How Investors Look to Score Sweet Deals on Distressed Properties
If you’re a confident investor, this might be your moment. High interest rates, tighter financing options and general economic uncertainty have banks worried. Defaults and distressed properties are on the horizon, but surprisingly, banks seem more inclined to sell off their loan portfolios rather than dive into the real estate game. This may be the time for investors to move in and take advantage of bargains and buy-offs.
As the Federal Reserve continues to battle inflation, the resultant high rates have become worrisome to a broad range of investment sectors. The commercial real estate (CRE) industry’s $4.5 trillion of outstanding mortgage debt means that there’s what to worry about. According to research conducted by Ernst & Young LLP , the average reported mortgage rate exceeded the average reported property cap rate in Q4 2022 and Q2 2023. The last time this occurred was during the 2008 financial crisis.
The market’s high volume of distressed debt that is approaching maturity leaves investors operating in loss positions. According to Trepp, a financial data and analytics company that provides information, analytics, and technology solutions to the real estate industry, approximately $2.81 trillion of debt is coming due by 2028. It is likely that banks will be looking to generate workouts with needy borrowers to unload that debt.
Higher interest rates, stiffer financing options and high and rising operating costs have created a sluggish CRE market, negatively affecting real estate valuations. Despite the market’s uncertainty, experts agree that confident buyers, looking for long term results, may find worthwhile opportunities by buying out bank debt.
In an effort to minimize risk and avoid exposure banks are taking a more restrained approach and avoiding foreclosing and repossessions. They are opting instead to unload troubled assets by selling debt. This makes it a good time for the knowledgeable investor to step in. Because banks are looking to dispose of loan books, investors need to be prepared to act quickly. “Investors need to begin planning in advance for transactions in terms of how they plan to mobilize, how they get data, how they are going to underwrite the property cash flows and loan cash flows and ultimately arrive at a price for the portfolio,” says EY’s Kevin Hanrahan
How can the investor take up Hanrahan’s advice? Robust tech capabilities can ensure that the investor is able to pull data, and process and aggregate it swiftly, leaving a clear path for the underwriting process. An investor that can access his or her information efficiently will be able to jump into negotiations quickly with realistic pricing and valuation data.
The continued uncertainty in the real estate industry will be felt uniquely by banks, borrowers, and investors. Experts agree that, as banks make more moves to unload debt, and more loan books enter the marketplace, investors should make sure to be prepared to respond quickly to win deals.
Investors who’ve had the foresight to build relationships with banks, who are able to effectively rely on their technology to access data, and who have the know-how to use their data to calculate realistic pricing, will be in the driver’s seat when an opportunity presents itself. Do your homework and be there with them.
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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Maximize the QBI Deduction Before It’s Gone
The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed individuals and small-business owners to deduct up to 20% of their qualified business income on their taxes. Eligible taxpayers can claim the deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025 – so be sure to take advantage of this big tax saver while it’s around.
Deduction basics
Pass-through business entities report their federal income tax items to their owners, who then take them into account on their owner-level returns. So the QBI is written off at the owner level. It can be up to 20% of:
- QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, and
- QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation.
QBI is calculated by taking income and gains and reducing it by the following related deductions.
- deductible contributions to a self-employed retirement plan,
- the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums.
Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals.
Limitations
At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively.
If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.
The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business.
Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).
Unfavorable rules for certain businesses
For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB.
Other factors
There are other rules that apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately.
There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result.
Use it or potentially lose it
Time is running out for self-employed and business owners to take advantage of the QBI; and while Congress could extend it, it’s doubtful that they will. Maximizing the deduction for 2024 and 2025 is a goal worth pursuing. Speak to your accounting professional to find out more.
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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Is now the time for your small business to launch a retirement plan?
Many small businesses start out as “lean enterprises,” with costs kept to a minimum to lower risks and maximize cash flow. But there comes a point in the evolution of many companies — particularly in a tight job market — when investing money in employee benefits becomes advisable, if not mandatory.
Is now the time for your small business to do so? As you compete for top talent and look to retain valued employees, would launching a retirement plan help your case? Quite possibly. And the good news is that the federal government is offering some intriguing incentives for eligible smaller companies ready to make the leap.
Late last year, the Consolidated Appropriations Act, 2023 was signed into law. Within this massive spending package lies the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Its provisions bring three key improvements to the small employer pension plan start-up cost tax credit, beginning this year:
1. Full coverage for the smallest of small businesses. SECURE 2.0 makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees, up to an annual cap. Previously, only 50% of costs were allowed. This limit still applies to employers with 51 to 100 employees.
2. Glitch fixed for multiemployer plans. SECURE 2.0 retroactively fixes a technical glitch that prevented employers who joined multiemployer plans in existence for more than 3 years from claiming the small employer pension plan start-up cost credit. If your business joined a pre-existing multiemployer plan before this period, contact us about filing amended returns to claim the credit.
3. Enhancement of employer contributions. Perhaps the biggest change brought by SECURE 2.0 is that certain employer contributions for a plan’s first 5 years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000, as follows:
- 100% in the plan’s first and second tax years,
- 75% in the third year,
- 50% in the fourth year, and
- 25% in the fifth year.
For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.
In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions is also unavailable for elective deferrals or contributions to defined benefit pension plans.
To be clear, though the name of the tax break is the ‘small employer pension plan start-up cost credit,’ it also applies to qualified plans such as 401(k)s and SIMPLE IRAs, as well as to Simplified Employee Pensions. Our firm can help you determine if now is the right time for your small business to launch a retirement plan and, if so, which one.
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.
© 2023
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2022 Q4 Tax Calendar: Key Deadlines for Businesses and Other Employers
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.
Monday, October 3
The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.
Monday, October 17
- If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2021 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2021 to certain employer-sponsored retirement plans.
Monday, October 31
- Report income tax withholding and FICA taxes for third quarter 2022 (Form 941) and pay any tax due. (See exception below under “November 10.”)
Thursday, November 10
- Report income tax withholding and FICA taxes for third quarter 2022 (Form 941), if you deposited on time (and in full) all of the associated taxes due.
Thursday, December 15
- If a calendar-year C corporation, pay the fourth installment of 2022 estimated income taxes.
Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.
© 2022
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Do Your Employees Receive Tips? You May Be Eligible for a Tax Credit
Are you an employer who owns a business where tipping is customary for providing food and beverages? You may qualify for a tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.
How the credit works
The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.
You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15 per hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.
Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.
How it works
Example: A waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.
The waiter’s $2 an hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.
While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Get the credit you’re due
If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.
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