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A minor tax tweak in Trump’s ‘Big Beautiful Bill’ may have nonprofits rethinking how they fundraise, operate, and define their value. While headlines spotlight corporate cuts and individual brackets, the nonprofit sector may face ripple effects that will force schools and charities to reevaluate their revenue streams and fundraising strategies.

The proposed legislation addresses three critical areas: education funding systems, charitable tax deductions, and compliance requirements for tax-exempt organizations.

Who will be the winners — or losers — when these tax changes become law? Some nonprofits will likely see funding boosts through new tax credits, while others may suffer reduced corporate donations and higher compliance costs.

Here’s a summary of the most relevant provisions impacting the nonprofit and charitable sectors and our read on how they may play out:

Education and Scholarship Programs

Tax Credit for Contributions to Scholarship Organizations

The bill offers a dollar-for-dollar tax credit to individuals who donate to eligible Scholarship Organizations. The credit is limited to the greater of 10% of the donor’s adjusted gross income (AGI) or $5,000. To qualify, these organizations must be registered 501(c)(3)s and meet strict regulatory standards.

Winners: Individual donors will benefit from a direct dollar-for-dollar reduction in their tax bill for every dollar they donate, up to the prescribed credit limit. At the same time, education nonprofits that qualify as Scholarship Organizations will benefit from increased donations.

Losers: Non-education nonprofits may lose out if stiffer competition evolves and more giving shifts toward tax-advantaged educational causes.

Expansion of 529 College Savings Account

The bill expands the use of 529 savings plans beyond college expenses to include K–12 education costs, such as private and religious school tuition. It also allows funds to be used for certain credentialing and professional certification programs.

Like an IRA, a 529 plan grows tax-free, so by the time account holders need to use it for education expenses, the funds have had time to grow—and withdrawals remain tax-free when used for qualified purposes.

This change means 529 plans are no longer limited to just college expenses—they now offer broader support for educational and career development at multiple stages.

Winners: Private and religious schools may benefit indirectly as schools become more accessible to families through the expanded use of 529 accounts, which can now be applied to K–12 tuition.

Losers: Public schools may bear some negative effects as private alternatives become more financially attractive and students and support are drawn away from the public system. Colleges may also lose out, as families redirect their 529 savings toward K–12 education or certification programs instead of traditional higher education degrees.

Individual Charitable Deductions

Charitable Deduction for Non-Itemizers

For a limited period—between 2025 and 2029—taxpayers who do not itemize deductions will be able to claim a modest charitable deduction ($150 for individuals and $300 for joint filers).

Winners include charities, which will enjoy a broader donor base, and smaller nonprofits that rely on modest individual donations, as they too may see a boost in contributions.

Losers: The temporary nature of the deduction may create uncertainty and affect organizations’ long-term fundraising strategies. Additionally, charities could potentially see donations drop off after 2029, when the deduction expires.

Overall, because the amounts are very modest, we don’t believe this provision will have a significant impact.

New Compliance Requirements for Nonprofits

Changes to Unrelated Business Taxable Income (UBTI) Rules:

Qualified Transportation and Parking Fringe Benefits and Name and Likeness Royalties Now Subject to UBTI

Unrelated Business Taxable Income, or UBTI, is income derived from non-exempt organization activities. For example, the income a nonprofit hospital derives from a gift shop it operates for the public would be UBTI. The proceeds it earns from its shop are derived from a commercial activity not substantially related to its charitable purpose and is taxable.

Under the new provisions, certain payments made by non-religious nonprofits for qualified transportation and parking fringe benefits will now be taxable as UBTI.

Also, starting in 2026, Royalties Derived from Publicity Rights (monies that nonprofits earn when others use their name, image, or reputation) will no longer qualify for the traditional UBTI royalty exception and will be taxable as UBTI.

Losers: Universities, media organizations, and branded nonprofits that rely on name and likeness royalties, will be taxed on this income—potentially reducing their net revenue. To learn more about UBTI, see our article here.

Nonprofits that don’t earn income from name and likeness royalties will see no impact.

Corporate Charitable Giving Changes

New Floor for Corporate Charitable Deductions

Corporations can currently deduct charitable contributions of up to 10% of their taxable income. Under the proposed bill, companies that give less than 1% of their taxable income in a year would lose access to the charitable deduction entirely.

Winners: Nonprofits with strong corporate partnerships will benefit from this provision, as companies may increase donations to meet the 1% threshold, and larger charities, which are more likely to receive increased corporate giving as businesses increase their giving to reach the threshold.

Losers: Corporations that give less than 1% in donations will miss out on their deduction for the year, though they are allowed to carry the donation forward to the next year when they do meet the minimum threshold.

Overall Impact

Bottom Line for Nonprofits

We don’t expect the provisions of Trump’s new “Big Beautiful Bill” to impose a significant tax burden on nonprofits. New donor incentives—like the scholarship credit and corporate deduction floor—could boost fundraising, but the added tax burdens relating to fringe benefits and royalty proceeds could reduce revenues. Educational organizations will benefit from the scholarship tax credit provision as a new source of funds.

For our clients and community, the expansion of the 529 College Savings Account is the legislation’s biggest win, enabling families and breadwinners to set aside tax-free funds for schooling for a broader range of students.

As always, nonprofits should be aware and informed of their exposures and vulnerabilities and stay adaptable as tax laws continue to shift and evolve.

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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The following narrative is based on conversations with Roth&Co clients and colleagues. Names and identifying details have been changed to maintain confidentiality.

On a Monday morning in early March, the loading docks at Lumina Electronics’ sprawling Ohio warehouse are quieter than usual. Pallets of smartphone components sit deliberately motionless. “We’re rethinking every box that comes in,” says CFO Maria Ortiz, gazing at rows of unopened crates. Just the week before, Lumina had been paying a 10% duty on circuit boards from Vietnam; now, with the administration’s tariff hikes and the removal of longstanding exemptions, that duty had ballooned to 25%. “Our margins are getting squeezed from every angle,” she explained. “We’re being forced to rearrange our entire supply chain.”

The Tariff Shock and the Vanishing De Minimis Exemption

In 2017, the Trump administration raised tariffs on hundreds of imported goods entering the United States. But the administration’s more recent elimination of key exemptions was a bigger blow—especially the “de minimis” rule, which had allowed duty-free entry for packages under $800. That provision quietly supported billions in small-package shipments and was vital to the cost structure of many mid-sized and large e-commerce sellers. After the rollback, those same shipments were hit with import duties of 10–25%, depending on their country of origin.

“You wake up one day and discover your cost of goods sold has jumped by 15% overnight,” said Ortiz. Companies across many sectors—consumer electronics, apparel, automotive parts—are scrambling to mitigate this new cost.

Many companies have responded directly by shifting manufacturing away from high-tariff regions. Products made in China, for instance, are often charged a 25% tariff under the latest Section 301 actions. But if those same products are made in Vietnam, the duty drops to around 10%. This shift may appear straightforward in theory, but transitioning away from established, trusted suppliers and identifying alternative sources that align with a business’s pricing, quality standards, and minimum order requirements is often complex and challenging.

The Transfer-Pricing Maneuver: A Tax and Tariff Tightrope

While some companies pursue alternative manufacturing sites, others are restructuring their global distribution networks, and using a revised transfer pricing model, to reduce their tariff costs.

