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February 07, 2025 BY Chaya Siegfried, CPA, MST

IRS Issues New Rules on Classification of Digital Transactions: How Will Your Business Be Taxed?

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On January 14, 2025, the US Treasury and IRS released final regulations on the classification of digital content and cloud transactions. These rules address how transactions related to software, including streaming content, SaaS, and other cloud-based solutions are classified for US tax purposes. The guidance is relevant specifically to cross-border tax provisions, including withholding on payments made to foreign persons, and specific rules under Subpart F & GILTI.  

How transactions are classified impacts how they are taxed. The new regulations clarify whether digital transactions are classified as leases, sales, or services. Once the tax classification of a transaction is established, the taxpayer can rely on the existing sourcing rules to understand what is defined as US sourced and what is foreign sourced – and the implications of each. The goal of refining the regulations is to help businesses, including multinational corporations, understand how cross-border digital transactions will be taxed and to ensure compliance with U.S. tax laws. 

Given that businesses have been engaged in cloud transactions for decades, this guidance is long overdue. The IRS has yet to issue guidance on the classification of more advanced technology-related transactions, such as those involving Artificial Intelligence or digital assets; and there is no current indication that such guidance is forthcoming. Ultimately, guidance that provides clarity on these topics help both U.S. and foreign companies comply with U.S. tax obligations, while they navigate the challenges of the digital economy. 

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.

January 31, 2025 BY Chaya Siegfried, CPA, MST

Profitable but Taxing: The Realities of U.S. Property for Foreign Investors

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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.

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.

January 30, 2025 BY Our Partners at Equinum Wealth Management

Volatility: A Feature or a Fault?

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We’ve all heard it before, “The stock market is too volatile!” Investors, analysts, and your brother-in-law’s best friend, the one who suddenly became a market expert after reading an article, all seem to grumble about the ups and downs of the market. But here’s the question — is this volatility really such a bad thing?

It’s clear that the stock market has been one of the most effective wealth building tools over the past century. The market’s ability to compound wealth over decades has made it a powerful mechanism for long-term growth. What if I were to tell you that market returns are largely attributable to its volatility? Sounds counterintuitive? Let me explain.

In investing, there is a concept called the Efficient Frontier. It’s a curve that shows the best possible return one can achieve for a given level of risk. Usually, risk is plotted on the X-axis and returns on the Y-axis. Higher returns require taking on greater levels of risk.

Effiecient Frontier

In reality, the better way to view this concept is to exchange “Risk” for “Reason”. When an investment has a higher expected return, it does not always mean it carries more risk, rather, it means there is a significant reason for its higher expected return.

If we were to plot a standard investment on the chart above, beginning with the bottom left, we would see that the safest asset (for example, U.S. Treasuries) presently shows yields of approximately 4%. Any investment that promises more than that – meaning it has a higher expected return – must be accompanied by a “reason” that will move it out further to the right of the chart.

What could be some reasons for higher expected returns?

  • Loss Exposure. For example, real estate and private businesses have a higher expected return than treasuries, as there is capital at risk.
  • If a bank CD is locked in for a long period, it doesn’t necessarily mean it is a riskier investment. However, the extra limitation period will create the demand for a higher return.
  • If an investment is volatile, investors will expect a higher rate of return.

To put it briefly, if there is no reason, there is no extra return.

Let’s focus a little more on the last factor on the list, volatility.

The stock market represents the ultimate in volatility. Some years, it may be up 30%, while other years it may swing 20% downward. If you focus on any one year, the picture is chaotic; but if you consider the market’s long-term average, the picture becomes much clearer. The U.S. stock market has returned approximately 10% annually over the past century. That return isn’t an accident – it is the reward for enduring volatility.

If the stock market were as stable as a savings account, it wouldn’t return 10%; it would return something closer to 4% – like Treasuries. If the market would be as safe as Treasuries, investors would bid up prices where the effective yield would be similar to the risk-free rate. The volatility is what creates the opportunity for higher returns. With no volatility, there would be no reason for stocks to outperform.

