed all its assets to the IRA holder at fair market value as of the first day of the year. When the total value of the former-SDIRA is more than the basis in the IRA – which was the investor’s goal – the owner will show a taxable gain that will be included in their income. Depending on the infringement, they may even be subject to penalties and interest.

Reach out to your financial advisor to learn if an SDIRA is the right tool for you.

Back to industry updates

The commercial real estate industry is heading towards a financing chokehold and that may translate into overwhelming stress for traditional sources of credit – namely banks and commercial mortgage-backed securities (CMBS). CREnews.com, in its “Year-End 2023: CRE at a Crossroads”, reports that about $2.8 trillion in commercial real estate (CRE) loans are maturing over the next five years, with $544.3 billion coming due this year, the majority of which are owned by banks and commercial mortgage-backed securities. Commercial real estate owners are experiencing a weakened demand for office space and a softening of property values. Previously low interest rates will be unobtainable, making refinancing untenable, and receiverships and defaults are looming. Lenders will look to unload defaulted properties at a much lower value. Lender’s CRE exposure, coupled with rising deposit costs, high levels of uninsured deposits, and declining asset values, have left commercial real estate owners – specifically, those holding maturing debt – in a very dangerous space.

Nomura analyst Greg Hertrich, quoted in a recent Reuters report, says, “Almost 50 U.S. lenders could fail in the coming years under pressure from higher interest rates and operational problems.” This projection is strongly supported by the FDIC’s published list of “problem banks” which listed fifty-two banks totaling $66.3 billion in assets experiencing financial, operational, or managerial weaknesses. In another analysis, conducted by Consulting firm Klaros Group, a review of 4,000 banks found that 282 banks face the threat of commercial real estate loans and potential losses tied to higher interest rates.

Earlier this year, the Federal Reserve published its Financial Stability Report, disclosing its assessment of the stability of the U.S. financial system as of Q1 2024. The study solicited views from a range of broker-dealers, investment funds, research and advisory firms, and academics concerned about the risks to U.S. financial stability. The study reported that banks with a significant exposure to commercial real estate loans could be headed for substantial losses if the trend towards remote work, high vacancy rates and slow rent growth continues. Funding tensions were also attributed to high levels of uninsured deposits and declines in the fair value of assets. The report’s respondents also noted that because interest rates may stay higher for longer than expected, there is a higher potential for “renewed deposit outflows,” or to use the colloquial term, “a run on the bank.”

Should borrowers worry? Some say not. In testimony in a May 15 Capitol Hill hearing on bank oversight, regulators opined that the banking industry is resilient, despite last years’ spate of bank failures. Martin J. Gruenberg, Chairman of the FDIC Board of Directors, testifying for the House Committee on Financial Services, said that banks have sufficient capital on hand, and sufficient liquidity to weather the storm. Gruenberg tempered his prognosis by noting that the banking industry continues to face significant downside risks from inflation, volatile interest rates, and global instability. The economic outlook is uncertain and “these risks could cause credit quality and profitability to weaken, loan growth to slow, provision expenses to rise, and liquidity to become more constrained.”

Lenders are walking a tightrope and that tightrope could easily be snapped by a change in interest rates, a global crisis, or borrower panic. In response, borrowers should stay aware, and start thinking about upcoming refinancing often and early. Traditional lending sources are sure to be compromised in the immediate future, and their available funds constrained and reserved for the best performing properties. By staying informed, property owners can strategically position themselves to address their refinancing needs.

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The 485x is a newly enacted tax credit recently unveiled in Governor Hochul’s FY 2025 Budget. This tax credit, also referred to as the “Affordable Neighborhoods for New Yorkers” program, replaces the 421-a tax incentive program which was created in 1971 to provide a partial real estate tax exemption for newly constructed housing. 421-a required that developers provide a certain percentage of affordable units to middle or low-income tenants in exchange for a 35-year tax credit. Over the years, the 421-a has been periodically suspended, reactivated, restructured, and has now reached its final expiration date. Like its predecessor, the 485x offers developers a long-term tax credit in exchange for the development of a percentage of affordable units; in addition, it seeks to secure fair wages for construction workers at projects benefiting from the program.

Both programs’ goals may be the same but the terms are different. The new program provides an up to 40-year exemption on taxes, an increase from the 35 years offered by the 421-a program. Additionally, the legislature gives the 485x a longer life than the previous initiative, setting it to expire by June 15, 2034. Provisions for the 485x demand a larger proportion of housing project units to be designated as affordable housing, which makes requirements for affordability more stringent, and also includes mandatory sustainability requirements.

For all projects over one hundred units, construction crew wages must start at a base wage rate of $40 an hour. For projects of more than 150 units, depending on location, the program demands construction workers’ total compensation range be the lesser of $63 to $72.45 per hour, or 60 to 65% of the prevailing wage. To keep up with inflation, these rates will increase 2.5% every year. Projects with more than one hundred units must reserve 25% of the units for tenants earning a weighted average of no more than 80% of the area median income, going down to 60% for projects with 150 units or more, depending on their location. If a developer takes it down a notch, buildings developed with 6 to 99 units will have to provide 20% percent of the units for tenants earning 80% percent of the area median income. Condominium and co-op projects are also eligible if they are located outside Manhattan and are valued at an average assessed value of $89 per square foot or less. Developers currently approved under the 421a program have been given an extended deadline and have until 2031 to complete their projects.

The 421a was unpopular and left to languish because developers complained that it was too stringent, while tenant advocates and unions grumbled that it did not do enough. Will the 485x fare better? It’s hard to say. Developers will have to dig deep and make definitive calculations to decide if the 485x credit will prove profitable with its added labor costs and rental income limitations. This is especially applicable to larger developments as the 485x’s tiered scale raises the required base pay per unit built.

Despite these constraints, brokers are reporting that the new law has awakened interest in qualified properties, and values have responded, showing a slow rise. In today’s troubled financing landscape, developers need an incentive to plunge into new projects. The 485x may provide that push. Lawmakers are hoping that the creation of the 485x will serve the dual purpose of wooing developers back into construction mode and helping the city achieve a fair balance between wages and affordability.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. In the episode below, we cover the main advantages of investing in student rental properties.

Student housing properties have earned a significant niche in the commercial real estate market, and while they may evoke a natural reluctance on the part of the investor, they actually offer several unique investment advantages.

Investing in student housing properties often carries less risk than investing in traditional multi-family properties. The need for student housing is on the rise, with a projected 46 million people falling into the college age-range by 2031. In response, off-campus rentals have been attracting capital from savvy investors.

Universities and colleges are historically unaffected by recession or economic flux. Education is always a commodity in demand. By association, student housing properties are also less susceptible to economic downswings. College enrollment runs in continuous cycles, so new housing is needed every semester. This means that demand for this type of property remains stable and cash flows are predictable, albeit the downside of constant turnover.

Because student spaces are usually shared by multiple renters, student housing offers the investor higher returns. It also offers opportunities to generate ancillary income by supplying amenities like parking, bike storage or a gym.

In terms of risk, student rentals have lower default rates than most multi-family units because parents are often the ones to cosign on their kids’ rentals.

Student housing is considered residential, and therefore qualifies for a 27.5-year depreciation schedule, as opposed to industrial and retail real estate, which has a 39-year depreciation schedule. This means there are more deductions to shelter the property income.

Of course there are some disadvantages to consider when you’re thinking of investing in a student rental property. These include lower cash flow in summer months and the high potential for damages. Investors in student housing must also be equipped to deal with an inexperienced renter population and should be prepared to communicate with renters’ parents, who are often involved in the rental process.

To identify lucrative investment opportunities in the student housing market, the investor should stay informed about which universities are growing in enrollment. Higher enrollment means the demand for off-campus housing will increase. A property’s location is an essential factor in assessing the property’s success. Student housing located near a main campus will attract renters more easily than one further away and can demand higher rents. Amenities are important to the student population, with Wi-Fi, gyms, and communal spaces acting as a heavy draw. Lastly, look out for college towns with a stable economy, or an economy that’s on the rise. Colleges and universities in growing towns will look to expand and attract more students – and those students will need housing.

Diversifying your investments to include student housing properties can insulate your investment portfolio from risk and may offer a profitable option for optimizing its value. Speak to your investment advisors to learn more about this promising investment.

Back to industry updates

In the wide, wide world of mergers and acquisitions (M&A), most business buyers conduct thorough due diligence before closing their deals. This usually involves carefully investigating the target company’s financial, legal, and operational positions.

As a business owner, you can perform these same types of reviews of your own company to discover critical insights.

Now you can take a deep dive into your financial or legal standing if you think something is amiss. But assuming all’s well, the start of a new year is a good time to perform an operational review.

Why Perform an Operation Review?

An operational review is essentially a reality check into whether – from the standpoint of day-to-day operations – your company is running smoothly and fully capable of accomplishing its strategic objectives.

For example, a real estate business relies on recurring revenue from established clients as well as new revenues, in order to survive and grow. It needs to continuously ensure that it has the knowledge, talent and resources to acquire, buy or lease properties to develop or resell. The point is, you don’t want to fall behind the times, which can happen all too easily in today’s environment of disruptors and rapid market changes.

Before getting into specifics, gather your leadership team and ask yourselves some big-picture questions:

Is your company falling short of its financial goals?

An operational review can spotlight both lapses and opportunities for increased profit and can offer recommendations to improve management performance.

Are day-to-day operations working efficiently?

Implementing system controls like automated financial tracking systems and data analytic tools can help real estate companies streamline their operations and improve efficiency.

Is your company organized optimally to safeguard its financial records and reports?

Protecting financial information is especially important in the real estate industry where most transactions involve large sums of money.

Are your company’s assets sufficiently protected?

Implementing system controls to protect your business and its properties can prevent unauthorized access; making regular inspections will identify any issues or damage.

What to look at

When business buyers perform operational due diligence, they tend to evaluate at least 3 primary areas of a target company:

Operations: Buyers will scrutinize a company’s structure and legal standing, contracts and agreements, sales and purchases, data privacy and security and more. Their goal is to spot performance gaps, identify cost-cutting opportunities and determine ways to improve the bottom line.
Selling, general & administrative (SG&A): This is a financial term that summarizes a company’s sales-related and administrative expenses. An SG&A analysis is a way for business buyers — or you, the business owner — to assess whether the company’s operational expenses are too high or too low.
Human resources (HR): Buyers typically review a target business’s organizational charts, staffing levels, compensation and benefits, and employee bonus or incentive plans. Their goal is to determine the reasonability and sustainability of each of these factors.