When the U.S. imposed steep tariffs on imported apparel, Wexford Tailoring—a London-based maker of high-end men’s suits—found itself in a financial bind. “We were staring at a 20% tariff that would wipe out our U.S. profit margins,” said Jonathan Davies, the company’s CFO. “Shifting production wasn’t realistic in the short term, so we needed a smarter solution.”

Instead of moving factories, Wexford established a wholly owned U.S. subsidiary. By shifting key distribution and marketing functions to the new American entity—and adjusting intercompany pricing accordingly—Wexford was able to allocate more profit to the U.S. arm and lower the customs value of its imports.

“It wasn’t about dodging rules; it was about making sure our profits matched where real business activity was happening,” Davies explained. Wexford’s transfer pricing strategy helped it reduce its tariff exposure while keeping its supply chain intact.

Wexford’s case is a case study of transfer pricing done right. They weren’t artificially shifting profits to the U.S. just to lower tariffs—they were restructuring their business, so the U.S. arm was doing more, and then pricing intercompany transactions to reflect that reality. This approach is both strategic and compliant with international tax and trade rules.

“It wasn’t easy—we had to invest heavily in legal, tax, and compliance work to get the transfer pricing right,” Davies said. “But for us, it was worth it. We protected our U.S. market, stayed compliant, and built a structure that’s more resilient for the future.

The Numbers at Work

Here’s a simplified illustration of the mathematics of transfer pricing:

PowerCore Manufacturing is a Chinese company that exports portable generators. Originally, PowerCore sold its generators directly to U.S. retailers at $200 per unit, and with a 10% tariff, it paid $20 in duties per unit. But when tariffs rose to 25%, the duty per unit jumped to $50, seriously eating into their profit margins.

To adapt, PowerCore set up a U.S. subsidiary called PowerCore USA, and restructured its pricing strategy. Instead of selling directly to retailers, PowerCore Manufacturing now sells the generators to its U.S. subsidiary at a transfer price of $80 per unit—well below the $200 final sale price.

U.S. customs applies the 25% duty on the $80 transfer price, resulting in only $20 in duties per unit.

PowerCore USA then sells the generators to retailers at the usual $200, completing the transaction. This shift effectively saves $30 in tariffs per unit ($50 original duty minus $20 new duty). Across 50,000 units per quarter, that translates to $1.5 million in savings every three months.

Bifurcating Costs Adjusts Real Value

Some companies that already use a U.S. subsidiary for distribution are reevaluating their transfer pricing arrangements to determine whether those structures truly reflect the arm’s length nature of their transactions. In many cases, they’re analyzing whether multiple distinct activities—such as services, support, or intangible contributions—have been bundled into a single transfer price that only reflects the cost of the tangible goods being imported.

Many discover that some of what they were treating as product cost actually represents support services and other related operations. These service-related costs are embedded in the overall transfer price and can be separated from the tangible goods cost for proper tariff and tax treatment.

Bifurcating costs involves disaggregating the total cost into its component parts: the cost of the physical product and the cost of associated services. Since service fees aren’t subject to tariffs, this separation can yield significant savings.

Let’s revisit our fictitious exporter, PowerCore, which sells a product originally valued at $200 per unit. We’ll revise the script and say that they conducted a comprehensive transfer pricing analysis to properly valuate their product costs. The analysis revealed that, based on arm’s length standards, the actual cost of the product should be $80. The remaining $120 can more accurately characterized as management and service fees attributed to product support.

By implementing proper transfer pricing rates—and bifurcating their costs— the company legitimately brings down the value of their product and gains significant tariff savings. This restructuring does not require any changes to the company’s organizational structure or product distribution.

Both Customs and the IRS can and likely will question declared values and transfer pricing rates used to compute income tax. Therefore, the values used for these purposes should be supported by transfer pricing documentation. In the absence of a documented valid analysis, both Customs and the IRS can reassess the values, resulting in potentially higher tariffs and/or income tax.

A Range of Reactions

Some importers are chasing new manufacturing sources and seeking to diversify their suppliers, some have turned to transfer pricing, and others have tried a hybrid approach. They split their procurement into two separate tracks where some manufacturing is relocated to low-tariff countries while other products are imported at a lower value due to restructuring or re-evaluating the true transaction for transfer pricing purposes.

This layered strategy highlights the complexity of today’s global supply chains and the need for thoughtful planning that considers both business operations and financial impacts in a shifting trade landscape.

Riding the Regulatory Roller Coaster

Since 2017, tariffs have inadvertently transformed businesses into trade experts, forcing them to master complex rules and overhaul supply chains. Companies have consolidated suppliers, reworked logistics, and built advanced transfer-pricing strategies that seemed impossible only a short time ago.

This complexity brings audit risks and operational strain, but it also opens the door to more resilient business models. Many executives now see tariffs not as a challenge, but as strategic tools that strengthen their competitive position. Those who adapt are now treating trade policy as a central part of their sourcing strategy rather than a passing obstacle.

“What started as a crisis forced us to completely rethink our business model,” says Wexford’s Jonathan Davies. “We’ve built something that goes beyond just tariff protection—we’re smarter, more agile, and honestly, more competitive today than we were a year ago.”

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When Your Brand IS You: The Double-Edged Sword of Personal Empire Building

There’s something undeniably compelling about entrepreneurs who build entire empires around their own personas. The outcomes tend to be spectacular—or precarious. Trump’s gold-plated towers scream his name, Elon’s late-night tweets whiplash Tesla’s valuation, and Bezos turned retail domination into rocket fuel for his space dreams. These leaders didn’t simply build companies; they crafted business systems where corporate strategy and personal identity became irreversibly fused. Every major decision reflects market analysis, filtered through their individual vision and unique brand of chaos.

What are the implications when multi-billion-dollar enterprises become extensions of a single personality? And more critically, what happens to shareholder value and market stability when that personality becomes a liability?

The Personality Premium—And Its Volatile Price

Building a business around your personality creates a unique form of market currency—one that trades not just on quarterly earnings but on your morning mood, your political opinions, and your midnight social media confessions.

Take Elon Musk as the perfect example. Tesla’s stock doesn’t just respond to production numbers; it dances to Elon Musk’s social media theatrics, swinging billions in market cap based on his latest cryptocurrency endorsement or SEC confrontation.

When Musk announced his Twitter acquisition, Tesla shareholders watched their investments hemorrhage value as markets questioned whether their CEO was losing focus on electric vehicles to chase social media fantasies.

The personality premium works both ways. Steve Jobs’ return to Apple in 1997 didn’t just bring back a CEO—it resurrected a brand identity that had been dying a slow death. His keynote presentations became cultural events, his design philosophy became the corporate bible, and his personal brand of perfectionist innovation became Apple’s competitive edge.

But this intimate relationship between founder and company creates a dependency that traditional businesses don’t face. When your brand promise is essentially “trust me,” every personal misstep becomes a potential business calamity.

This vulnerability becomes even more pronounced when personal controversies explode into public view. Trump’s empire provides a case study in this dual-edged reality. Back in the day, when his political controversies dominated headlines, the business consequences were swift and brutal: banks distanced themselves, partnerships dissolved overnight, and the Trump brand—once the gold standard of luxury and success—became toxic in certain markets.