Instead of being disturbed about market volatility, why not embrace it?! Volatility is not your enemy; it’s your ticket to higher returns. Volatility is a reason you get paid more. It’s the price you pay for participating in one of the greatest wealth-building mechanisms ever created. Beyond that, volatility offers opportunities to invest at times when investments are at reduced or discounted rates. Sir John Templeton put it best when he said, “For those properly prepared, the bear market is not only a calamity but an opportunity”.

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.

January 30, 2025 BY Hershy Donath, CPA

Forever On the Move: How Interstate Migration Affects the Real Estate Industry

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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.

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.

January 30, 2025 BY Moshe Schupper, CPA

Sky-rocketing Demand for ABA Services Offers Vast Opportunities: Here are the Key Metrics for Success

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Autism rates are skyrocketing across the country, reshaping the healthcare industry’s landscape for families, insurers, and providers. Does this surge in the autistic population make the ABA space a surefire investment opportunity? We believe there is great potential in this space, however, like any industry, a successful ABA agency comes with its own unique challenges and operational demands. To navigate these challenges and ensure long-term success, ABA agencies must focus on key performance indicators that drive both operational efficiency and profitability.

Escalating Demand

Applied Behavior Analysis or ABA has become widely known as the go-to therapy for treating individuals with autism spectrum disorders (ASD). Historically, insurers excluded ABA therapies, classifying them as educational rather than as medical services. However, the 2013 release of The Diagnostic and Statistical Manual of Mental Disorders, Fifth Edition (DSM-5) significantly broadened the definition of autism and today, Medicaid and most insurance plans are mandated under the 2014 Affordable Care Act (ACA) and state law to provide coverage for autism treatment, including ABA therapy.

In a study issued in October of 2024, the journal JAMA Network Open reported that data gathered from over 12 million patients enrolled in major U.S. health care systems determined that between 2011 and 2022 the number of people diagnosed with autism climbed to a shocking 175%. Autism rates stand highest among the very young; according to calculations issued by the U.S. Centers for Disease Control and Prevention, about 1 in 36 children were diagnosed with ASD in 2020.

Do the math – this could translate to an estimated 2.9 million autistic individuals by 2034.

Key performance indicators

Revenue per Client, Therapist Utilization Rate, and Accounts Receivable Turnover  are essential key performance indicators. They provide measurable data that enables an agency to monitor cash flow, improve billing efficiency, and maximize revenue. They can help reduce delays in payments, thereby reducing a business’ working capital requirements and enabling appropriate cash flow. These metrics also serve to reflect whether an agency’s performance holds value to a potential investor.

Consider this fictional case scenario:

All-Smiles ABA Center is a friendly place and prides itself on its dedicated and professional staff.

The Accounts Receivables representative is often sick and behind in billing. She manages the agency’s finances by documenting when cash comes in and out, without keeping track of the revenue or expenses for each specific service or the date they are provided.

All-Smiles’ warmhearted therapists will often spend extra time with patients and understand occasional no-shows. The administrative staff is always ready to delay documentation until the client is comfortable with its services.

At the request of its clientele, the agency heavily promotes social skills groups, even though these sessions are reimbursed at much lower rates than direct one-on-one therapy. The majority of the agency’s clients are on Medicaid, which provides lower reimbursement rates, but the agency values its relationships and doesn’t want to make clients feel unwanted by focusing on a more diversified mix.

Accounts Receivable Turnover – All-Smiles billing and receivables processes are underperforming. Agencies must be able to consistently submit accurate and timely claims, in compliance with payor requirements to minimize rejected claims and payment delays. Timely collections are crucial to ensure that funds are available for salaries, and administrative and operational costs. Important metrics for accounts receivables include tracking average days in accounts receivable, collection rates by payor, and percentage of overdue accounts.