A Funny Question to Ask Yourself

Would you buy your real estate company if you didn’t already own it? It may seem like a funny question, but an operational review can tell you, objectively, just how efficiently and impressively your business is running. Roth&Co is happy to help you gather and analyze the pertinent information involved.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. In this episode we dive into the 5 major KPIs to consider when investing in the hospitality industry.

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There are five major KPIs, or key performance indicators, that investors in the hospitality industry use to evaluate and compare potential hotel investments:

The Occupancy Rate (OCC)

This measures the percentage of hotel rooms occupied by guests at any given time. The OCC is calculated by dividing the hotel’s occupied rooms by the total number of rooms available. A hotel with a low OCC will need to look for ways to increase room availability in order to remain viable.

The Average Daily Rate (ADR)

The ADR represents the average price guests pay for a room. It’s an important metric because it reveals the price point that guests are willing to pay for a stay at the hotel. The higher the ADR, the better. A growing ADR tells the investor that a hotel is increasing the money it’s making from renting out rooms. To calculate the ADR, the investor takes the total (dollar) amount in room revenue and divides it by the number of occupied rooms

Revenue Per Available Room (RevPAR)

The RevPAR is calculated by dividing a hotel’s total room revenue in a given period by the total number of rooms available in that period. The RevPAR reflects a property’s ability to fill its available rooms and measures how much revenue each rentable room in the hotel generates. A hotel’s RevPAR is particularly useful because it takes into account both the occupancy rate and ADR.

Gross Operating Profit Per Available Room (GOPPAR)

To get a good picture of a hotel’s overall financial performance, an investor might want to look at its GOPPAR. The GOPPAR calculates the revenue from all hotel departments and amenities, then subtracts operating expenses, and divides that by the total number of rentable rooms. GOPPAR is a broad metric; it takes into account all of the property’s revenues – including room revenues and ancillary services, like on-site restaurants or stores.

Market Penetration Index (MPI)

Finally, an investor will want to look at a hotel’s MPI to see how it fairs compared to others in the market. The Market Penetration Index measures a hotel’s occupancy against the average occupancy of its competitors. It helps the investor understand how well a hotel is doing relative to its competitors in a given market. An MPI is calculated by multiplying a hotel’s OCC by its number of available rooms. That number is then divided by the product of the average market occupancy rate and the available rooms in the market.

Remember that no single KPI will reveal the full story about a hotel’s potential. The KPIs are tools that are meant to work together to inform an investor about a hotel’s strengths, weaknesses and commercial possibilities.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. This episode discusses the difference between passive and non-passive income, and why it matters.

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When it comes to a real estate investment, the income generated can be defined as either passive or non-passive.

Passive income refers to income earned from any business activity where the investor does not materially participate in its creation. When a real estate investor invests in a real estate property, but has no substantial, hands-on, active participation in generating its income, that income is defined as ‘passive.’ Passive income comes from money that was invested in a property and was left to generate revenue; the earnings are regarded similarly to earnings from interest, dividends, royalties and bonds, though the tax rates differ.

On the flip side, when an investor materially participates in the day-to-day activities of managing a property – for example, collecting rents, managing tenants, advertising and maintenance – the income he generates is defined as ‘non-passive.’ Some other examples of non-passive income include wages, earnings from active stock trading and earnings from business activity.

Why is the difference between passive and non-passive income relevant?

Because the way your income is categorized impacts how it will be taxed.

Generally, the IRS does not allow a taxpayer to offset passive losses against non-passive income. Passive activity loss rules preclude a real estate owner from deducting losses generated from passive income (i.e. rental income) from non-passive income (i.e. business income).

However, when it comes to taxes, there are always some exceptions to the rule.

If a taxpayer qualifies as a real estate professional, as defined by IRC Sec. 469, the passive activity loss rules do not apply. The investor, or ‘real estate professional,’ can use the losses from real estate activities (like rentals) to offset ordinary and non-passive income.

In another caveat, if a taxpayer owns a piece of real estate and uses it for his own business (i.e. it is “owner occupied”), then real estate loss (passive) can offset the business’ ordinary income (non-passive).

The takeaway? It is essential for a real estate owner to correctly define his income as passive or non-passive in order to enjoy the greatest ROI.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. This episode discusses a tax-friendly way to maximize your charitable donations – by donating appreciated property.

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Donating appreciated property to a charitable organization that you care about is not only a do-good, feel-good undertaking; it also offers valuable tax benefits. When you sell a real estate property and donate the proceeds, your earnings are subject to capital gains tax. If instead, you donate that same property, you are free from capital gains taxes and the charity gets a higher-value donation. It’s a win-win.

A second benefit is realized when a real estate owner donates appreciated property held longer than one year. Appreciated long-term assets – such as stocks, bonds, mutual funds, or other personal assets like real estate that have appreciated in value – qualifies the donor for a federal income tax charitable deduction. Generally, this deduction is for the full fair market value of the property (or up to 30% of the donor’s adjusted gross income). If the property is held for less than a year, an owner can still benefit by deducting the basis of the property. Since the calculation is based on fair market value, it is highly recommended to get a qualified appraisal on the property so that the donor can substantiate its value if challenged.

What happens if the property is mortgaged? That debt is taken into account when calculating the deduction. The donation of the property is divided into two parts. The portion of the fair market value representing the mortgage is treated as a sale, and the equity portion is treated as a donation. The adjusted basis of the property will be prorated between the portion that is ‘sold’ and the portion that is ‘donated.’ The calculations are often complex, so don’t try this at home! Consult with an experienced tax advisor when donating a mortgaged property for the most accurate computation of your tax benefits.

The double benefits of donating appreciated property – a fair market value deduction and avoidance of the capital gains tax – makes donating to causes you care about both a generous and tax-efficient way to support a charity.

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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. This episode discusses the difference between holders and developers, and why it makes a difference.

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An identity crisis in the real estate industry can make for costly tax obligations. The real estate industry is diverse and there are many roles to play – investor, agent, broker, developer. Each has its own tax ramifications. Before embarking on the purchase of a property, a buyer needs to ask himself some important questions in order to understand what role he is assuming. What is his business? Is he purchasing a property to hold and profit from as an asset? Is he purchasing a property to develop for sale?

Let’s start with some definitions. A real estate developer is someone who buys land and builds a real estate property on it or buys and improves an existing property. His intent in purchasing is to sell the property for a profit. A developer profits by creating real estate.

A holder or investor purchases a property with a long term intent. He intends to hold the property, rent it out and accrue revenues from it. A holder profits by possessing real estate.

Whether a purchaser defines himself as a holder or a developer is critical because the tax treatment of real estate holders provides certain benefits that are unavailable to developers.

A real estate holder may purchase a property, rent it out, collect income, and when he sells the property, his profit is taxed as a capital gain, as long as he’s held it for more than a year. That means that instead of being subject to the ordinary tax rate he had been paying on his rental income, his income from the sale will be subject to a lower, long term capital gains rate of 15%-20%. Holders are allowed to take advantage of a Section 1031 like-kind exchange to defer the recognition of their gains or losses that would otherwise be recognized at the time of a sale.

Because a holder may be challenged to prove that his intentions were to hold and utilize a property for the long term, it is advisable that he keep good records to support his status. Lease and rental agreements, advertising and listing information, and research efforts should be documented and saved in case his position is challenged by tax authorities after the sale of the property.

For a real estate developer, it’s a whole different picture. A developer is taxed like someone who is running a business that buys and sells real estate inventory. A real estate dealer, or developer, is defined as “an individual who is engaged in the business of selling real estate to customers for gain and profit.” Under this definition, a developer’s income, earned by the sale of his property, would be taxed as an ordinary gain, and taxed at the higher ordinary income rate of up to 37%. He may also be subject to self-employment taxes up to 15.3% (subject to OASDI limitations) as well as city taxes. Developers also cannot depreciate property held as inventory or use a Section 1031 like-kind exchange to defer income recognition. However, they may take advantage of their real estate selling expenses by taking them as ordinary business expenses and deducting unlimited ordinary losses.

Under the IRS Code, each individual property purchased is assessed independently, so one’s status as ‘holder’ or ‘developer’ is not absolute. A real estate entrepreneur may own a portfolio of rental properties which makes him a holder, and may simultaneously purchase and sell other properties, making him a developer as well. His tax status will depend on his intent for that individual property at the time of purchase.

Before purchasing, the savvy investor must be cognizant of his goals and make sure to structure his purchase properly at inception in order to avoid any tax surprises. Consult with your financial advisor regarding newly acquired or potential real estate assets.

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Roth&Co’s latest video series: Real Estate Right Now.

Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co real estate department, this series covers the latest real estate trends and opportunities and how you can make the most of them. Part one of our mini-series on syndication focuses on the use of a clause called a ‘waterfall provision.’

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A real estate syndicate is formed when an individual, partnership or organization pools together outside capital and invests in real estate. The syndicator will do all the groundwork on behalf of the investors, or “partners”, and will research, locate, purchase and eventually manage the investment property. Although the syndicator puts in sweat equity, it doesn’t invest any of its own capital.

There are several ways that a syndicator can share in the investment’s profits, and the role that each player assumes in the real estate transaction will determine its share. Those roles are explained in the “waterfall provision” found in their partnership agreement.

A ‘waterfall,’ also known as a waterfall ‘model’ or ‘structure,’ is a legal term that appears in a partnership’s operating agreement that describes how and to whom distributions are made. The property’s profits from operations, or from a “capital event” (i.e. refinance or sale), are allocated to the investors based on the terms of the waterfall provision. In the example in our video, the investors agree to contribute $2 million towards the property’s purchase. They make it a 70%/30% split and decide on an 8% “preferred return” on their $2 million capital investment.

Here’s how it will play out: The syndicator keeps an accounting of the property’s cash flow over the course of their ownership and will wait until the investors have been satisfied as specified in the waterfall agreement. In our example, the agreement ensures that the investors earn 8% of their capital investment – that would be $160,000, or 8% in preferred returns – and recoup their original $2 million investment. The syndicator will benefit from the profits of the operation, or its sale or refinance, only after the investors have recouped $2,160,000, (the amount of their capital investment and preferred returns). When the terms are satisfied, the syndicator will earn its 30% share of any residual profits, and the remaining 70% will be shared among the investors. It’s a win-win.

When distributions are made based on the profits of a property’s operations, it results in steady payments over the life of the property. However, it’s very common, and often very profitable, for an ‘event’ to accelerate the waterfall process. If the property is sold or refinanced, profits are actualized quickly and monies are released for distribution quickly. In either case, real estate investment by syndication offers an investment model that can benefit investors at many levels and presents profitable opportunities for syndicators and non-real estate professionals alike.