His golf courses lost members, his hotels saw boycotts, and major retailers pulled Trump-branded merchandise from their shelves. Yet simultaneously, his political rise energized a completely different customer base. A dual market was born where his brand became simultaneously more or less valuable depending on your zip code and voting record.

This is the ultimate expression of what economists call “reputation risk concentration”—where your entire business empire rises and falls not on earnings or market conditions, but on the daily whims and public perception of one unpredictable human being.

The Art of Strategic Separation

The smartest founders recognize the warning signs: when your personal drama starts dominating business headlines, or when your presence becomes a bigger story than your company’s actual work. The most successful separations happen gradually and strategically.

Jeff Bezos understood this calculation perfectly. He didn’t just quit Amazon one day—he spent years building operational systems, developing other leaders, and transitioning from day-to-day management to strategic oversight before finally stepping down as CEO. He maintained his connection to the company’s vision while freeing it from the constraints of his personal bandwidth and the risks of his other ventures. The transition preserved his founder premium while reducing the company’s dependency on his personal brand.

Smart founders also recognize that separation doesn’t mean disappearance. They evolve from being the brand to being the brand’s creator—a subtle but crucial distinction.

Consider how Walt Disney’s empire met this challenge. His death didn’t destroy Disney because he had already institutionalized his creative vision into processes, principles, and people who could carry forward his legacy. The brand became bigger than the man because the man was wise enough to prepare it to grow without him.

The Final Reckoning

In the end, every founder who builds a company around their own personality must answer the same fundamental question: Is their company a shrine to themselves or a machine that can outlast them?

The patterns we’ve seen—from Musk’s market-moving tweets to Trump’s brand polarization, from Jobs’ resurrection of Apple to Bezos’ strategic transition—all point to the same truth.

The greatest entrepreneurs understand that real empire building isn’t about creating a cult of personality. It’s about creating something so valuable, so systematically sound, and so culturally embedded that it can survive the human frailties of its creator.

Because in the cold math of business, even the most magnetic personality is ultimately just another asset to be managed, leveraged, or—if necessary—divested. The question isn’t whether a branded mogul will eventually need to step back from his brand. The question is whether he’ll be wise enough to do it before his brand steps back from him.

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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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Tax-exempt and non-profit entities represent a significant source of capital in private equity investments. In November 2024, the NYS Common Retirement Fund (NYSCRF) committed nearly $3 billion to private equity investments and, as of June 2024, Yale allocated an estimated $18.6 billion of its $41.4 billion endowment to private equity and venture capital. Private equity investments can be beneficial for nonprofits, but they come with specific concerns and risks, one of which is that they can inadvertently generate Unrelated Business Taxable Income (UBTI).

A commonly used approach that often triggers UBTI exposure is the use of ‘management fee offset structures,’ a mechanism used to reduce investor fees. If not designed carefully, fee offset arrangements can result in substantial tax liabilities.

Despite this challenge, with strategic planning and precise structuring, fund managers can implement fee offset mechanisms and still mitigate the tax burden for their exempt investors.

UBTI in Private Equity

The IRS grants tax exemption to a variety of organizations, including charities and foundations, private pension funds, college and university endowments, individual retirement accounts (IRAs), and state and municipal institutions. However, these organizations remain liable for taxes on UBTI.

UBTI is defined as any gross income derived by a tax-exempt entity “from an unrelated trade or business that it regularly carries on,” less the deductions directly connected with that trade or business. Essentially, it is income that does not align with an organization’s tax-exempt purpose. Only passive income, including dividends, interest, capital gains, and certain real property rents are excluded and generally not defined as UBTI.

A real-world example of UBTI would be a tax-exempt hospital that runs a gift shop open to the public. The income derived from sales would likely be considered UBTI because selling gifts is not related to patient healthcare. By contrast, if a university owns stock in a manufacturing company and earns dividends, that income is not UBTI. It is deemed passive investment income; it is not sourced from active income that is unrelated to the university’s mission. The proceeds would be exempt from taxes.

Private equity and UBTI risk factors

Several common private equity activities can create UBTI for non-profit organizations. These include using leverage to make investments, investing in operating businesses structured as partnerships or LLCs, and implementing certain fee offset arrangements.

UBTI offsets work by finding permissible deductions or losses that can be applied against this taxable income.

Private equity firms typically charge investors two main fees:

Monitoring fees are charged to portfolio companies for oversight.

Management fees are charged to investors for fund management.

To avoid “double-dipping,” many private equity firms offer management fee offsets. They reduce management fees charged to investors based on a percentage of the monitoring fees collected from portfolio companies. Fee offsets appear deceptively simple, but in fact, require careful structuring to avoid UBTI implications.

UBTI is largely determined by how income is characterized. If monitoring fees are recognized as compensation for services rendered and they flow back to tax-exempt investors through offsets, they might be reclassified as UBTI.

Structuring solutions

Tax-exempt investors are well advised to work with fund managers to structure offset arrangements that avoid UBTI implications. The following strategies can achieve this:

Ensure that offsets are characterized as adjustments to management fees rather than distributions of monitoring fee income.

Use “blocker” entities: specialized legal structures that shield problematic income and the tax-exempt organization to absorb monitoring fees before they reach tax-exempt investors.

Carefully word partnership agreements to clarify that tax-exempt investors are not participating in service businesses.

Use completely different fee structures, like reduced management fees, from the start of the business relationship.

The Bottom line

UBTI for tax-exempt organizations is generally taxed at the corporate income tax rate (presently 21%), so the stakes can be high. Based on our experience with a wide range of tax-exempt clients, we’ve learned that, with careful structuring, it is possible to avoid initiating UBTI.

A tiered partnership structure that clearly separates income streams offers an elegant and effective solution to UBTI challenges. When the management company receives monitoring fees directly and the fund applies corresponding reductions to its management fees, services and proceeds remain separate and defined. In this way, tax-exempt investors enjoy fee reductions without directly participating in or receiving income from service activities that would trigger tax liability.

Maintaining this crucial distinction between service income and investment activity allows nonprofits a dual benefit: participation in private equity investment and protection from tax exposure.

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“We’re making $3 billion a day.”

– President Trump, about his new tariffs plan.

The Trump administration would have you believe that the tariffs will be a massive moneymaker for the US government. White House trade adviser Peter Navarro claims that the U.S. will raise about $600 to $700 billion a year from tariffs, or $6-7 trillion over a decade. Add the proposed auto tariffs to that and he projects another $100 billion annually. Trump took an even stronger stance, claiming that tariffs have brought in $3 billion a day since he took office.

The administration may be relying on numbers issued by the U.S. Customs and Border Protection Agency which, on April 8, stated that it has collected over $200 million per day in “additional associated revenue” from 13 of Trump’s tariff-related executive actions that have been recently implemented under the new administration. According to a Treasury Department daily financial statement, as of April 15, the U.S. had received more than $2.3 billion in customs duties and excise taxes for the month.

These aggressive numbers cited by the administration have elicited considerable skepticism among economists. Some believe the estimates are overly optimistic, while most call “optimistic” a generous overstatement and instead describe the numbers as completely nonsensical. Navarro’s math translates into a little over $1.6 billion a day, with Trump’s $3 billion claim almost double that.

What is the methodology behind these calculations? Scrutinizing these projections through the lens of financial accounting and valuation principles gives us some surprising answers – some of which clash with the administration’s confident narrative.