Therapist Utilization Rate – Compassionate and dedicated therapists may enhance services – but unbilled time translates directly into lost income. clients whose services earn lower reimbursements, or who take up extra, unbilled, therapy time are bringing in less revenue than it costs to serve them. Tracking an agency’s percentage of billable hours against total hours worked, the average caseload per therapist, and therapists’ cancellation rates maximizes therapist productivity and ensures operational efficiency. All-Smiles would also be wise to assess their client base and focus on clients with more robust coverage that yields reimbursements at higher rates.

Revenue per Client: Understanding how much revenue each client generates is essential in order to evaluate profitability, identify inefficiencies in billing, and ensure the business remains financially sustainable. Tracking revenue by service type helps the company assess which services yield the most profit. All-Smiles accounting and billing processes are so poor that it does not realize that its social skills sessions generate low revenues relative to therapist’s time. As a result, it fails to expand on therapy services or train additional staff and misses opportunities to boost profitability. Because All-Smiles operates on a cash basis and never reviews revenue and direct expenses on a date of service level, they are unable to properly track AR and know its accurate revenue, bad debt, and trends.

By analyzing the information revealed by these KPIs, an agency can track its revenues, scrutinize its performance, and use the data to create its own unique competitive advantage in the industry. It can evaluate profitability and identify opportunities to improve.

Working with our clients in the ABA space has proven that profitability in this industry is less about the volume of clients served and more about operational excellence and strategic management. For existing healthcare entities, the burgeoning autistic population offers promising opportunities to extend services and take advantage of this explosive growth. Established ABA agencies would be wise to analyze these key performance indicators to recognize red flags, maximize their returns, and set a value on their entity to attract potential investors.

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.

January 13, 2025 BY Ahron Golding, Esq.

IRS Issuing Erroneous Auto Disallowances for ERC

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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 12th 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 12th  of 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.

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.

January 13, 2025 BY Chaya Siegfried, CPA, MST

Cross Border Transactions: International Tax Implications and What It Means For Your Organization

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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.

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.

January 13, 2025 BY Wendy Barlin, CPA

CFO or No? Identifying the Financial Leadership Your Business Needs

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Are you considering hiring a Chief Financial Officer (CFO)?

Congratulations! That means your business is growing, your revenue is rising, and you are evaluating how to best manage your financial reporting. Hiring a CFO is one of several solutions for a business seeking to upgrade its financial management team. Alternative choices that offer opportunities for growth include outsourced CFO services, Fractional CFO, and CAS providers. How can a business assess which option will best fit its needs?

A CFO is employed full-time as a senior executive. They develop financial strategies, manage cash flow, monitor risk factors, and perform financial forecasting. A CFO’s salary will typically account for 1% to 5% of a company’s revenue. If your business is complex, with multiple revenue streams or many affiliated entities, or has experienced significant and rapid growth, it is likely that you need a CFO on your executive team. The CFO assumes high- level financial responsibilities, such as raising capital, engaging in mergers and acquisitions, and managing compliance requirements. They stand at the forefront of the business’s strategic planning team and ensure the preparation of accurate and detailed financial reporting to serve stakeholders, investors, and banks.

What if your business is not yet ready for the expense of a full time CFO, but still needs upgraded financial support? Most small- to medium-sized companies could benefit from a CFO’s expertise, especially if they have defined growth strategies or are in the process of scaling up. But if the business is experiencing uncertainty or is in middle of a transition, it is usually not the ideal time to take on the added cost or commitment of a full time CFO. Outsourced CFO Services or a Fractional CFO may be a better option.

Professionals in these roles supply part-time or project-based high-level, financial expertise. Outsourced or Fractional CFOs work with multiple clients and will allow your business to access expert guidance on a flexible, as-needed basis. The services are tailored to your business, without making a permanent hire and taking on more overhead.