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Roth&Co’s latest video series: Real Estate Right Now.

Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, this series covers the latest real estate trends and opportunities and how you can make the most of them. This episode discusses how the tax-deferred benefits resulting from a 1031 exchange can help investors build a more valuable real estate investment portfolio.

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What is a 1031 exchange?

In 1921, Section 1031 was entered in the US Internal Revenue Code and the ‘1031 exchange’ was born. Under specific criteria, a 1031 exchange allows an investor to sell his property, reinvest in a similar property of equal or greater value, and defer payment of capital gains taxes until that second property is ultimately sold.

Eligibility for a 1031 exchange is reserved for real property that is “held for productive use in a trade or business or for investment”. This kind of property could include an apartment building, a vacant lot, a commercial building, or even a single-family residence. Properties held primarily for personal use do not qualify for tax-deferral under Section 1031. There are specific types of property that don’t qualify for a 1031 exchange, including business inventory, stocks and bonds, securities and partnership interests.

Your reinvested property must be “like kind,” or of the same nature, as the property being replaced. The definition of “like kind” is fairly loose, and IRS considers real estate property to be like-kind regardless of if or how that property has been improved.

Benefits

The obvious benefit of a 1031 exchange is that you get to hold onto your money for longer and have more funds available to take advantage of other investment opportunities. A 1031 exchange could also yield tax-shielding benefits, such as depreciation and expense deductions and capital returns at a refinance. A 1031 exchange is also useful for estate tax planning. Tax liabilities end with death, so if you die without selling a property that was invested through a 1031 exchange, your capital gains tax debt disappears. Not only that, but your heirs will inherit the property at a stepped-up market-rate value.

Details and Dangers

A 1031 Exchange has a very strict timeline. The replacement property, which must be of equal or greater value, and must be identified within 45 days. The replacement property must be purchased within 180 days. One potential pitfall investors face when deciding to implement a 1031 Exchange is that, because of the time pressure, they may rush to commit to an investment choice that is less than worthwhile. For that reason, potential investors are advised to plan ahead when considering a 1031 exchange. In order to get the best deal on a replacement property, don’t wait until the original property has been sold before starting to research replacement options.

45-Day Rule

When an investor sells his property and chooses to do a 1031 Exchange, the proceeds of the sale go directly to a qualified intermediary (QI). The QI holds the funds from the sold property and uses them to purchase the replacement property. As per IRS 1031 rules, the property holder never actually handles the funds. Also within the “45 day rule”, the property holder must designate the replacement property in writing to the intermediary. The IRS allows the designation of three potential properties, as long as one of them is eventually purchased.

180-Day Rule

The second timing rule in a 1031 is that the seller must close on the new property within 180 days of the sale of the original property. The two time periods run concurrently, so for example, if you designate a replacement property exactly 45 days after your sale, you’ll have only 135 days left to close on it. To determine the 180-day time frame, the IRS counts each individual day, including weekends and holidays.

1031 Exchange Tax Implications

What happens when the purchase price of your replacement property is less than the proceeds of the sale of your original property? That cash – known as the “cash boot” – will be returned to you after the closing on the replacement property, but it will be considered as sales proceeds and taxed as a capital gain.

Another important factor to remember is that if you have a mortgage, loan or other debt associated with the exchange, and your liability goes down, that sum will also be treated as income. For example, if you had a mortgage of $1 million on your original property, but your mortgage on the replacement property is only $900,000, you will enjoy a $100,000 gain. That $100,000 is the “mortgage boot”, and it will be taxed.

The 1031 Exchange is a tax-deferred strategy that any United States taxpayer can use. It allows equity from one real estate investment to roll into another and defers capital gains taxes. It’s like having an interest free loan, compliments of the IRS. Savvy investors can put that extra capital to work and acquire a more valuable investment property, painlessly building wealth over time. Over the long term, consistent and proper use of a 1031 Exchange strategy can provide substantial advantages for both small and large investors.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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Roth&Co’s latest video series: Real Estate Right Now.

Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, this series covers the latest real estate trends and opportunities and how you can make the most of them. This last episode in our valuation metrics mini-series discusses one final metric: Discounted Cash Flow.

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DCF, or Discounted Cash Flow, is used to determine the total monetary value of an asset in today’s dollars and is a powerful tool for valuing businesses, real estate investments or other investments that project to generate profits and cash flow.

DCF studies a potential investment’s projected future income and then discounts that cash flow to arrive at a present, or current, value. It adds up the property’s future cash flow from the time of purchase until the time of its sale and all the activity that happens in between. It takes into account the property’s initial cost, annual cost, estimated income, operating costs, renovations, changes in occupancy and its future selling price, among other factors. At the end of the assumed investment period, an exit price is determined using the building’s metrics in the year of disposition. The entire cash flow stream, including the forecasted profit from the investment’s sale, is then discounted back to the current period using a discount rate.

The discount rate represents the rate of return that is required of the investment based on its risk. The higher the risk, the higher the return required by the investor, and the more we have to discount the investment’s value. A higher discount rate implies greater uncertainty, and that means a lower present value of our future cash flow. On the flip side, the lower the perceived risk in an investment, the lower the discount rate.

The DCF metric is an influential tool, but it has its drawbacks. The upside of the DCF model is that it is very customizable and able to be tailored to the facts and circumstances, such as projected renovation costs or market changes. The downside is that the model is very sensitive to changes in its variables. For example, a change in the discount rate of less than 1% can have a 10% effect on the value of the investment. There is a lot of assumption and estimation involved, and small changes can have a big impact on the end-result.

Whereas it may not always be accurate or applicable for every situation, the DCF calculation remains a formidable tool in the investors’ arsenal and, combined with other important metrics, allows the investor to assess the present value, risk and potential profitability of a real estate investment.

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Roth&Co’s latest video series: Real Estate Right Now.

Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, this series covers the latest real estate trends and opportunities and how you can make the most of them. This episode discusses more critical valuation metrics used to calculate the potential of an investment property.

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In our last video we talked about three useful tools to help calculate the potential of an investment property: GRM (Gross Rent Multiplier), PPU (Price Per Unit) and Cap Rate (Capitalization Rate). Moving forward, here are additional metrics that can help an investor dig even deeper.

IRR

The Internal Rate of Return (IRR) is a metric used in financial analysis to estimate the profitability of a potential investment. It represents the annual rate of return on your investment, over the life of that investment. The higher the IRR, the healthier the return.

The IRR is calculated by computing the net present value of the investment. The Net Present Value (NPV) is the amount that the investment is worth in today’s money. To successfully analyze the data, future values must be considered against today’s values. Why? Because today’s money is more valuable than the value of the same money later on. This is also known as the time value of money.

When we calculate the IRR, we solve for “a rate”, so that the Net Present Value of the cash outflows and inflows is zero. That “rate” is the IRR. We achieve this by plugging in different interest rates into our IRR formula until we figure out which interest rate delivers an NPV closest to zero. Computing the Internal Rate of Return may require estimating the NPV for several different interest rates. The formulas are complex, but Microsoft Excel offers powerful functions for computing internal return of return, as do many financial calculators.

Simplified, here is how it works:

If you invest $10,000 in year one and receive an $800 return annually through Year 5, then exit the investment for $15,000, you would calculate the IRR as follows:

This scenario yields an IRR of 18%.

Here’s a similar scenario that yields a different result:

This scenario yields an IRR of 15%

Which scenario provides a better return? Looking at the bottom line is deceptive. By calculating the IRR for both investments, you would see that the IRR on the second investment, 15%, is a nice return. However, the first investment, with an 18% IRR, would be a better use of your money.

CoC Return

The Cash-on-Cash Return tells the investor how much cash the investment will yield relative to the cash invested. It measures the annual return the investor made on a property after satisfying all debt service and operating costs. This is a helpful analytic for many real estate investors who commonly leverage investments by taking out mortgages to reduce their cash outlay. The metric is the most helpful when liquidity during the investment period is important to the investor. One of the most important reasons to invest in rental properties is cash flow, and Cash-on-Cash return measures just that. Put simply, Cash-on-Cash return measures the annual return the investor made on the property after satisfying all debt service and operating costs.

Here is a simple CoC Return example:

Let’s say you buy a multifamily property for $200,000, putting down a $40,000 deposit, and assuming a $160,000 mortgage. Your gross rents are $30,000 monthly, with $20,000 of operating expenses. Additionally, you have $9,000 monthly debt service payment comprised of $7,000 interest and $2,000 principal. Because principal payments are not an expense, Net income is $3,000 annually.

However, when calculating Cash-on-Cash, you consider the debt service as well, bringing your return to $1,000 monthly, or $12,000 annually.

Comparing your investment’s yearly net income of $12,000 to the $40,000 down payment, you have a Cash-on-Cash annual return of 30%. While there is no specific rule of thumb for what constitutes a good return rate, the general consensus amongst investors is that a projected Cash-on-Cash return between 8% to 12% implies a worthwhile investment.

Financial metrics are important and useful tools that can help an investor make smart, informed decisions. Whereas any one metric may have limitations, by considering a combination of metrics commonly used for comparing, in addition to tracking performance or value, an investor can target a strategy and analyze risk in a potential investment opportunity.

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Roth&Co’s latest video series: Real Estate Right Now.

Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, this series covers the latest real estate trends and opportunities and how you can make the most of them. This episode discusses critical valuation metrics used to calculate the potential of an investment property.

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Investing in real estate can be profitable, rewarding and successful. At the same time, the real estate investment industry is also demanding, competitive and very often, risky. Success requires a combination of knowledge, organization and determination, and while this article may not be able to supply some of those requirements, it will help increase your knowledge about how to initially assess a real estate investment. Here are three useful tools to help calculate the potential of an investment property:

o Gross Rent Multiplier (GRM)
o Price Per Unit (PPU)
o Capitalization Rate (Cap Rate)

Gross Rent Multiplier (GRM)
When an investor considers buying a commercial or rental property, he’ll need to know how long it will take to earn back his investment. The GRM is a simple calculation that tells us how many years of rent it will take to pay off the cost of an investment purchase. The GRM formula compares a property’s fair market value (the price of the property) to its gross rental income.

Gross Rent Multiplier = Purchase Price / Gross Annual Rental Income

The result of the calculation represents how many years it will take for the investor to recoup the money he spent on the purchase of the property. The lower the gross rent multiplier, the sooner the investor can expect to get his money back.