A deeper dive into revenue

Tariffs are a big part of an even bigger picture. The Unites States economy is a complicated ecosystem of global trade, and tariff wars can trigger complex ripple effects such as reduced trade, international retaliation, and supply chain disruptions – all of which will compound already existing volatility.

Let’s take all those factors and break them down to their most simplistic components, treating them like asset and liability line items on a balance sheet.

First, let’s define how to categorize potential revenue and cost.

Assets (Potential Revenue):

Direct tariff collection from imported goods

Potential growth in domestic manufacturing tax base

Possible increased employment tax revenue

Liabilities (Costs):

Retaliatory tariffs reducing export markets

Supply chain disruptions increasing costs for U.S. businesses

Consumer price inflation depressing spending

Decreased import volume reducing tariff collection

Valuation Analysis: What will the tariff policy really cost?

Valuation concepts are used in financial analysis and capital budgeting to estimate the worth and pricing of businesses, assets, investments, securities, and intellectual property. They can help determine what creates or damages value. We can use valuation frameworks to weigh the tangible costs of tariff policies, such as increased import prices and retaliatory tariffs, against any anticipated economic gains.

We can look at opportunity costs, long-term return on investment, and how risk-adjusted cash flows may shift as the policies evolve. Essentially, we are analyzing tariffs as we would a major capital expenditure and scrutinizing, not only what it costs today, but what might be tomorrow’s added value.

We can apply valuation concepts to assess the tariff policy’s effectiveness:

Return on Investment Analysis

If we consider a $10 trillion market capitalization loss triggered by tariff implementation as the “investment cost,” the financial metrics can be surprising:

Payback Period: At $600 billion in annual revenue, it would take over 16 years to recover a $10 trillion market loss.

Internal Rate of Return (IRR): If we treat the $10 trillion loss as an investment to generate $600 billion in annual returns, the implied IRR is around 6% – well below the risk-adjusted return threshold for most ventures.

Comparison to Market Averages: Historically, the S&P 500 has averaged about 8% annual returns since 1928. By this standard, the tariff policy’s return, at 6%, underperforms the broader market.

Discounted Cash Flow (DCF): Using an 8% discount rate (reflecting market opportunity cost) the calculation looks like this:

$10 trillion (market loss) – $7.4 trillion (DCF value) = $2.6 trillion (value loss)

Based on discounted future tariff revenues, the market “overpaid” by $2.6 trillion compared to what those cash flows are worth today. According to standard capital budgeting principles, the tariff policy would destroy economic value rather than create it.

If we strip away the political oratory, focus strictly on the numbers, and apply standard financial analysis techniques used to evaluate corporate investments, Trump’s tariff initiatives do not add up as a strong financial strategy. The revenues generated by tariffs could easily be offset by broader economic losses, especially when benchmarked against long-term market performance. President Trump, as a successful businessman, surely understands this. We can speculate that the goal of his tariff strategy is to negotiate better terms and lessen America’s dependence on foreign nations, but the market has yet to reflect those potential benefits.

That said, many supporters argue that the value of tariff policy can’t be expressed solely as a profit and loss statement. The strategic goals that Trump hopes to address—securing stronger trade agreements, reinforcing national security, and rebalancing global alliances—are outside the scope of traditional valuation calculations. These goals have intangible benefits that cannot be easily quantified. The benefits of Trump’s strident tariff policies may not be visible in short-term stock prices or economic indicators, but they could lead to stronger strategic positioning further down the road.

Ultimately, the combination of rhetoric and hard numbers leaves investors, businesses, and taxpayers questioning whether tariffs are a sound financial strategy or a costly economic experiment – an answer that will only become clear with time.

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Surge in Foreign Investment in the US

White House data reveals a $5-7 trillion surge in investment in US business under President Trump’s administration. This capital influx is fueled by international businesses launching new ventures or reinforcing their existing presence in the US market.

Among those investors are powerhouses like Hyundai, NVIDIA, and Taiwan Semiconductor Manufacturing Company; however, a wave of small and mid-sized companies is also moving into the US market with ambitious expansion plans.

Regardless of business size, identifying the optimal tax structure for US operations is critical when planning expansion. What is the most advantageous structure for maximizing returns while minimizing tax exposure?

Common Sense?

Smaller enterprises may seek advice from US accountants serving similarly sized domestic companies, potentially resulting in suboptimal tax structures. How so?

The most common structure recommended for domestic growth-stage companies is an LLC, which is taxed as a flow-through entity, due to its tax efficiency for privately or closely held businesses. Although this structure is often also recommended for foreign companies investing in the United States, ownership by a foreign entity introduces additional considerations that must be carefully evaluated.

Flow-Through vs. Corporation

Understanding the fundamental differences between business structures is crucial for foreign investors.

Partnerships or flow-through entities report income, but partners pay the taxes.

Corporations face entity-level tax plus shareholder-level tax upon distribution of profits.

LLCs are treated as partnerships and are required to report income but don’t pay taxes on that income — rather, the tax liability sits with the individual partners. A benefit here is that there is no second level of tax. Partners in a flow-through entity must file personal returns with the IRS and pay the taxes on this income.

Corporations, conversely, first pay federal income tax on all profits at the corporate tax rate. Then, when the after-tax profits are distributed to shareholders as dividends, these same earnings face a second round of taxation at the individual shareholder level.

This dual layer of taxation, or “double taxation,” creates a higher cumulative tax burden than flow-through entities — but provides a cleaner separation between business and personal finances, something that many foreign investors find advantageous for compliance, simplicity, and privacy preservation.

Considerations for Foreign Investors

C Corporations often present several advantages for foreign investors. C Corporations allow foreign investors to better match when income is taxed in the US with when it’s taxed in their home country. This timing alignment helps investors maximize the tax credits they can claim in their home country for taxes already paid in the US, potentially reducing their overall global tax burden.

Additionally, tax treaties between countries frequently provide more favorable rates on dividend income from corporations compared to business income from flow-through entities.

Furthermore, with a corporate structure in place, foreigners would not have to file individual income tax returns in the US. For many foreigners this is a big consideration as they prefer to avoid having to file individual income tax returns in the US.

Finally, many countries view the US LLC as a corporation regardless of how it is treated in the US. This discrepancy between how the US classifies the entity and how foreign tax authorities view the entity can result in unfavorable tax consequences for the partner/investor.

Can a foreigner still use an LLC?

While many investors want to avoid the negative tax impact of being members in an LLC they are still attracted to the legal and governnce flexibility of one. A compromise does exist. Foreign investors can establish an LLC entity for legal purposes, but elect to have it treated as a C Corporation for US income tax purposes, thereby achieving the best of both options.

Additional Factors to Consider

Beyond entity structure decisions, foreign investors must also consider Transfer Pricing and State and Local Tax (SALT) implications. Watch for our upcoming articles that will offer guidance on these critical aspects of inbound investment planning.

Ultimately, the optimal entity choice depends on specific business circumstances and goals. Consulting with specialists in both domestic and international tax planning is essential for proper entity structuring.

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Most of us are scared silly to talk about death and prefer to avoid estate planning. Others mistakenly think that estate planning only applies to the ultra-wealthy who want to minimize estate tax burdens. In reality, estate planning is a necessity for people of all economic levels; it is a comprehensive strategy that defines how assets and responsibilities will be handled if one is incapacitated or passes away.