Client Accounting Services (CAS) firms take over day-to-day accounting tasks like bookkeeping, bill paying, and reconciliations. They can assume responsibility for cash flow management to make sure payments go out on time and that there are enough liquid funds to ensure that all business needs are met. They can work along with Fractional CFOs to handle a business’s financial management, and provide comprehensive support without the added expense of hiring multiple full-time employees.

A CAS team will keep your financial records in order to serve your tax preparation, filing, and regulatory needs and safeguard your business in case of audit. They can also assume high-level executive functions such as generating detailed financial reports, analyzing key performance indicators (KPIs), and providing insights into financial trends to help a business make informed decisions.

It may be time for your business to take a good look in the mirror. If it is facing rapid growth, has a complex financial structure, wants to embark on significant fundraising or M&A activity, is subject to serious regulatory requirements, or desperately needs strategic leadership, it’s high time to hire a competent CFO.

However, depending on your business’s long-term goals and budget, the services of a Fractional CFO supported by a CAS provider can enhance your business’s efficiency, streamline financial processes, and deliver the valuable data that management needs for strategic decision-making – all without adding another senior executive into the mix.

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.

January 13, 2025 BY Alan Botwinick, CPA

Working Capital: Managing Cash, Profits and Growth

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Many businesses measure their success in terms of sales, but a better indicator is profitability. Turning a profit after paying for expenses means that a business is achieving its financial goals. But in order to consistently yield profits, the business needs to have liquidity.

Even if sales are sky-high, the bottom line can’t grow unless there is enough cash to fund and maintain operations to fulfill all those orders. There is, however, a tried and true method to maintaining liquidity while expanding a business: managing working capital knowledgeably and efficiently.

Cautious with cash

Working capital is the amount of accessible cash you need to support short-term business operations. The traditional way to measure liquidity is current assets minus current liabilities equals working capital. Regularly calculating working capital can help a business’s leadership team answer questions such as:

  • Are there enough assets to cover current obligations?
  • How fast could those assets be converted to cash if needed?
  • What short-term assets are available for loan collateral?

Another way to evaluate liquidity is the working capital ratio: current assets divided by current liabilities. A healthy working capital ratio varies from industry to industry, but it’s generally considered to be 1.5 to 2. A ratio below 1.0 typically signals impending liquidity problems.

A third perspective is to compare working capital to total assets and annual revenue. From this angle, working capital becomes a measure of efficiency.

Costs and credit

The amount of working capital a company needs, or its working capital requirement, depends on the costs of its sales cycle, operational expenses and current debt payments. Fundamentally, there must be enough working capital to finance the gap between payments from customers and payments to suppliers, vendors, lenders and others.

High liquidity generally equates with low credit risk. But having too much cash tied up in working capital may detract from important growth initiatives such as:

  • expanding into new markets,
  • buying better equipment or technology,
  • launching new products or services, and
  • paying down debt.

Failure to pursue capital investment opportunities can also compromise business value in the long run.

Focus on these factors

The right approach to managing working capital will vary between companies depending on factors such as size, industry, mission and market. In general, to optimize a business’s working capital requirement, focus primarily on the following three key areas:

  • Accounts receivable.The faster you collect from customers, the more readily you can manage debt and capitalize on opportunities. Possible solutions include tighter credit policies, early bird discounts, and collections-based sales compensation. Also, improve your administrative processes to eliminate inefficiencies.
  • Accounts payable.From a working capital perspective, since liquidity is key, you generally do not want to pay bills earlier than necessary. Except to take advantage of early bird discounts, it’s best to pay bills at or close to their due date. Be careful not to fall into arrears or nonpayment, which could damage your credit rating and reputation.
  • Maintaining inventory is a challenge of efficiently managing working capital. Excessive inventory levels may dangerously reduce liquidity because of restocking, storage, obsolescence, insurance and security costs. Conversely, insufficient inventory levels can frustrate customers and hurt sales. Be sure to give your inventory proper time and attention, such as regular technology upgrades and strategic consideration of ideal quantities.