Calculating an investment property’s GRM is not complex and will result in a useful metric, but in practicality, it does not consider operating costs such as the debt service coverage, the property’s maintenance expenses, taxes, local property values and other important factors that strongly impact the profitability of an investment
Experienced investors use the GRM metric to make quick assessments of their opportunities, and to quickly weed through their options. A high GRM may serve as a red flag, directing the investor to look elsewhere and spend more time analyzing more optimal options.

Price Per Unit (PPU)
Another tool in the investment arsenal is the PPU, or Price Per Unit. This calculates just that – the price per door on your investment property. The calculation is simple:

Price Per Unit = Purchase Price / Number of Units

In other words, the PPU is the amount the seller is asking per unit in the building. The PPU can provide a broad view of the market and can give you a good idea of how one property compares to another. The downside of the calculation is that it does not determine the ROI or Return on Investment. PPU does not take any other features of the property into consideration, so its usefulness is limited.

Capitalization Rate (Cap Rate)
The Cap Rate is a realistic tool that considers an investment’s operating expenses and income, and then calculates its potential rate of return (as opposed to the GRM, which looks only at gross income). The higher the Cap Rate, the better it is for the investor. Why is it realistic? Because the Cap Rate estimates how profitable an income property will be, relative to its purchase price, including its operational expenses in the computation.

Capitalization Rate = Net Operating Income / Purchase Price

Like any other calculation, the Cap Rate will only be as accurate as the numbers applied. If a potential investor under- or overestimates the property’s operational costs or other factors, the calculated Cap Rate won’t be accurate.

There is no one-size-fits-all calculation that will direct an investor to real estate heaven. However, utilizing basic tools like the GRM, PPU and Cap Rate will give an investor a broad view of the investment’s potential. Using these tools to jumpstart the due diligence process can help the investor determine whether further research into the investment is warranted and what a property’s potential for profit may be.

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Roth&Co’s latest video series: Real Estate Right Now. Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, will cover the latest real estate trends and opportunities and how you can make the most of them. This episode discusses real estate professionals.

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REAL ESTATE PROFESSIONALS IN DETAIL:

Qualifying as a real estate professional potentially allows a taxpayer to deduct 100% of all real estate losses against ordinary income. It also helps the taxpayer avoid the 3.8% Section 1411 net investment income tax on qualifying rental property income.

For many real estate businesspeople, especially those who own several rental properties, acquiring Real Estate Professional status can create thousands of dollars in tax deductions resulting in a zero tax liability at the end of the year.

How does one qualify as a Real Estate Professional?

Under the IRS’s Section 469(c)(7)(B), one can qualify as a real estate professional if two conditions are met:

The taxpayer must prove that he or she spends more time “materially participating” in real estate activities than in non-real estate activities.
The taxpayer must spend at least 750 hours per year “materially participating” in real estate activities

Material Participation

The IRS wants to know that the taxpayer is active in real estate activity and is not a passive investor. A taxpayer can try to establish material participation by satisfying any one of the seven tests provided in IRS Publication 925. The taxpayer may elect to aggregate all of his or her interests in rental real estate to establish material participation.

Passive or Non-Passive Income?

According to the IRS, non-passive income is money that you actually work for. It’s generally reported as W-2 or 1099 wages. Passive income is the money you earn without any particular labor, like interest, dividends…and rental income.

IRS Code Section 469 defines all rental activities, regardless of the taxpayer’s level of participation, as passive activity; and the taxpayer may only offset losses from a passive activity against income from a passive activity.

However, Section 469(c)(7) was later added to the law to avoid unfair treatment to those actually participating in the business of renting, selling or developing real estate. This provision provides an exception for ‘qualifying real estate professionals’ and allows them to treat rental activities as non-passive.

So, the rental activity of a taxpayer who qualifies as a real estate professional under Section 469(c)(7) is not presumed to be passive and will be treated as non-passive if the taxpayer materially participates in the activity.

Bottom line? As a qualified real estate professional, one can deduct of rental losses against his or her non-passive income.

Qualifying as a real estate professional can also be advantageous to taxpayers with rental income. A net investment income tax imposed in Section 1411 levies an additional 3.8% surtax on, among other matters of investment income, all passive income of a taxpayer. A taxpayer who qualifies as a real estate professional with rental income may choose to represent that rental income as non-passive and may be able to avoid this 3.8% surtax.

Does your business activity define you as a Qualified Real Estate Professional? Contact us for advice on how to take advantage of this significant status and how to minimize your real estate tax burden.

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COST SEGREGATION IN DETAIL:

What is cost segregation?

From a tax perspective, there are two types of property that depreciate differently:

Real Property: Actual buildings or structures that can be depreciated over 27.5 or 39 years.

Personal property: Furniture and fixtures, equipment and machinery, carpeting, electrical wiring and window treatments that can be depreciated over 5, 7, or 15 years.

As assets depreciate, their value decreases, reducing federal and state income taxes on their rental income.

Cost-segregation is an IRS-approved federal tax planning tool that allows companies and individuals who have purchased, constructed, expanded or renovated any kind of real estate to accelerate depreciation by reclassifying specific assets from real property to personal property reducing the federal and state income taxes owed.

How does it work?

A cost segregation study is required to breakdown commercial buildings into assets that could be reclassified as personal property. The cost segregation study provides real estate owners with information required to calculate the accelerated depreciation deductions for income tax purposes. The cost segregation study will also serve as the supporting documentation during any IRS audit.

On average, 20% to 40% of components fall into the personal property categories that can be written off much quicker than the building structure.

How much does a cost segregation study cost?

Cost segregation studies generally run between $5,000 – $20,000.

What properties are eligible?

Any commercial property placed into service after 1986, including any new acquisition, real estate construction, building, or improvements may qualify for a cost segregation study. Examples of eligible buildings include retail centers, office and industrial buildings, car dealerships, medical offices, multi-family unit buildings, restaurants, manufacturing facilities, and hotels.

When is the best time to conduct a cost segregation study?

Cost segregation studies may be conducted after a building has been purchased, built, or remodeled. However, the ideal time to perform a study is generally within the first year after the building is placed into service to maximize depreciation deductions as soon as possible.

Can I utilize cost segregation if my property is already in use?

Yes! A cost segregation study performed on a property in use and a tax return has been filed, is known as a look-back study.

You can then apply a “catch-up” deduction, which is equal to the difference between what was depreciated and what could have been depreciated if a cost segregation study was performed on day one.

The IRS allows taxpayers to use a cost segregation study to adjust depreciation on properties placed in service as far back as January 1, 1987.

Properties already in service are often overlooked when it comes to cost segregation, however the benefits of a look-back study can be quite significant.

What changed?

The Tax Cuts & Jobs Act passed in 2017 introduced the “100% additional first year depreciation deduction” otherwise known as “bonus depreciation” that allows businesses to write off the cost of most personal property in the year they are placed in service by the business. The bonus deduction is eligible until 2023.

What are other factors do I need to consider before claiming a depreciation deduction or bonus depreciation?

Active vs Passive Partners: Active partners can use the deduction to offset ordinary income. Passive partners can only use the deduction to offset passive income.

State Tax: The bonus depreciation deduction may only apply to federal income tax. Check with your state to see if they apply to state taxes as well.

President Joe Biden promised the end of many tax cuts. Could this be one of them?

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If you reside in a high-tax state, you may want to consider using nongrantor trusts to soften the blow of the $10,000 federal limit on state and local tax (SALT) deductions. The limit can significantly reduce itemized deductions if your state income and property taxes are well over $10,000. A potential strategy for avoiding the limit is to transfer interests in real estate to several nongrantor trusts, each of which enjoys its own $10,000 SALT deduction.

Grantor vs. nongrantor trusts

The main difference between a grantor and nongrantor trust is that a grantor trust is treated as your alter ego for tax purposes, while a nongrantor trust is treated as a separate entity. Traditionally, grantor trusts have been the vehicle of choice for estate planning purposes because the trust’s income is passed through to you, as grantor, and reported on your tax return.

That’s an advantage, because it allows the trust assets to grow tax-free, leaving more for your heirs. By paying the tax, you essentially provide an additional, tax-free gift to your loved ones that’s not limited by your gift tax exemption or annual gift tax exclusion. In addition, because the trust is an extension of you for tax purposes, you have the flexibility to sell property to the trust without triggering taxable gain.

Now that fewer families are subject to gift taxes, grantor trusts enjoy less of an advantage over nongrantor trusts. This creates an opportunity to employ nongrantor trusts to boost income tax deductions.

Nongrantor trusts in action

A nongrantor trust is a discrete legal entity, which files its own tax returns and claims its own deductions. The idea behind the strategy is to divide real estate that’s subject to more than $10,000 in property taxes among several trusts, each of which has its own SALT deduction up to $10,000. Each trust must also generate sufficient income against which to offset the deduction.

Before you attempt this strategy, beware of the multiple trust rule of Internal Revenue Code Section 643(f). That section provides that, under regulations prescribed by the U.S. Treasury Department, multiple trusts may be treated as a single trust if they have “substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries” and a principal purpose of the arrangement is tax avoidance.

Bear in mind that to preserve the benefits of multiple trusts, it’s important to designate a different beneficiary for each trust.

Pass the SALT

If you’re losing valuable tax deductions because of the SALT limit, consider passing those deductions on to one or more nongrantor trusts. Consult with us before taking action, because these trusts must be structured carefully to ensure that they qualify as nongrantor trusts and don’t run afoul of the multiple trust rule.

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The end of one year and the beginning of the next is a great opportunity for reflection and planning. You have 12 months to look back on and another 12 ahead to look forward to. Here are five ways to strengthen your business for the new year by doing a little of both:

1. Compare 2019 financial performance to budget. Did you meet the financial goals you set at the beginning of the year? If not, why? Analyze variances between budget and actual results. Then, evaluate what changes you could make to get closer to achieving your objectives in 2020. And if you did meet your goals, identify precisely what you did right and build on those strategies.

2. Create a multiyear capital budget. Look around your offices or facilities at your equipment, software and people. What investments will you need to make to grow your business? Such investments can be both tangible (new equipment and technology) and intangible (employees’ technical and soft skills).

Equipment, software, furniture, vehicles and other types of assets inevitably wear out or become obsolete. You’ll need to regularly maintain, update and replace them. Lay out a long-term plan for doing so; this way, you won’t be caught off guard by a big expense.