Estate planning includes the creation of a will or testamentary trust, the appointment of guardians for dependents, and succession planning. Succession planning, more specifically, is crucial for business owners who want to ensure a seamless continuation of their business after their departure. Regardless of one’s age, succession isn’t optional. It’s your legacy’s insurance policy, and like any other insurance policy, you need it to protect against unexpected circumstances — even if it means facing the uncomfortable idea of your mortality.

A well-structured succession plan prepares a business for all contingencies to ensure operational stability. Often, a founder of a family business will dedicate years of hard work to build a thriving enterprise, yet no succession planning—or poor succession planning—can dismantle this legacy in mere hours due to sibling rivalry, internal disputes, or confusion following the founder’s departure. A study by the Family Business Institute found that only 30% of family-owned businesses survive into the second generation, while a mere 3% persist into the fourth generation. While founders may hope for harmony among heirs, wishful thinking alone cannot replace a well-structured succession process.

A recent study conducted by Ameriprise Financial found that 70% of sibling disputes and financial quarrels stem from inheritance issues and parental finances. Even if a business owner devises a seemingly straightforward succession plan, such as transferring the entire company to designated heirs, several complications may arise. First, the transfer of business interests may impact the lifetime estate and gift tax exemption, potentially affecting the inheritance of other siblings. Second, the timing of the transfer must be strategically planned. Lastly, a clear plan must delineate the specific beneficial owners of the business and their respective ownership stakes.

A proper succession plan requires meticulous development and consultation with estate law professionals. It must outline the transition process, define the sequence of control, select a successor or successors, establish a management plan post-owner departure, and determine the valuation method for shares or ownership interests. The sequence of control is particularly vital for closely held family businesses, ensuring clarity on decision-making processes in the event of the owner’s incapacitation or death.

We’ve all heard the horror stories of individuals experiencing memory loss being influenced and exploited to make unauthorized and unsavory business decisions. A well-drafted succession plan must explicitly define “capacity” and specify the individual or entity responsible for making this determination, whether a physician, a legal professional, or a member of the clergy.

An effective succession plan must also consider the delegation of authority within the business. While it may seem logical to grant control to all the children who work in the company, involving uninvolved family members in decision-making could lead to inefficiencies and conflicts. A business administrator tasked with obtaining approvals for routine operational decisions may struggle to perform essential duties, particularly if they require consent from parties with competing interests. However, it may be prudent to require a collective vote from all stakeholders for significant business decisions or structural changes.

Estate and succession planning are fundamental components of securing a legacy. A well-crafted succession plan protects the business and the family from uncertainty, ensuring that the founder’s lifetime of hard work doesn’t fall apart overnight and endures for future generations. With strategic planning and expert guidance, business owners can avoid disaster, preserve family harmony, and secure the future for generations to come.

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Regulations around COVID-era tax programs were rolled out so fast and furious that accountants had to be on constant alert for updates and changes. So, it didn’t surprise us that the IRS has changed its mind regarding the proper reporting of the Employee Retention Credit (ERC). What is surprising, however, is how unceremoniously the IRS made an about-face on such a significant tax issue, acting as if that was its position all along. It all comes down to how to handle previously filed income tax returns for the periods when an ERC claim was submitted.

Many taxpayers previously struggled with the IRS policy that they must file an amended income tax return to correct their overreported wage expenses, even if the taxpayers haven’t received their money yet (see Notice 2021-20, Q&A 60, and Notice 2021-49, §IV(C) for example). The unwavering position of the IRS was that taxpayers were required to amend the return for the year in which the wage expense occurred, not the year the credit was received. Some taxpayers listened to the IRS and amended their income tax returns; some didn’t. Many tax practitioners struggled with their professional responsibilities advising clients regarding amending income tax returns.

In the event of an ERC audit, one of the first questions an auditor may ask is, “Did you file an amended return to reduce your wage deduction?” Some auditors felt that filing an amended income tax return was a condition precedent to making a proper ERC claim.

On March 20, 2025, the IRS revised its Employee Retention Credit (ERC) FAQs and issued new and surprising guidance on ERC-related reporting. In the “Income Tax and ERC” section of the IRS’s updated ERC website, the IRS explicitly instructs that to address overstated wages,

“… you’re not required to file an amended return or, if applicable, an administrative adjustment request (AAR) to address the overstated wage expenses. Instead, you can include the overstated wage expense amount as gross income on your income tax return for the tax year you received the ERC.

Example: 

Business A claimed an ERC of $700 based on $1,000 of qualified wages paid for tax year 2021 but did not reduce its wage expense on its income tax return for 2021.

The IRS paid the claim to Business A in 2024, so Business A received the benefit of the ERC but hasn’t resolved its overstated wage expense on its income tax return.

Business A does not need to amend its income tax return for tax year 2021. Instead, Business A should account for the overstated deduction by including the $700 in gross income on its 2024 income tax return.”

But what if the taxpayer did reduce his wage expense but his claim was later denied?

The IRS now instructs the taxpayer,

“…in the year their claim disallowance is final, increase their wage expense on their income tax return by the same amount that it was reduced.”

This provision is especially relevant because some “ERC years” are approaching the three-year statute of limitations for amendment. Until now, if the statute of limitations to file an amended return for the year the wages were originally paid had expired, the taxpayer had no practical way to account for this. In fact, many taxpayers who had filed amended returns and added back their overstated wages even received rejections from the IRS, who would not process their returns (and checks!) based on the expired statute of limitations. Now, the IRS permits and even instructs the taxpayer to make corrections in a later tax year.

The IRS’s reasoning for now having the income reported in the year of receipt is the “tax benefit rule,” which states that if a taxpayer takes a deduction based on specific facts but later the circumstances change and contradict those facts, he may need to “undo” part of that deduction by reporting it as income.

Instead of going back and amending the tax return from the year the claim was made, the IRS now allows you to correct the issue in the year you received the ERC by adding the overstated wage amount to the income for that year.

This new practical guidance is welcome for many tax practitioners and their clients. It eliminates the question of whether to file amended returns, allowing taxpayers to legitimately receive the full benefits of the ERC and remain in compliance with the IRS. It also provides an answer for those asked by the IRS why they haven’t yet filed an amended income tax return.

Others who have recently filed amended returns based on prior IRS guidance are wondering whether their returns will even be processed, and now they are in limbo as to whether to account for the ERC in the year of receipt. Never a dull moment for today’s tax practitioners!

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The Passive Foreign Investment Company (PFIC) rules have been in force for many decades, yet they remain a persistent source of angst for US taxpayers, particularly those in the financial services world.

PFIC rules were introduced in 1986 as part of the Tax Reform Act of 1986. Congress felt these rules were necessary to address US taxpayers who could easily move their liquid assets into offshore corporate structures and generate passive income. This passive income would be sheltered from US tax until the earnings would be repatriated to the US. The nature of passive income makes it easier to migrate out of the US to avoid US taxes.

Hence the PFIC regime — an anti-deferral mechanism that prevents US taxpayers from using offshore corporate structures to avoid paying US taxes on passive income.

What is a PFIC?

A PFIC is a foreign corporation primarily earning passive income or holding assets generating passive income.

Specifically, if more than 75% of a foreign corporation’s income is passive or more than 50% of a foreign corporation’s assets generate passive income, then the foreign entity would be considered a PFIC for US tax purposes.