The right balance

A successful business strikes the right balance of sustaining enough liquidity to operate smoothly, while also saving funds for capital investments and maintaining an emergency cash reserve. Management must assess precisely the business’s working capital and consistently work to optimize it.

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.

December 24, 2024

Webinar Recap: Year-End Charity Tips to Maximize Your Tax Benefit

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In partnership with The OJC Fund, Roth&Co hosted a highly informative webinar providing valuable insights on year-end charitable giving and tax-saving strategies. The webinar featured Roth&Co Partner Michael Wegh, CPA, Roth&Co Manager Yisroel Kilstein, CPA, and Aron Pinson, CFA, Chief Investment Officer at Equinum Wealth Management. Click here to watch the recording, or read the recap below.

Charitable giving creates a “win-win” for taxpayers: it supports meaningful causes while offering deductions that reduce taxable income. Taxpayers have two options for claiming deductions on their returns: They can either take the standard deduction, or opt to itemize deductions, which allows them to include all their annual contributions. For those who itemize, tax-deductible donations can be a valuable tool for reducing overall tax liability.

It’s important to note, though, that not every charitable contribution qualifies for a deduction. Donations must be made to an IRS-registered organization or an official House of Prayer. In most cases, tangible property can be deducted unless goods or services are exchanged in return for the donation. For example, if you attend your child’s annual school dinner, you can deduct the entrance fee—minus the fair market value of the meal, as the meal constitutes a tangible benefit.

Intangible religious benefits—such as moral guidance or participation in religious services—are not considered taxable income, and are exempt from IRS reporting requirements. However, tuition payments for religious education are considered tangible benefits and do not qualify as deductible charitable contributions.

To claim a deduction for any given year, the donation must be made before December 31st of that year. Electronic contributions should be withdrawn from a bank account or non-electronic contributions should be postmarked by that date. Additionally, it’s essential to keep documentation in case of an audit. Written records are required for donations under $250, while donations over that amount must be substantiated with a ‘Contemporaneous Written Acknowledgement’ or receipt.

An individual’s charitable contribution deduction is capped based on the classification of the organization or recipient. For cash donations, contributions to public charities are generally limited to 60% of a person’s adjusted gross income (AGI). The percentage limit may differ for non-cash contributions (e.g., securities or property), which are capped at 50% or 30%, depending on different factors. Donations to private foundations are capped at 30% of AGI for most contributions, and 20% for capital gain contributions. Contributions to foreign charities are generally not deductible unless the charity is registered with the IRS. Donating to a Donor-Advised Fund (DAF) provides similar benefits as donating to a public charity (with the 60% AGI limit) while offering flexibility, ease of use, and simplified recordkeeping.

Charitable deductions can be strategically applied to maximize tax benefits. For instance, if you experience a high-income year, consider making a significant donation to a DAF before year-end. While you can recommend how the funds are distributed over the next year, your donation will be recognized in the current year, and the deduction can be claimed immediately. Conversely, in a year with lower income, you might consider “bunching” your contributions with the following year’s donations to optimize the tax impact in a year with a higher income.

Charitable giving not only supports causes you care about, but also offers meaningful tax benefits. Speak to your tax advisor to explore how your charitable contributions can be leveraged to enhance your tax strategy and support your overall financial well-being.

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.

December 12, 2024 BY Shulem Rosenbaum, CPA, ABV

Estimating Damages: Lost Profits vs. Diminished Business Value

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In commercial litigation, it is common for business valuation experts to measure damages based on lost profits, diminished business value, or both. Here’s an introduction to these concepts.

The Basics
Generally, it’s appropriate to estimate lost profits when a plaintiff suffers an economic loss for a discrete period and then returns to normal. On the other hand, diminished business value is typically reserved for businesses that are completely destroyed or suffer a permanent loss, such as the destruction of an entire division or product line.