3. Assess the competition. Identify your biggest rivals over the past year. Discuss with your partners, managers and advisors what those competitors did to make your life so “interesting.” Also, honestly appraise the quality of what your business sells versus what competitors offer. Are you doing everything you can to meet — or, better yet, exceed — customer expectations? Devise some responsive competitive strategies for the next 12 months.

4. Review insurance coverage. It’s important to stay on top of your property, casualty and liability coverage. Property values or risks may change — or you may add new assets or retire old ones — requiring you to increase or decrease your level of coverage. A fire, natural disaster, accident or out-of-the-blue lawsuit that you’re not fully protected against could devastate your business. Look at the policies you have in place and determine whether you’re adequately protected.

5. Analyze market trends. Recognize the major events and trends in your industry over the past year. Consider areas such as economic drivers or detractors, technology, the regulatory environment and customer demographics. In what direction is your industry heading over the next five or ten years? Anticipating and quickly reacting to trends are the keys to a company’s long-term success.

These are just a few ideas for looking back and ahead to set a successful course forward. We can help you review the past year’s tax, accounting and financial strategies, and implement savvy moves toward a secure and profitable 2020 for your business.

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Audit season is right around the corner for calendar-year entities. Here’s what your auditor is doing behind the scenes to prepare — and how you can help facilitate the audit planning process.

The big picture

Every audit starts with assessing “audit risk.” This refers to the likelihood that the auditor will issue an adverse opinion when the financial statements are actually in accordance with U.S. Generally Accepted Accounting Principles or (more likely) an unqualified opinion when the opinion should be either modified or adverse.

Auditors can’t test every single transaction, recalculate every estimate or examine every external document. Instead, they tailor their audit procedures and assign audit personnel to keep audit risk as low as possible.

Inherent risk vs. control risk

Auditors evaluate two types of risk:

1. Inherent risk. This is the risk that material departures could occur in the financial statements. Examples of inherent-risk factors include complexity, volume of transactions, competence of the accounting personnel, company size and use of estimates.

2. Control risk. This is the risk that the entity’s internal controls won’t prevent or correct material misstatements in the financial statements.

Separate risk assessments are done at the financial statement level and then for each major account — such as cash, receivables, inventory, fixed assets, other assets, payables, accrued expenses, long-term debt, equity, and revenue and expenses. A high-risk account (say, inventory) might warrant more extensive audit procedures and be assigned to more experienced audit team members than one with lower risk (say, equity).

How auditors assess risk

New risk assessments must be done each year, even if the company has had the same auditor for many years. That’s because internal and external factors may change over time. For example, new government or accounting regulations may be implemented, and company personnel or accounting software may change, causing the company’s risk assessment to change. As a result, audit procedures may vary from year to year or from one audit firm to the next.

The risk assessment process starts with an auditing checklist and, for existing audit clients, last year’s workpapers. But auditors must dig deeper to determine current risk levels. In addition to researching public sources of information, including your company’s website, your auditor may call you with a list of open-ended questions (inquiries) and request a walk-through to evaluate whether your internal controls are operating as designed. Timely responses can help auditors plan their procedures to minimize audit risk.

Your role

Audit fieldwork is only as effective as the risk assessment. Evidence obtained from further audit procedures may be ineffective if it’s not properly linked to the assessed risks. So, it’s important for you to help the audit team understand the risks your business is currently facing and the challenges you’ve experienced reporting financial performance, especially as companies implement updated accounting rules in the coming years.

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Audited financial statements come with a special bonus: a “management letter” that recommends ways to improve your business. That’s free advice from financial pros who’ve seen hundreds of businesses at their best (and worst) and who know which strategies work (and which don’t). If you haven’t already implemented changes based on last year’s management letter, there’s no time like the present to improve your business operations.

Reporting deficiencies

Auditing standards require auditors to communicate in writing about “material weaknesses or significant deficiencies” that are discovered during audit fieldwork.

The AICPA defines material weakness as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.” Likewise, a significant deficiency is defined as “a deficiency, or a combination of deficiencies, in internal control that is … important enough to merit attention by those charged with governance.”

Auditors may unearth less-severe weaknesses and operating inefficiencies during the course of an audit. Reporting these items is optional, but they’re often included in the management letter.

Looking beyond internal controls

Auditors may observe a wide range of issues during audit fieldwork. An obvious example is internal control shortfalls. But other issues covered in a management letter may relate to:

Cash management,
Operating workflow,
Control of production schedules,
Capacity,
Defects and waste,
Employee benefits,
Safety,
Website management,
Technology improvements, and
Energy consumption.

Management letters are usually organized by functional area: production, warehouse, sales and marketing, accounting, human resources, shipping/receiving and so forth. The write-up for each deficiency includes an observation (including a cause, if observed), financial and qualitative impacts, and a recommended course of action.

Striving for continuous improvement

Too often, management letters are filed away with the financial statements — and the same issues are reported in the management letter year after year. But proactive business owners and management recognize the valuable insight contained in these letters and take corrective action soon after they’re received. Contact us to help get the ball rolling before the start of next year’s audit.

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Extending credit to business customers can be an effective way to build goodwill and nurture long-term buyers. But if you extend customer credit, it also brings sizable financial risk to your business, as cash flow could grind to a halt if these customers don’t make their payments. Even worse, they could declare bankruptcy and bow out of their obligations entirely.

For this reason, it’s critical to thoroughly research a customer’s creditworthiness before you offer any arrangement. Here are some ways to do so:

Follow up on references. When dealing with vendors and other businesses, trade references are key. As you’re likely aware, these are sources that can describe past payment experiences between a business and a vendor (or other credit user).

Contact the potential customer’s trade references to check the length of time the parties have been working together, the approximate size of the potential customer’s account and its payment record. Of course, a history of late payments is a red flag.

Check banking info. Similarly, you’ll want to follow up on the company’s bank references to determine the balances in its checking and savings accounts, as well as the amount available on its line of credit. Equally important, determine whether the business has violated any of its loan covenants. If so, the bank could withdraw its credit, making it difficult for the company to pay its bills.

Order a credit report. You may want to order a credit report on the business from one of the credit rating agencies, such as Dun & Bradstreet or Experian. Among other information, the reports describe the business’s payment history and tell whether it has filed for bankruptcy or had a lien or judgment against it.

Most credit reports can be had for a nominal amount these days. The more expensive reports, not surprisingly, contain more information. The higher price tag also may allow access to updated information on a company over an extended period.

Explore traditional and social media. After you’ve completed your financial analysis, find out what others are saying — especially if the potential customer could make up a significant portion of your sales. Search for articles in traditional media outlets such as newspapers, magazines and trade publications. Look for anything that may raise concerns, such as stories about lawsuits or plans to shut down a division.

You can also turn to social media and look at the business’s various accounts to see its public “face.” And you might read reviews of the business to see what customers are saying and how the company reacts to inevitable criticisms. Obviously, social media shouldn’t be used as a definitive source for information, but you might find some useful insights.

Although assessing a potential customer’s ability to pay its bills requires some work up front, making informed credit decisions is one key to running a successful company. Our firm can help you with this or other financially critical business practices.

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A primary estate planning goal for most people is to hold on to as much of their wealth as possible to pass on to their children and other loved ones. To achieve this, you must limit estate tax liability and protect assets from creditors’ claims and lawsuits.

The Tax Cuts and Jobs Act reduces or eliminates federal gift and estate taxes for most people (at least until 2026). The gift and estate tax exemption is $11.4 million for 2019. One benefit of this change is that it allows you to focus your estate planning efforts on asset protection and other wealth-preservation strategies, rather than tax minimization. One estate planning vehicle to consider is a “hybrid” domestic asset protection trust (DAPT).

What does “hybrid” mean?

The benefit of a standard DAPT is that it offers creditor protection even if you’re a beneficiary of the trust. But there’s also some risk: Although many experts believe they’ll hold up in court, DAPTs are relatively untested, so there’s some uncertainty over their ability to repel creditors’ claims. A “hybrid” DAPT offers the best of both worlds. Initially, you’re not named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds down the road, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.

Do you need this trust type?

Before you consider a hybrid DAPT, determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children or other family members, either outright or in a trust, without retaining any control. If the transfer isn’t designed to defraud known creditors, your creditors won’t be able to reach the assets. And even though you’ve given up control, you’ll have indirect access to the assets through your spouse or children (provided your relationship with them remains strong).

If, however, you want to retain access to the assets in the future, without relying on your spouse or children, a DAPT may be the answer.

How does a hybrid DAPT work?

A hybrid DAPT is initially set up as a third-party trust — that is, it benefits your spouse and children or other family members, but not you. Because you’re not named as a beneficiary, the trust isn’t a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.

There’s little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the previously discussed risks.

A flexible tool

The hybrid DAPT can add flexibility while offering maximum asset protection. It also minimizes the risks associated with DAPTs, while retaining the ability to convert to a DAPT should the need arise. Contact us with any questions.

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After insurance policies expire, many businesses just throw away the paper copies and delete the digital files. But you may need to produce evidence of certain kinds of insurance even after the coverage period has expired. For this reason, it’s best to take a long-term approach to certain types of policies.

Occurrence-based insurance

Generally, the policy types in question are called “occurrence-based.” They include:

General liability,
Umbrella liability,
Commercial auto, and
Commercial crime and theft.

You should retain documentation of occurrence-based policies permanently (or as long as your business is operating). A good example of why is in cases of embezzlement. Employee fraud of this kind may be covered under a commercial crime and theft policy. However, embezzlement sometimes isn’t uncovered until years after the crime has taken place.

For instance, suppose that, during an audit, you learn an employee was embezzling funds three years ago. But the policy that covered this type of theft has since expired. To receive an insurance payout, you’d need to produce the policy documents to prove that coverage was in effect when the crime occurred.

Retaining insurance documentation long-term isn’t necessary for every type of policy. Under “claims-made” insurance, such as directors and officers liability and professional liability, claims can be made against the insured business only during the policy period and during a “tail period” following the policy’s expiration. A commonly used retention period for claims-made policies is about six years after the tail period expires.

Additional protection

Along with permanently retaining proof of occurrence-based policies, it’s a good idea to at least consider employment practices liability insurance (EPLI). These policies protect businesses from employee claims of legal rights violations at the hands of their employers. Sexual harassment is one type of violation that’s covered under most EPLI policies — and such claims can arise years after the alleged crime occurred.

As is the case with occurrence-based coverage, if an employee complaint of sexual harassment arises after an EPLI policy has expired — but the alleged incident occurred while coverage was in effect — you may have to produce proof of coverage to receive a payout. So, you should retain EPLI documentation permanently as well.