For PFIC purposes, passive income generally includes the following types of income:

Dividends

Interests

Rents

Royalties

Capital gains

Impact of Owning a PFIC

Income from distributions and gains on dispositions of PFICs are subject to the highest tax rate applicable to the taxpayer type, regardless of the taxpayer’s tax rate bracket. In addition to imposing a higher rate of tax on many taxpayers, this also eliminates the qualified dividend and capital gains beneficial tax rates. An interest charge is also applied to the amount of recognized income considered to have been deferred.

Planning Considerations

Some planning opportunities are available to mitigate the harsh impact of PFIC ownership, but administratively, they can be challenging. Another burden of owning a PFIC is the additional disclosures and filing requirements related to PFIC ownership.

Taxpayers who invest directly in PFICs must address these issues at the more basic level. Venture capital or private equity fund investors encounter even more significant challenges, including layered compliance burdens, limited access to required tax information, and increased filing obligations.

Things got worse for investors in this space with the 2017 Tax Cuts and Jobs Act (TCJA). Prior to the TCJA, many foreign portfolio companies relied on a fair market value method to value their assets, allowing them to consider the fair market value of the enterprise and treat it as a goodwill asset. This was particularly helpful when the foreign portfolio company would have stores of cash from investors sitting on the balance sheet but no other significant assets. Cash is considered an asset that generates passive income and would quickly put the company’s assets over the 50% threshold, making it a PFIC. The fair market value method allowed the company to take credit for the company’s value, which is an asset not reflected on the balance sheet, and treat that enterprise value as “goodwill” or some similar type of intangible asset that does not generate passive income – thereby keeping the passive assets below the 50% threshold.

This election to use the fair market value is not available if the foreign corporation is a Controlled Foreign Corporation. The TCJA provision that reintroduced “downward attribution” caused many more foreign portfolio companies to be considered CFCs and even more to have to undertake additional administrative burdens to determine if they were indeed CFCs under these new rules.

Fortunately, in 2019, the IRS introduced a safe harbor rule with respect to the downward attribution rule, providing some relief for foreign portfolio companies dealing with this issue. While the guidance provided some relief,, it still required additional analysis.

In January 2022, the IRS issued proposed regulations (REG-118250-20) addressing the treatment of domestic partnerships and S corporations owning stock in PFICs.

These regulations suggest an aggregate approach where the partnership and S Corp would not be considered shareholders. Rather, each partner or shareholder of these domestic entities would be responsible for making PFIC-related elections and calculations for PFICs in which they were not directly invested but rather through S Corps and partnerships.

Understandably, the financial services industry met these proposed regulations with some hysteria. The current approach is to allow the S Corp or partnership to file the PFIC-related disclosures, make the relevant elections, track these elections and attributes, and perform necessary calculations. Requiring that the individual partners and shareholders take on this function tremendously increases the administrative burden on taxpayers in the financial services industry.

On a positive note, the current status of these rules is only ‘proposed’ and not binding; many have chosen to carry on as they have until now.

Given these considerations, there remains uncertainty in this area, particularly affecting taxpayers and those in the financial services industry. It is prudent to stay informed, act proactively, and consult with professionals to minimize risk, and ensure compliance.

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Private equity firms have long been central players in the U.S. economy, driving investments in businesses, creating jobs, and stimulating the economy. Last month, lawmakers issued a renewed call to eliminate the capital gains tax treatment on carried interest, a crucial component of private equity, venture capital, and hedge-fund compensation. Private equity firms have responded by pushing back against this potential reform, lobbying to keep the current tax policy in place to preserve economic growth.

Explaining Carried Interest

Carried interest is a share of the profits that investment managers receive as additional compensation for successfully managing high-risk investments. Typically, carried interest constitutes about 20% of the profits generated by the fund, although the percentage can vary depending on the specific arrangement. This compensation is not a salary or fee for services rendered but a share in the profits of the fund, paid only after investors have received their initial capital back, along with a minimum required return, often referred to as the “hurdle rate.”

The core controversy with carried interest lies in its tax treatment. Under the current U.S. tax system, carried interest is classified as a long-term capital gain rather than ordinary income. The IRS treats it as a capital gain because the manager is perceived to be making an investment in the fund. As a result, the income derived from carried interest is taxed at the capital gains tax rate, which is generally 20% for long-term holdings compared to the ordinary income rate of 37%.

For carried interest to qualify as long-term capital gain, the underlying investments held by the fund must be held for more than a year. Prior to the 2017 tax reform, the requirement for carried interest to be taxed as long-term capital gains was not explicitly restricted, so fund managers could claim long-term capital gain treatment even if the assets were held for a shorter period.

The 2017 Tax Cuts and Jobs Act (TCJA) introduced Section 1061, which extended the holding period for investments to qualify for the lower capital-gains rate from one year to three years. This provision was designed to close a perceived loophole where fund managers could enjoy long-term gains as long as the investment was held for more than a year but still enjoy the lower long-term capital gains tax rate.

Trump’s Proposal and Its Impact

Section 1061 highlighted the growing political pressure to reform carried interest taxation. While the three-year holding period rule tightened the previous tax benefits, this proposal could subject fund managers to ordinary income tax rates on carried interest in entirety.

Trump’s push for higher tax on carried interest is part of his broader tax reform strategy. The proposal is aimed at generating additional tax revenue, which could offset tax cuts for corporations or contribute to reducing the federal deficit. According to a December 2024 estimate from the Congressional Budget Office, taxing carried interest as ordinary income could decrease the federal budget deficit by $14 billion over 10 years.

This could have profound implications for the private equity industry. Fund managers would see a higher tax burden, which could reduce the after-tax return on investments, ultimately impacting the overall attractiveness of private equity as an investment vehicle. Higher taxes could discourage fund managers from pursuing certain types of investments, particularly riskier long-term projects, which require substantial upfront capital. As a result, some private equity firms might seek to restructure their compensation arrangements or adjust their investment strategies to mitigate the impact of these tax changes.

For investors, the shift in tax treatment could result in lower returns on their investments, particularly as the structure of the private equity industry evolves in response to these reforms. We could potentially see a reduction in new funds, with the biggest impact felt at the smaller fund level. Changes in carried interest tax rules may increase structure complexity and compliance costs for private equity firms. Clients may be forced to restructure fund agreements to avoid the proposed tax consequences. However, the full extent of these effects remains uncertain, and private equity advocates argue that the proposals could ultimately reduce overall economic growth.

Pushing Back

Private equity firms have been vocal in their opposition to any proposed changes to the tax treatment of carried interest. One of their key arguments is that the current system helps to attract and retain investment in long-term growth opportunities. Private equity firms argue that by taxing carried interest at the capital gains rate, fund managers are incentivized to focus on creating lasting value rather than making short-term, quick-profit investments.

Industry advocates assert that the capital gains treatment encourages fund managers to take calculated risks on businesses that need capital to scale, innovate, and grow. These investments, in turn, lead to job creation, higher wages, and an increased tax base. Groups like the American Investment Council have published reports showing that private equity-backed businesses are major contributors to job creation, with private equity firms generating more than 10 million jobs across the United States.

Private equity groups have pushed back with significant lobbying efforts. They argue that the new tax structure could harm the economy by discouraging investment in high-risk businesses, particularly those in underserved sectors. They point to studies suggesting that private equity plays a critical role in improving the productivity of U.S. businesses and enhancing global competitiveness.