In rare situations, lost profits may fail to adequately capture a plaintiff’s damages. For example, suppose a defendant’s wrongful conduct damages a plaintiff’s reputation but doesn’t directly affect the plaintiff’s expected profits. Nevertheless, the defendant’s actions have rendered the plaintiff’s business less marketable and, therefore, less valuable. In this situation, diminished business value may be an appropriate measure of damages, even though the plaintiff’s business will survive.

Double Dipping
There are important similarities between how lost profits and diminished business value are measured. Typically, lost profits are a function of lost revenue caused by the defendant’s wrongful conduct and avoided costs that otherwise would have been incurred to generate the revenue. Once lost profits have been estimated, the amount is adjusted to present value.

Alternatively, business value is generally determined using one or more of the following three techniques:

  1. Cost (or asset-based) approach
  2. Market approach
  3. Income approach

Because value is generally a function of a business’s ability to generate future economic benefits, awarding damages based on both lost profits and diminished business value is usually considered double dipping. A possible exception is the “slow death” scenario: A defendant’s wrongful conduct initially causes the plaintiff’s profits to decline, but the plaintiff continues operating. Eventually, however, the plaintiff succumbs to its injuries and goes out of business. In these cases, it may be appropriate for the plaintiff to recover lost profits for the period following the injury along with diminished business value as of the “date of death.”

There’s a Difference
Both lost profits and diminished business value involve calculating the present value of future economic benefits. However, the two approaches have distinct nuances, and the calculations used for each to determine damages will, in most cases, not yield the same result. For example, lost profits are typically measured on a pretax basis, while business value is often determined based on after-tax cash flow.

The fair market value of a business may include adjustments such as discounts for lack of marketability and key person risks, which are often not considered when estimating lost profits. Additionally, business value is based on what is “known or knowable” as of the valuation date, whereas lost profits calculations may sometimes account for developments that have occurred up to the time of trial.

Another differentiating factor lies in each approach’s perspective. Fair market value is generally based on the perspective of a hypothetical buyer, while lost profits consider the specific plaintiff’s perspective.

For example, while lost profits are typically measured on a pre-tax basis, business value is generally determined by after-tax cash flow. Often, a business’s value may include adjustments such as discounts for lack of marketability and key person risks. These may not be considered when estimating lost profits.

Moreover, business value is based on what’s “known or knowable” on the valuation date, but lost profits calculations may sometimes consider developments that have occurred up to the time of trial. Another differentiating factor is each approach’s perspective. Fair market value is generally based on the perspective of a hypothetical buyer, while lost profits can consider the specific plaintiff’s perspective.

Which Way to Go?
Lost profits and diminished business value are closely related, but they’re not identical. Contact us to discuss which measure is appropriate for your situation and how it might affect the outcome.

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.

December 12, 2024 BY Rachel Stein, CPA

With Trump in the Driver’s Seat, Tax Cuts Could Be On the Horizon

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On the campaign trail, Trump vocally championed American business interests and vowed to support corporate America and draw business back into the U.S. Now it’s showtime, and one area where we may see Trump’s plans begin to emerge is in changes to business tax law and policy. While no detailed tax plan has been issued yet, Trump has hinted at how tax policy may take shape next year.

Trump has proposed a 1% decrease in the corporate income tax rate, which presently stands at 21%, and he is suggesting a more substantial 15% rate for companies that manufacture in the U.S. This tax cut is relatively modest, but it will increase corporate profits and give businesses more resources to reinvest and grow. Unless the changes also address pass-through tax rates or deductions, there will likely be no significant benefits for small businesses organized as pass-through entities. There is the possibility that the tax cut could improve global competitiveness and tempt international corporations to return or transfer operations to the U.S., potentially stimulating modest economic growth.

Though a 1% decrease seems insignificant, given the scale of U.S. corporate earnings, it could have a noteworthy and negative impact on U.S. tax revenues and may increase the country’s deficit. Much will depend on how businesses use their 1% savings, where they allocate them, and how the broader economic environment reacts to the adjustment.