Better safe than sorry

You can’t necessarily rely on your insurer to retain expired policies or readily locate them. It’s better to be safe than sorry by keeping some insurance policies in either paper or digital format for the long term. This is the best way to ensure that you’ll receive insurance payouts for events that happened while coverage was still in effect. Our firm can help you assess the proper retention periods of your insurance policies, as well as whether they’re providing optimal value for your company.

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Whole Foods Market is now famous as the upscale supermarket chain that was acquired by Amazon for close to $14 billion. However, Whole Foods Market began with humble beginnings. In 1978, John Mackey and Renee Lawson borrowed money from friends and family to open a small natural food store in Austin, Texas. As the store expanded to open more locations and Mackey and Lawson admitted two additional partners and designated specific tasks to each partner, such as finance, human resources, and sales. This process continues today where, although Whole Foods Market is a multinational food chain with 500 locations, each regional manager has the autonomy and flexibility to decide on suppliers and pricing.

The proverb “too many cooks spoil the broth” applies to the management of a business. Thus, establishing the sequence of control as part of a succession plan ensures that the company continues to operate effectively and efficiently – especially if the business is bequeathed to children who do not work in the family business.

The sequence of control of a business succession plan outlines the decision-making process of a closely-held, family business once the owner is determined to be incapacitated or deceased. Although this can be emotionally tolling, the sequence of control is essential for the continuity of the business. The following are questions that arise when planning the sequence of control.

What is the definition of incapacitated?

You undoubtedly know of instances in which the patriarch of a family suffered from dementia or a form of memory loss. You are probably familiar with cases in which people took advantage of individuals suffering from Alzheimer’s disease. Such undue influence can arise if a business owner can no longer exercise prudent business reasoning and judgment. Accordingly, the business succession plan should define “capacity” and specify who makes the determination, which can be a physician or a member of the clergy.

Who assumes control?

It may seem irresponsible to vest absolute control to the child or children who work(s) in the business; however, it may be imprudent to allow children who do not work in the company to be involved in the decision-making process of the business. A business administrator who requires approval for the day-to-day operational decisions in the ordinary course of business may be unable to perform basic administrative duties of the company, especially if consent is needed from an adverse party. Nevertheless, a proper business plan may require a vote of all members for significant business decisions, or decisions that may alter the business structure or significantly impact the business.

How can I secure oversight over the business administrator?

Proper internal controls are always recommended to promote accountability and prevent fraud, but it is even more critical when one heir controls the family business. The business succession plan can provide for a salary and fringe benefits or performance-based compensation, methods for removing or replacing the administrator, an arbitrator to adjudicate disagreements or disputes among family members, and an exit strategy or process of dissolving the business or partnership.

How can I provide for myself and my spouse while incapacitated?

If you are considered an owner of the business during your lifetime or so long that your spouse is alive, your succession plan can stipulate that you receive periodic distributions. However, a fixed withdrawal may prove to be insufficient for your medical needs or general cost of living. Conversely, the business may be dependent on its working capital that is now being distributed and accumulated in your personal checking account.

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Roth&Co is proud to announce the launch of its new Outsourced CFO Services, which provides a full suite of CFO services managed by an experienced and knowledgeable Controller.

Roth & Company prides itself on providing the personalized services of a boutique firm, combined with the experience and expertise of a large organization, and through this new addition, clients will be better equipped to achieve their desired results and reach their business and financial goals.

As part of Roth&Co’s Outsourced CFO Services, a CFO/Controller will work directly with the business, in order to review the accuracy of their financial statements, assist in creating and implementing internal controls and policies and procedures, help them with financial planning, and manage the financial risk of their businesses.

Yona Strimber has joined the Roth&Co team as the lead Controller for this new service. Mr. Strimber has experience managing large client bases within many industries and providing tax and accounting consulting.

“While we are always focused on the numbers, when it comes to taking care of our clients and their businesses, we don’t believe in putting a cap on that,” said Zacharia Waxler, Co-Managing Partner. He continued, “It’s difficult to find someone with the necessary skills who also exhibits the enthusiasm we look for in our team members. When we met Yona though, it was clear that he had the experience and attitude to help our clients grow”.

Carefully guiding businesses through the financial world for over 40 years, Roth & Company continually looks for ways to provide additional resources for its clients, and is excited to offer Outsourced CFO Services to its new and existing clients.

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There are many ways for employers to conduct annual performance reviews. So many, in fact, that owners of small to midsize businesses may find the prospect of implementing a state-of-the-art review process overwhelming.

The simple truth is that smaller companies may not need to exert a lot of effort on a complex approach. Sometimes a simple conversation between supervisor and employee — or even owner and employee — can do the job, as long as mutual understanding is achieved and clear objectives are set.

Remember why it matters

If your commitment to this often-stressful ritual ever starts to falter, remind yourself of why it matters. A well-designed performance review process is valuable because it can:

Provide feedback and counseling to employees about how the company perceives their respective job performances,
Set objectives for the upcoming year and assist in determining any developmental needs, and
Create a written record of performance and assist in allocating rewards and opportunities, as well as justifying disciplinary actions or termination.

Conversely, giving annual reviews short shrift by only orally praising or reprimanding an employee leaves a big gap in that worker’s written history. The most secure companies, legally speaking, document employees’ shortcomings — and achievements — as they occur. They fully discuss performance at least once annually.

Don’t do this!

To ensure your company’s annual reviews are as productive as possible, make sure your supervisors aren’t:

Winging it. Establish clear standards and procedures for annual reviews. For example, supervisors should prepare for the meetings by filling out the same documentation for every employee.

Failing to consult others. If a team member works regularly with other departments or outside vendors, his or her supervisor should contact individuals in those other areas for feedback before the review. You can learn some surprising things this way, both good and bad.

Keeping employees in the dark. Nothing in a performance review should come as a major surprise to an employee. Be sure supervisors are communicating with workers about their performance throughout the year. An employee should know in advance what will be discussed, how much time to set aside for the meeting and how to prepare for it.

Failing to follow through. Make sure supervisors identify key objectives for each employee for the coming year. It’s also a good idea to establish checkpoints in the months ahead to assess the employee’s progress toward the goals in question.

Put something in place

As a business grows, it may very well need to upgrade and expand its performance evaluation process. But the bottom line is that every company needs to have something in place, no matter how basic, to evaluate and document how well employees are performing. Our firm can help determine how your employees’ performance is affecting profitability and suggest ways to cost-effectively improve productivity.

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Roth 401(k) accounts have been around for 13 years now. Studies show that more employers are offering them each year. A recent study by the Plan Sponsor Council of America (PSCA) found that Roth 401(k)s are now available at 70% of employer plans, up from 55.6% of plans in 2016.

However, despite the prevalence of employers offering Roth 401(k)s, most employees aren’t choosing to contribute to them. The PSCA found that only 20% of participants who have access to a Roth 401(k) made contributions to one in 2017. Perhaps it’s because they don’t understand them.

If you offer a Roth 401(k) or you’re considering one, educate your employees about the accounts to boost participation.

A 401(k) with a twist

As the name implies, these plans are a hybrid — taking some characteristics from Roth IRAs and some from employer-sponsored 401(k)s.

An employer with a 401(k), 403(b) or governmental 457(b) plan can offer designated Roth 401(k) accounts.

As with traditional 401(k)s, eligible employees can elect to defer part of their salaries to Roth 401(k)s, subject to annual limits. The employer may choose to provide matching contributions. For 2019, a participating employee can contribute up to $19,000 ($25,000 if he or she is age 50 or older) to a Roth 401(k). The most you can contribute to a Roth IRA for 2019 is $6,000 ($7,000 for those age 50 or older).

Note: The ability to contribute to a Roth IRA is phased out for upper-income taxpayers, but there’s no such restriction for a Roth 401(k).

The pros and cons

Unlike with traditional 401(k)s, contributions to employees’ accounts are made with after-tax dollars, instead of pretax dollars. Therefore, employees forfeit a key 401(k) tax benefit. On the plus side, after an initial period of five years, “qualified distributions” are 100% exempt from federal income tax, just like qualified distributions from a Roth IRA. In contrast, regular 401(k) distributions are taxed at ordinary-income rates, which are currently up to 37%.

In general, qualified distributions are those:

Made after a participant reaches age 59½, or
Made due to death or disability.

Therefore, you can take qualified Roth 401(k) distributions in retirement after age 59½ and pay no tax, as opposed to the hefty tax bill that may be due from traditional 401(k) payouts. And unlike traditional 401(k)s, which currently require retirees to begin taking required minimum distributions after age 70½, Roth 401(k)s have no mandate to take withdrawals.

Not for everyone

A Roth 401(k) is more beneficial than a traditional 401(k) for some participants, but not all. For example, it may be valuable for employees who expect to be in higher federal and state tax brackets in retirement. Contact us if you have questions about adding a Roth 401(k) to your benefits lineup.

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Businesses use two types of audits to gauge financial results: internal and external. Here’s a closer look at how they measure up.

Focus

Internal auditors go beyond traditional financial reporting. They focus on a company’s internal controls, accounting processes and ability to mitigate risk. Internal auditors also evaluate whether the company’s activities comply with its strategy, and they may consult on a variety of financial issues as they arise within the company.

In contrast, external auditors focus solely on the financial statements. Specifically, external auditors evaluate the statements’ accuracy and completeness, whether they comply with applicable accounting standards and practices, and whether they present a true and accurate presentation of the company’s financial performance. Accounting rules prohibit external audit firms from providing their audit clients with ancillary services that extend beyond the scope of the audit.

The audit “client”

Internal auditors are employees of the company they audit. They report to the chief audit executive and issue reports for management to use internally.

External auditors work for an independent accounting firm. The company’s shareholders or board of directors hires a third-party auditing firm to serve as its external auditor. The external audit team delivers reports directly to the company’s shareholders or audit committee, not to management.

Qualifications

Internal auditors don’t need to be certified public accountants (CPAs), although many have earned this qualification. Often, internal auditors earn a certified internal auditor (CIA) qualification, which requires them to follow standards issued by the Institute of Internal Auditors (IIA).

Conversely, the partner directing an external audit must be a CPA. Most midlevel and senior auditors earn their CPA license at some point in their career. External auditors must follow U.S. Generally Accepted Auditing Standards (GAAS), which are issued by the American Institute of Certified Public Accountants (AICPA).

Reporting format

Internal auditors issue reports throughout the year. The format may vary depending on the preferences of management or the internal audit team.