Moreover, private equity firms have argued that the industry already faces significant regulatory scrutiny and that additional taxes would place an undue burden on private equity funds. Firms that specialize in venture capital or other high-growth investments may be particularly affected, as they depend on the capital gains treatment to incentivize their partners to take on riskier investments.

Bottom Line

Proposed changes to Section 1061 could affect how carried interest is taxed and may impact the financial industry—beginning with high-level fund managers and executives, then extending to broader investment structures, compensation models, and investor returns. We advise clients to avoid surprises and model various exit scenarios, especially for assets close to the new holding period thresholds.

As President Trump and other lawmakers propose various reforms, the private equity industry stands firm in defending its tax structure. While reform advocates argue for a more equitable system, private equity firms emphasize the crucial role that carried interest plays in driving innovation, job creation, and economic growth. The outcome of this debate will have significant implications for both the private equity industry and the broader U.S. economy, making the conversation over tax reform a topic worth watching.

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An inheritor’s trust is not just another estate planning tool—it’s your secret weapon for keeping wealth protected and under control. This trust is designed to protect and manage the assets you pass to a beneficiary. An inheritor’s trust allows your beneficiary to receive his or her inheritance in trust rather than as an outright gift or bequest. It locks down the assets and shields the beneficiary from taxes, creditors, and bad decisions. The beneficiary gets his share, but the assets are kept out of his or her own taxable estate.

Having assets pass directly to a trust not only protects the assets from being included in the beneficiary’s taxable estate but also shields them from other creditor claims, such as those arising from a lawsuit or a divorce. The inheritance is protected because the trust, rather than your beneficiary, legally owns the inheritance and because the beneficiary doesn’t fund the trust.

To ensure complete asset protection, the beneficiary must establish an inheritor’s trust before receiving the inheritance. The trust is drafted so that your beneficiary is the investment trustee, giving him or her power over the trust’s investments.

Your beneficiary then selects an unrelated person — someone he or she knows well and trusts — as the distribution trustee. The distribution trustee will have complete discretion over the distribution of principal and income, which ensures that the trust provides creditor protection.

The trust should be designed with the flexibility to remove and change the distribution trustee at any time and make other modifications when necessary, such as when tax laws change. Bear in mind that the unfettered power to remove and replace trustees may jeopardize the creditor protection aspect of the trust, which could result in the inclusion of the trust property in the beneficiary’s taxable estate.

Because it’s your beneficiary, and not you, who sets up the trust, he or she will incur the bulk of the fees, which will vary depending on the trust. In addition, he or she may have to pay annual trustee fees. Your cost, however, should be minimal — only the legal fees to amend your will or living trust to redirect your bequest to the inheritor’s trust.

Wealth preservation

Another benefit of an inheritor’s trust is that it can help ensure that inherited assets remain within the family lineage. By keeping assets in the trust rather than transferring them outright to beneficiaries, the trust can prevent wealth depletion due to mismanagement, overspending, or other poor financial decisions.

The trust’s grantor can include specific provisions or restrictions. These may include setting limits on distributions or requiring certain milestones (like completing education) before beneficiaries can access funds.

Follow the law

Ensuring an inheritor’s trust is properly drafted isn’t just a legal formality—it’s essential for protecting both the assets and the beneficiaries. Trusts must comply with federal and state laws to avoid potential IRS audits or court challenges. Most importantly, by taking the time to establish the trust correctly, the grantor ensures that his or her beneficiaries receive the full benefits of their inheritance without unnecessary risk.

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After numerous promises and delays, the IRS and Treasury have finally issued Proposed Regulations addressing Previously Taxed Earnings and Profits (PTEP) of foreign corporations and the related basis adjustments.

The proposed regulations are a follow-up of Notice 2019-01, which was issued in response to 2017’s Tax Cuts and Jobs Act (the “TCJA”). This notice provided a preview on how previously taxed income should be tracked and allocated when distributed. The current proposed regulations present a framework for tracking and managing PTEP to ensure that US shareholders in controlled foreign corporations (CFCs) are not taxed twice on the same earnings.

US Shareholders in CFCs are subject to a handful of tax regimes which require them to recognize “phantom income,” or income attributed from the foreign corporation, without even having received a distribution of cash or property. These regimes include Subpart F, Global Intangible Low Taxed Income (GILTI) and the one-time Section 965 Transition tax, ca. 2017.

When an actual distribution of cash or property is made, these earnings could be subject to US tax for a second time. The PTEP rules provide that these earnings, previously taxed under one of the above-mentioned regimes, should be excluded from income when distributed, preventing double taxation.

The latter two regimes, GILTI and Section 965, were codified as part of the 2017 TCJA and resulted in a tremendous increase in the number of US taxpayers that were recognizing phantom income and in the amounts of PTEP that were in the system. Hence, the increased urgency for guidance on the practical application of the PTEP rules.

The 350-page proposal does not make for light reading, and experts claim it doesn’t cover many issues that still need to be addressed.

Below are some key points:

PTEP Accounting and Tracking – The regulations require tracking of PTEP at both the U.S. shareholder and foreign corporation levels.

Categorized, annual PTET accounts – Taxpayers must maintain annual PTEP accounts categorized by the different types of income inclusions (e.g., Subpart F income, Global Intangible Low-Taxed Income [GILTI], Section 965 inclusions).

Share-by-Share Basis Adjustments – This approach entails applying basis adjustments to specific shares or property, which prevents improper shifts and ensures accurate gains or losses upon sale.

Tiered structures present challenges because they involve multiple layers of ownership. Under Subpart F/GILTI/Section 965 rules, lower tier foreign corporation income can bypass intermediate holding companies and be allocated directly to the US shareholder, making it difficult to accurately account for PTEP.

Adjustments to basis are generally made at the beginning of the taxable year in which the inclusion or distribution occurs.

Foreign Currency Dollar Basis Pools – Taxpayers are required to maintain U.S. dollar basis pools to compute foreign currency gain or loss under Section 986(c).

Foreign Tax Credits Allocation and Apportionment – The proposal includes rules for allocating and apportioning foreign taxes to PTEP distributions.

The proposed regulations are set to apply only for future tax years of foreign corporations, starting on or after the date when the regulations are officially finalized. They are not retroactive.

Taxpayers have the option to apply the regulations retroactively to open tax years.

The proposed regulations are welcome and will be helpful for taxpayers who have had recognized Subpart F, GILTI or other phantom inclusions from CFCs. However, accounting for US investments in foreign corporations and keeping updated about the new ordering rules, basis adjustments, and distribution classifications is not for an amateur. Taxpayers should work closely with tax professionals who can help them update their tracking systems, accurately categorize PTEP pools, and strategize to avoid double taxation and address compliance issues.

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Like much else under the new Trump presidency, the country’s tax landscape is shifting and reshaping beneath our feet.

Thousands of federal jobs have been slashed, including a large swath at the IRS. This, coupled with an IRS hiring freeze, will reduce the IRS’s ability to pursue tax debt collection and slow down audits, collections, and legal actions. The Department of Government Efficiency’s (DOGE) access to the IRS’s Integrated Data Retrieval System will accelerate a swing toward AI-driven fraud detection and enforcement, and could increase scrutiny on delinquent taxpayers and open the door to a wave of litigation in defense of data privacy. Lastly, the Tax Cuts and Jobs Act (TCJA) of 2017, which has kept tax rates low, key deductions and credits in place, and favorable tax breaks available, is set to expire by the end of 2025 and may or may not be renewed.