Trump also proposes to repeal the limitation on excess business losses for non-corporate taxpayers. The limitation, created by the American Rescue Plan Act of 2021 and extended through 2028 by the Inflation Reduction Act of 2022, prevents non-corporate taxpayers from deducting excess business losses above $578,000 (2023-married filing jointly) or $289,000 (other), with any excess losses treated as net operating loss carryforward (subject to indexed thresholds).

Repealing this limitation would mean more deductions available for non-corporate taxpayers, including S Corps, partnerships, and sole proprietors. It would enable them to offset their business losses against other types of income, like wages or investment income, and overall, it would reduce their tax burden. Critics may claim that this tax cut favors the rich, who have multiple income streams and are more likely to have large business losses and other income to offset.

Besides tax relief, the injection of additional cash into businesses could spur growth and reinvestment. As above, this tax cut would also reduce federal tax revenues and may raise the deficit unless other revenue-generating measures are implemented.

Even with the possibility of a Republican-controlled Congress, it is uncertain whether Trump will be successful in pushing through tax cuts and policy changes. He may face backlash from the public for seemingly favoring the wealthy, or lawmakers may question whether his tax initiatives can benefit the overall economy. The Fed will be cautious of any changes impacting inflation and, by extension, interest rates. With so many economic moving parts, it is hard to predict whether or how Trump’s intentions will be realized.

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.

December 12, 2024 BY Our Partners at Equinum Wealth Management

Riding the Waves: Lessons From a Resilient Market in 2024

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As we stepped into 2024, the investment landscape was filled with uncertainty. Several significant challenges loomed, posing threats to financial stability. Some of these challenges included:

  • Persistently high inflation
  • Widespread predictions of a recession by economists and strategists
  • Uncertainty surrounding the Federal Reserve’s next steps
  • A rapidly escalating national debt
  • Historically high interest rates
  • An imminent housing crash fueled by those high rates

These menacing issues were further intensified by the pending election, with its highly charged public sentiments and the expectation of political unrest and chaos.

Despite these challenges, the stock market has shown remarkable resilience, surging 27.56% year-to-date in 2024. This performance underscores an important lesson: attempting to time the market based on macroeconomic conditions or political developments is a futile exercise.

You might be thinking, “If the market weathered all these storms, doesn’t that mean it never goes down? Maybe investing is smooth sailing.” But that assumption couldn’t be further from the truth. Historically, the market experiences a 30% correction approximately once every five years, in addition to many smaller intermittent corrections. It’s far from a smooth ride. The takeaway is that predicting when the ups and downs will occur is incredibly difficult—arguably impossible.

Instead of getting caught up in fear or trying to anticipate market movements, a prudent investor focuses on maintaining a diversified portfolio and committing to their long-term financial goals. By tuning out the noise and staying invested, you can position yourself to benefit from the market’s resilience and the power of compounding your investment over time.

2024’s stock market resilience, despite a seemingly endless array of concerns, serves as a powerful reminder that time in the market—not timing the market—is the key to investment success. As we navigate the unpredictable road ahead, remain disciplined, stay invested, and trust in the long-term potential of the U.S. stock market to deliver substantial returns.

his 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.

December 12, 2024 BY Wendy Barlin, CPA

Neglecting Your Financial Reporting? Could Outsourced CAS Services Come to the Rescue?

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They say a cluttered desk is a sign of a cluttered mind. For businesses, messy or inaccurate financial records signify more than disorder; they reflect a company in chaos—one that is likely flying blind financially. Outsourcing Client Accounting Services (CAS) is an effective way to turn financial chaos into clarity.

For small businesses with revenues under $10 million, maintaining a full-time CFO can cost anywhere from 2% to 5% of annual revenue. If the expense of a full-time executive is too steep for your business, outsourced CAS services offer essential solutions to help you operate effectively and remain compliant. CAS services typically include accounting operations, strategic financial planning, cash flow management, budgeting, forecasting, and expert financial guidance.