External auditors issue financial statements quarterly for most public companies and at least annually for private ones. In general, external audit reports must conform to U.S. Generally Accepted Accounting Principles (GAAP) or another basis of accounting (such as tax or cash basis reporting). If needed, external auditing procedures may be performed more frequently. For example, a lender may require a private company that fails to meet its loan covenants at year end to undergo a midyear audit by an external audit firm.

Common ground

Sometimes the work of internal and external auditors overlaps. Though internal auditors have a broader focus, both teams have the same goal: to help the company report financial data that people can count on. So, it makes sense for internal and external auditors to meet frequently to understand the other team’s focus and avoid duplication of effort. Contact us to map out an auditing strategy that fits the needs of your company.

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Life presents us with many choices: paper or plastic, chocolate or vanilla, regular or decaf. For businesses, a common conundrum is buy or lease. You’ve probably faced this decision when considering office space or a location for your company’s production facilities. But the buy vs. lease quandary also comes into play with equipment.

Pride of ownership

Some business owners approach buying equipment like purchasing a car: “It’s mine; I’m committed to it and I’m going to do everything I can to familiarize myself with this asset and keep it in tip-top shape.” Yes, pride of ownership is still a thing.

If this is your philosophy, work to pass along that pride to employees. When you get staff members to buy in to the idea that this is your equipment and the success of the company depends on using and maintaining each asset properly, the business can obtain a great deal of long-term value from assets that are bought and paid for.

Of course, no “buy vs. lease” discussion is complete without mentioning taxes. The Tax Cuts and Jobs Act dramatically enhanced Section 179 expensing and first-year bonus depreciation for asset purchases. In fact, many businesses may be able to write off the full cost of most equipment in the year it’s purchased. On the downside, you’ll take a cash flow hit when buying an asset, and the tax benefits may be mitigated somewhat if you finance.

Fine things about flexibility

Many businesses lease their equipment for one simple reason: flexibility. From a cash flow perspective, you’re not laying down a major purchase amount or even a substantial down payment in most cases. And you’re not committed to an asset for an indefinite period — if you don’t like it, at least there’s an end date in sight.

Leasing also may be the better option if your company uses technologically advanced equipment that will get outdated relatively quickly. Think about the future of your business, too. If you’re planning to explore an expansion, merger or business transformation, you may be better off leasing equipment so you’ll have the flexibility to adapt it to your changing circumstances.

Last, leasing does have some tax breaks. Lease payments generally are tax deductible as “ordinary and necessary” business expenses, though annual deduction limits may apply.

Pros and cons

On a parting note, if you do lease assets this year and your company follows Generally Accepted Accounting Principles (GAAP), new accounting rules for leases take effect in 2020 for calendar-year private companies. Contact us for further information, as well as for any assistance you might need in weighing the pros and cons of buying vs. leasing business equipment.

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As the old saying goes, success is going from failure to failure without losing your enthusiasm. The world is teeming with information and advice meant to help you take your great idea to business startup and onward to prosperity, but in the end success goes to those who don’t tire of tackling obstacles and confronting the inevitable predicaments.

Some mistakes are easier to avoid than others are, and they often involve the expertise of other professionals. The largest percentage of failed businesses have stumbled blindly into the financial abyss. Miscalculating and underestimating just how much money a startup needs is common; being hit with a hefty and unexpected tax bill at year’s end is another.

Confer with an attorney before going into business to decide upon the most appropriate legal structure and set up the appropriate filings, licenses or registrations. Make sure you are aware of all your legal responsibilities and liabilities and you will avoid costly errors and ethical issues down the road.

Sounds obvious, but sometimes it is not our instincts that get us in trouble, but our attachment to them, our belief that we know it all, can do it all and will always be right. Honesty and transparency are recent buzzwords in business marketing and PR, but being honest with yourself about your strengths and weaknesses and the risks your business faces is an imperative precursor. To be honest with the world, start by being fiercely honest with yourself then your top management. That’s the way to map out a plan, whether it’s your first business plan, or your tenth. Without proper planning, reality will certainly complicate the fantasy.

Some companies and organizations that are still thriving have made the most monumental and infamous mistakes of all time. Others were not as lucky with their blunders.

In 1977, Kodak filed a patent for one of the first digital camera technologies, but never brought it to market. Blinded by the success of their film business they simply failed to keep pace with the trend. Had Kodak only trusted that instinct and acted on it they might still be a leader in their field. Did they lose sight of their vision to be the means by which people capture their memories? Did they run out of steam to take on a major transition?

When the pressure to make money eases, what will motivate you to keep doing all the things you did to become profitable in the first place? The answer requires honesty.

In 1999, NASA and Lockheed Martin, a global aerospace and security company, collaborated on the design and production of a Mars Orbitor. Due to a simple error, that could have (should have!) been caught numerous times, engineers at Lockheed used English measurements while NASA used metric, a 125 million dollar probe malfunctioned and was lost in space. Both continued on to great achievements. Not without some difficult reckoning, certainly. But when you’re faced with your next failure, remember that your next success still lies ahead.

Roth&Co provides that much needed professional and experienced support to set a course for success and keep you on track.

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Many employers prefer to classify workers as independent contractors to lower costs, even if it means having less control over a worker’s day-to-day activities. But the government is on the lookout for businesses that classify workers as independent contractors simply to reduce taxes or avoid their employee benefit obligations.

Why it matters

When your business classifies a worker as an employee, you generally must withhold federal income tax and the employee’s share of Social Security and Medicare taxes from his or her wages. Your business must then pay the employer’s share of these taxes, pay federal unemployment tax, file federal payroll tax returns and follow other burdensome IRS and U.S. Department of Labor rules.

You may also have to pay state and local unemployment and workers’ compensation taxes and comply with more rules. Dealing with all this can cost a bundle each year.

On the other hand, with independent contractor status, you don’t have to worry about employment tax issues. You also don’t have to provide fringe benefits like health insurance, retirement plans and paid vacations. If you pay $600 or more to an independent contractor during the year, you must file a Form 1099-MISC with the IRS and send a copy to the worker to report what you paid. That’s basically the extent of your bureaucratic responsibilities.

But if you incorrectly treat a worker as an independent contractor — and the IRS decides the worker is actually an employee — your business could be assessed unpaid payroll taxes plus interest and penalties. You also could be liable for employee benefits that should have been provided but weren’t, including penalties under federal laws.

Filing an IRS form

To find out if a worker is an employee or an independent contractor, you can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” Then, the IRS will let you know how to classify a worker. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It can be better to simply treat independent contractors so the relationships comply with the tax rules. This generally includes not controlling how the workers perform their duties, ensuring that you’re not the workers’ only customer, providing annual Forms 1099 and, basically, not treating the workers like employees.

Workers can also ask for a determination

Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Defending your position

If your business properly handles independent contractors, don’t panic if a worker files a Form SS-8. Contact us before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that stand up to IRS scrutiny.

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Many businesses have a life cycle that, as life cycles tend to do, concludes with a period of decline and failure. Often, the demise of a company is driven by internal factors — such as weak financial oversight, lack of management consensus or one-person rule.

External factors typically contribute, as well. These may include disruptive competitors; local, national or global economic changes; or a more restrictive regulatory environment.

But just because bad things happen doesn’t mean they have to happen to your company. To prepare for the worst, identify a business turnaround strategy that you can implement if a severe decline suddenly becomes imminent.

Warning signs

When a company is drifting toward serious trouble, there are usually warning signs. Examples include:

Serious deterioration in the accuracy or usage of financial measurements,
Poor results of key performance indicators — including working capital to assets, sales and retained earnings to assets, and book value to debt,
Adverse trends, such as lower margins, market share or working capital,
Rapid increase in debt and employee turnover, and
Drastic reduction in assessed business value.

Not every predicament that arises will threaten the very existence of your business. But when missteps and misfortune build up, the only thing that may save the company is a well-planned turnaround strategy.

5 stages of a turnaround

No two turnarounds are exactly alike, but they generally occur in five basic stages:

Rapid assessment of the decline by external advisors,
Re-evaluation of management and staffing,
Emergency intervention to stabilize the business,
Operational restoration to pursue or achieve profitability, and
Full recovery and growth.

Each of these stages calls for a detailed action plan. Identify the advisors or even a dedicated turnaround consultant who can help you assess the damage and execute immediate moves. Prepare for the possibility that you’ll need to replace some managers and even lay off staff to reduce employment costs.

In the emergency intervention stage, a business does whatever is necessary to survive — including consolidating debt, closing locations and selling off assets. Next, restoring operations and pursuing profitability usually means scaling back to only those business segments that have achieved, or can achieve, decent gross margins.

Last, you’ll need to establish a baseline of profitability that equates to full recovery. From there, you can choose reasonable growth strategies that will move the company forward without leading it over another cliff.

In case of emergency

If your business is doing fine, there’s no need to create a minutely detailed turnaround plan. But, as part of your strategic planning efforts, it’s still a good idea to outline a general turnaround strategy to keep on hand in case of emergency. Our firm can help you devise either strategy. We can also assist you in generating financial statements and monitoring key performance indicators that help enable you to avoid crises altogether.

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In the course of operating your business, you probably spend time and money “wining and dining” current or potential customers, vendors and employees. What can you deduct on your tax return for these expenses? The rules changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs.

No more entertainment deductions

One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.

Meal deductions still allowed

You can still deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:

The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.
The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.
You must be able to substantiate the expenses. There are requirements for proving that meal and beverage expenses qualify for a deduction. You must be able to establish the amount spent, the date and place where the meals took place, the business purpose and the business relationship of the people involved.

Set up detailed recordkeeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.

Other considerations

What if you spend money on food and beverages at an entertainment event? The IRS clarified in guidance (Notice 2018-76) that taxpayers can still deduct 50% of food and drink expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.

Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these meals provided to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.

Plan ahead

As you can see, the treatment of meal and entertainment expenses became more complicated after the TCJA. Reach out to your Roth&Co advisor with any questions on how to get the biggest tax-saving bang for your business meal bucks.

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It’s every business owner’s nightmare. Should hackers gain access to your customers’ or employees’ sensitive data, the very reputation of your company could be compromised. And lawsuits might soon follow.

No business owner wants to think about such a crisis, yet it’s imperative that you do. Suffering a data breach without an emergency response plan leaves you vulnerable to not only the damage of the attack itself, but also the potential fallout from your own panicked decisions.

5 steps to take

A comprehensive plan generally follows five steps once a data breach occurs:

1. Call your attorney. He or she should be able to advise you on the potential legal ramifications of the incident and what you should do or not do (or say) in response. Involve your attorney in the creation of your response plan, so all this won’t come out of the blue.