These potential changes have tax professionals worried about taxpayer health and the IRS’s capacity to enforce tax law and resolve tax controversy issues. Will scrutiny on delinquent taxpayers increase or weaken in 2025? Will there be sufficient IRS staff available to address delinquencies for tax debtors who want to resolve their obligations? What is the recalcitrant taxpayer to do in these tumultuous times?

What are taxpayers thinking

Taxpayers who are in arrears may wonder if it is the right time to come clean and resolve their outstanding tax issues, or to continue to cruise, hoping that IRS disarray will stand in their favor.

According to statistics generated by the Professional Managers Association, the IRS workforce stands at more than 100,000 total employees. Approximately 28,000 of those have been onboarded within the past year, and about 30,000 employees have worked there less than three years. The IRS, as of February 19, 2025, reports that it plans to lay off approximately 6,000 first-year probationary employees, despite the hiring freeze recently imposed by President Trump. These layoffs will disproportionately affect IRS employees in enforcement because they represent a large share of new employees.

While it’s true that the disorder in federal functioning may translate into diminished scrutiny, the dearth in staffing means that there won’t be agents and reps available to address taxpayers’ issues when necessary. If a taxpayer is at the “Final Notice” stage, automated notices will continue to be released, and a levy will automatically be imposed. However, there likely won’t be enough IRS agents to review appeals, release levies, arrange payment plans, or offer compromises for petitioners. We recommend that the delinquent taxpayer move to resolve his tax debt before he gets caught up in the IRS’ machinery and finds he has no recourse for his debt.

 What we’ve seen at the IRS

Our tax controversy team communicates with IRS representatives daily and has found that auditors, tax reps and agents share taxpayers’ state of confusion. They are stressed and anxious in the face of DOGE’s aggressive layoffs, wondering if or where the hatchet will fall next. Many are considering retirement to get out of the line of fire. New employee training has been frozen mid-stream, leaving longstanding agents worried about the extra burden they will shoulder to compensate for insufficient staff. Their state of limbo does not enhance operations. As one auditor told us, “Sorry if I sound muddled; it’s because I am.”

What You Should Do

Compliance is always the answer. File your taxes on time to avoid additional penalties. If you are in arrears, consider setting up a payment plan now, before IRS processing delays get worse. Stay abreast of policy changes; if TCJA provisions expire, your tax bill will change. Finally, if you are out of your depth, seek the help of an accounting professional.

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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.

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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.

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The Employee Retention Credit (ERC) was introduced in response to the COVID-19 pandemic as part of the CARES Act in 2020. It is a refundable tax credit with the purpose of incentivizing businesses to keep their employees on payroll during the disruptive pandemic period.

The ERC is calculated per employee and (for 2021) offers a credit of 70% of qualified wages paid to each employee during eligible quarters. Wages are capped at $10,000 per employee per quarter, resulting in a maximum credit allowance of $7,000 per employee per quarter.

Applying for the ERC should have been a fairly straightforward process, but a glitch in the IRS system triggered a spate of erroneous notices of disallowance to many applicants, causing complications, frustration, and losses for taxpayers.

The IRS claimed the disallowances were due to discrepancies in the number of employees reported by applicants. To support this accusation, the IRS points to taxpayers’ filed Form 941, Part 1, Box 1. Taxpayers are asked for the number of employees appearing on the payroll for the quarter. If the IRS finds that the employee count cited on Form 941 is less than the amount of employees claimed for the ERC on the employer’s 941X, it will disallow the credit.

The source of the problem boils down to the language used on the form. Form 941, Part 1, Box 1 of the 941 requests:

“Number of employees who received wages, tips, or other compensation for the pay period including Mar. 12 (Quarter 1), June 12 (Quarter 2), Sept. 12 (Quarter 3), or Dec. 12 (Quarter 4).”

The instructions explicitly request employee counts for a specific ‘snapshot’ of time – the 12th day of the last month of the quarter—rather than for the entire quarter.

In practice, the quarter ends on the last day of the last month of the quarter. Any fluctuation in employee count that an entity experienced between the 12^th and the close of the quarter will not be accounted for in the ‘Box 1 count’. The total number of employees for the entire quarter is not properly reflected in the original 941 filing because the filing requested the employee count only for the pay period including the 12th of the month, not for the whole quarter.

Thus, many discrepancies in taxpayers’ employee counts are not a result of payroll errors or fraudulent reporting, but instead are a reflection of the misguided and ineffective language used by the IRS when requesting taxpayers’ data. Employers are eligible for the ERC on all employees who were paid during the quarter, not only on the ones that were employed during the “snapshot” pay period.

We advise taxpayers who have received this type of disallowance notice to respond to the IRS in writing, with an explanation of their calculations – including the number of employees that may have been onboarded after the 12^thof the month, but within the quarter. If the taxpayer can support the employee count as reported on the Form 941 filing, there is every reason to believe they can reinstate their full legitimate credit, as provided by law. Many of our clients who responded in this manner have already received IRS notices confirming their full credit has been approved.

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What is International Tax?

Any time a business or individual engages in a financial transaction that crosses a border, there are international tax implications, and therefore an international tax advisor should be consulted. Some examples of such transactions are:

investing in non- U.S. investments
selling services or products to customers outside of the U.S.
hiring an employee outside of the U.S.
establishing a foreign subsidiary
collaborating with a business based outside of the U.S. in a joint venture
borrowing money from a non-U.S. lender, or
purchasing real estate in a different country.

What are some International Tax implications?

Any time you do business or make an investment, the country where the transaction took place has the right to tax the income you’ve earned. In our digital world, even if you don’t have any physical presence in a particular country, that country may still leverage a tax on the income generated within it. An international tax advisor can assist you in understanding what are the local country’s tax implications of your activities and what may be your potential tax liability. There will likely be income tax ramifications and a Value Added Tax (VAT), a tax which is common in Canada and many European Countries. Often, these additional taxes can be as high or higher than a country’s corporate income tax.

In addition to the foreign country’s tax implications, there are specific tax rules that address how the IRS taxes transactions outside of the U.S., and there are additional disclosure requirements. These requirements usually take the form of specific filings that report details of the foreign activity. Even when there may not be a significant taxable impact from the cross-border activity, there will be a filing requirement that, if left unmet, could result in heavy penalties starting from $10,000 per form. The costs of missing a filing requirement or planning opportunity in the cross- border context can be very high, more so than in a purely domestic context.

How can one benefit from using an International Tax Advisor?

Anyone dealing in any cross-border transaction could potentially need international tax services. Cross-border tax is fraught with traps for the unaware; it also offers many planning opportunities. Consulting with a knowledgeable international tax specialist can help you avoid unnecessary costs or potential penalties and inform you about opportunities to minimize your effective global tax rate.

Businesses with international connections and multinational corporations require insight into the international marketplace, as well as information regarding the global business arena.

Whether regarding regulations, compliance, or tax advisory, international tax consultants can help you navigate the complex web of the international market and help you achieve your business goals.

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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.

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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.

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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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Refine your strategic plan with SWOT