2. Engage a digital forensics investigator. Contact us for help identifying a forensic investigator that you can turn to in the event of a data breach. The preliminary goal will be to answer two fundamental questions: How were the systems breached? What data did the hackers access? Once these questions have been answered, experts can evaluate the extent of the damage.

3. Fortify your IT systems. While investigative and response procedures are underway, you need to proactively prevent another breach and strengthen controls. Doing so will obviously involve changing passwords, but you may also need to add firewalls, create deeper layers of user authentication or restrict some employees from certain systems.

4. Communicate strategically. No matter the size of the company, the communications goal following a data breach is essentially the same: Provide accurate information about the incident in a reasonably timely manner that preserves the trust of customers, employees, investors, creditors and other stakeholders.

Note that “in a reasonably timely manner” doesn’t mean “immediately.” Often, it’s best to acknowledge an incident occurred but hold off on a detailed statement until you know precisely what happened and can reassure those affected that you’re taking specific measures to control the damage.

5. Activate or adjust credit and IT monitoring services. You may want to initiate an early warning system against future breaches by setting up a credit monitoring service and engaging an IT consultant to periodically check your systems for unauthorized or suspicious activity. Of course, you don’t have to wait for a breach to do these things, but you could increase their intensity or frequency following an incident.

Inevitable risk

Data breaches are an inevitable risk of running a business in today’s networked, technology-driven world. Should this nightmare become a reality, a well-conceived emergency response plan can preserve your company’s goodwill and minimize the negative impact on profitability. We can help you budget for such a plan and establish internal controls to prevent and detect fraud related to (and not related to) data breaches.

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Merger and acquisition activity has been brisk in recent years. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. assets

From a tax standpoint, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The now-permanent 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The TCJA’s reduced individual federal tax rates may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask your tax advisor for details.

Buyer vs. seller preferences

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Keep in mind that other issues, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Professional advice is critical

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed in your situation.

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As an individual, you’ve no doubt been urged to regularly check your credit score. Most people nowadays know that, with a subpar personal credit score, they’ll have trouble buying a home or car, or just getting a reasonable-rate credit card.

But how about your business credit score? It’s important for much the same reason — you’ll have difficulty obtaining financing or procuring the assets you need to operate competitively without a solid score. So, you’ve got to be vigilant about it.

Algorithms and data
Business credit scores come from various reporting agencies, such as Experian, Equifax and Dun & Bradstreet. Each agency has its own algorithm for calculating credit scores. Like personal credit scores, higher business credit scores equate with lower risk (and vice versa).

Credit agencies track your business by its employer identification number (EIN). They compile data from your EIN, including the company’s address, phone number, owners’ names and industry classification code. Agencies may also search the Internet and public records for bankruptcies, judgments and tax liens. Suppliers, landlords, leasing companies and other creditors may also report payment experiences with the company to credit agencies.

Important factors
Timely bill payment is the biggest factor affecting your business credit score. But other important ones include:

Level of success.
Higher net worth or annual revenues generally increase your credit score.

Structure.
Corporations and limited liability companies tend to receive higher scores than sole proprietorships and partnerships because these entities’ financial identities are separate from those of their owners.

Industry.
Some agencies keep track of the percentage of companies under the company’s industry classification code that have filed for bankruptcy. Participation in high-risk industries tends to lower a business credit score.

Track record.
Credit agencies also look at the length and frequency of your company’s credit history. Once you establish credit, your business should periodically borrow additional money and then repay it on time to avoid the risk of being downgraded.

Best practices
Business credit scores help lenders decide whether to approve your loan request, as well as the loan’s interest rate, duration and other terms. Unfortunately, some small businesses and start-ups may have little to no credit history.

Build your company’s credit history by applying for a company credit card and paying the balance off each month. Also put utilities and leases in your company’s name, so the business is on the radar of the credit reporting agencies.

Sometimes, credit agencies base their ratings on incomplete, false or outdated information. Monitor your credit score regularly and note any downgrades. In some cases, the agency may be willing to change your score if you contact them and successfully prove that a rating is inaccurate.

Central role
Maintaining a healthy business credit score should play a central role in how you manage your company’s finances.
Contact us for help in using credit to help maintain your cash flow and build the bottom line.

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With the year underway, your business probably has a strategic plan in place for the months ahead. Or maybe you’ve created a general outline but haven’t quite put the finishing touches on it yet. In either case, there’s a time-tested approach to refining your strategic plan that you should consider: a SWOT analysis. Let’s take a closer look at what each of the letters in that abbreviation stands for:

Strengths. A SWOT analysis starts by identifying your company’s core competencies and competitive advantages. These are how you can boost revenues and build value. Examples may include an easily identifiable brand, a loyal customer base or exceptional customer service.

Unearth the source of each strength. A loyal customer base, for instance, may be tied to a star employee or executive — say a CEO with a high regional profile and multitude of community contacts. In such a case, it’s important to consider what you’d do if that person suddenly left the business.

Weaknesses. Next the analysis looks at the opposite of strengths: potential risks to profitability and long-term viability. These might include high employee turnover, weak internal controls, unreliable quality or a location that’s no longer advantageous.

You can evaluate weaknesses relative to your competitors as well. Let’s say metrics indicate customer recognition of your brand is increasing, but you’re still up against a name-brand competitor. Is that a battle you can win? Every business has its Achilles’ heel — some have several. Identify yours so you can correct them.

Opportunities. From here, a SWOT analysis looks externally at what’s happening in your industry, local economy or regulatory environment. Opportunities are favorable external conditions that could allow you to build your bottom line if your company acts on them before competitors do.

For example, imagine a transportation service that notices a growing demand for food deliveries in its operational area. The company could allocate vehicles and hire drivers to deliver food, thereby gaining an entirely new revenue stream.

Threats. The last step in the analysis is spotting unfavorable conditions that might prevent your business from achieving its goals. Threats might come from a decline in the economy, adverse technological changes, increased competition or tougher regulation.

Going back to our previous example, that transportation service would have to consider whether its technological infrastructure could support the rigorous demands of the app-based food-delivery industry. It would also need to assess the risk of regulatory challenges of engaging independent contractors to serve as drivers.

Typically presented as a matrix (see accompanying image), a SWOT analysis provides a logical framework for better understanding how your business runs and for improving (or formulating) a strategic plan for the year ahead. Our firm can help you gather and assess the financial data associated with the analysis.

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The IRS has recently released proposed regulations, along with a Revenue Ruling, creating greater guidance for Opportunity Zones.

While much remains to be learned, here are 5 takeaways from the Ruling and proposed laws:

A Qualified Opportunity Zone Fund can be a corporation or a partnership. In the case where a partnership does not elect to defer any capital gains by reinvesting them in a Qualified Opportunity Zone Fund, individual partners can still make the election.
A Fund can purchase an existing business located in an Opportunity Zone, provided that it meets the other legal requirements.
The incentive to invest in a Qualified Opportunity Zone fund is available to individuals, corporations, trust funds, and other funds.
If a Qualified Opportunity Zone Fund purchases real estate, an allocation must be made between the value of the land and a building.
The requirements to invest capital to improve the purchased property only apply to the building. The land does not need to be improved.

For those who do not know, a Qualified Opportunity Zone investment comes as a part of the 2017 tax laws, created to spur development in distressed areas. It offers three major benefits to taxpayers with capital gains from other investments:

If they are invested in a Qualified Opportunity Zone Fund, the original capital gains can be deferred for a period of up to seven years, so long as the gains remain in the Qualified Opportunity Zone funds.
If the investor keeps the original capital gain in a Qualified Opportunity Zone Fund for five years, the original capital gain is reduced by 10 percent; if it is held for the full seven years, the original gain is reduced by 15 percent.
If it is held for 10 years, when the Opportunity Zone property is sold, there will be no gain on any increase in the property’s value. As an example, if Fund A purchases a building for $500,000 and sells it 10 years later for $5,000,000, the entire transaction will be treated as a tax-free sale.

If you have any questions about this opportunity, please reach out to your Roth&Co financial adviser.

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When the word “tax shelter” comes to mind, many of us think of a locale such as the Cayman Islands, Switzerland, or Apple’s own Ireland. While many of those countries do offer enticing tax benefits, a recent piece of legislation has clandestinely spurred one of the most significant tax incentives in modern history, with no international accountant required. Called the Investing in Opportunity Act, this bipartisan law was launched over a process of more than 10 years, started by tech mogul Sean Parker, all with the aim of helping America’s most under-performing and neglected cities. Quickly catching the attention of Democratic Senator Corey Booker, along with many of his colleagues from both Houses of Congress, the Bill was officially signed into law in December 2017, which most tax professionals equate with the Tax Cuts & Jobs Act.

The way in which the bill works to a client’s benefit is in many ways reminiscent of a 20th Century tax shelter, especially in that the venture is most successful when implemented as a Limited Partnership. Essentially, the bill is engineered to corporations, wealthy individuals, and investment institutions who have recently realized capital gains, and are looking to defer (or in some instances eliminate) those tax liabilities. First, investors who have sold an asset at a gain have 180 days (roughly six months) to reinvest the capital into an Opportunity Zone. What is an “Opportunity Zone”? An Opportunity Zone, termed O-Zone, is any city which is designated by the government with 20% or greater poverty rates or a median household income less than 80% of the neighboring areas. Once the investor places the capital into an O-Zone fund, which must have a minimum of 90 percent of its assets in O-Zone projects, the original capital gain isn’t due until 2026. When the investor pays the original capital gains tax in 2026, he is given a 15% tax cut on whatever the liability is.

Further, after the O-Zone investment is sold (provided it is sold after 10 years), any gains realized are tax-free. Yes, tax-free. Other than several articles by Forbes Magazine, this law has gotten minimal attention from experts and newspapers alike, but, especially in states such as New York and California, this law can prove to be a tremendous tax planning device as the industry races to find ways to offset the increased tax burdens for many clients.

Where are these O-Zones located?

While many are in the rural communities that make up the majority of the local economic crises, it is surprising to see just how many of them are within striking distance of our desktops. In fact, in the national Opportunity Zone database, there are currently 83 located in Brooklyn alone, with dozens more in the Bronx, Queens, and Nassau Counties. Of course, no strategy is universally successful, but wouldn’t this law be useful to many clients, eager to invest in real estate, but afraid of the tax consequences? Since this law is truly a new concept, the IRS has not released the final regulations pertaining to it, which means that now is the time to keep up with the rulings and updates, gaining the knowledge to help clients in truly expert standards.

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