Why Does a Business Need Accurate and Timely Financial Statements?

Financial statements are the building blocks of any well-run company. Accurate and timely financials are essential for:

  • Tax reporting and compliance
  • Financial planning and budgeting
  • Securing financing or attracting investors
  • Managing operations efficiently

Poorly executed financial reporting can invite tax audits, compromise financing opportunities, and damage a company’s prospects for a potential sale. On a practical level, not knowing the state of your finances leads to losing control over cash flow and expenses. Management cannot set or implement long-term business goals or develop effective strategies. Decision-making becomes impaired.

Bottom line?  Bad books mean management will make bad decisions.

What is Financial Reporting?

Financial statements consist of three key components that provide insights into a company’s assets, liabilities, and equity:

  1. Balance Sheet: This snapshot of a company’s financial standing at a specific point in time shows assets, liabilities, and the difference between them—known as shareholders’ equity (also referred to as net worth or owner’s equity).
  2. Income Statement: Also called a profit and loss statement, this document reflects a company’s financial performance over a given period. It identifies revenues, expenses, and the resulting net income or loss.
  3. Cash Flow Statement: This statement tracks the movement of cash in and out of a business during a specific period, showing how well a company generates and uses cash.

How Do Bad Reporting Habits Play Out?

Consider XYZ Corp., a company plagued by constant turnover in its finance department. Its CEO, more focused on improving his golf handicap than reviewing financials, ignored ambiguous and incomplete records.

The consequences were severe. The company couldn’t track cash flow; payments to suppliers were missed; employees’ salaries were issued late; and the company underreported taxable income, inviting an IRS audit.

The CEO was mid-swing on the fourth hole when the office manager called to inform him of the audit. The result? Fines, penalties, and reputational damage. Eventually, when XYZ Corp. tried to sell, buyers were unwilling to move forward because the company could not demonstrate consistent financial health. The company went bankrupt, and the CEO’s golf handicap remained depressingly high.

What Are the Two Most Essential Rewards of Sound Financial Reporting?

  1. Informed Decision-Making
    Accurate financial records are vital for making informed decisions. They enable management to assess company goals, forecast future revenues, and allocate resources effectively. Financial data can help identify internal trends: Are costs rising? Are revenues declining?

With this insight, management can make proactive adjustments to “right the ship.” They can prioritize expenditures, focus on strategic investments, and ensure long-term stability.

  1. Improved Cash Flow Management
    Cash flow describes the inflow and outflow of funds used for daily operations, such as taxes, payroll, inventory, and other expenses. By analyzing cash flow data, management can anticipate and prepare for periods of low cash flow. They can then prudently decide whether to postpone non-essential expenditures or perhaps secure short-term financing, if needed.

Efficient cash flow management ensures stability, prevents debilitating shortfalls, and gives management the flexibility to focus on growth and success.

Watch Your Bottom Line

Financial statements provide management with a clear view of future investments and expenditures while serving as benchmarks for performance assessment. They can also instill confidence in investors who need assurance before allocating capital.

For organizations that lack the size or capacity to staff in-house personnel for financial reporting, outsourcing CAS services can make a significant difference. Professionally managed back-office accounting operations allow management to focus on operations, strategy, and growth objectives.

Neglecting financial accuracy can result in missed opportunities, poor decision-making, and even legal consequences. Can your business afford the risk?

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.

December 06, 2024 BY Hershy Donath, CPA

Raining on the Trump Rate-Cut Parade

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With Trump’s recent victory, real estate professionals are counting on seeing significant rate cuts and enjoying potential benefits. These include a more vigorous market, relief for buyers, and more favorable financing conditions, by way of lower interest rates for investors. Bus this rosy forecast may be met with rain clouds.

Trump’s proposed tax cuts are meant to create a more business-friendly economic environment and may mildly stimulate the economy by increasing business investment. However, the Federal Reserve (Fed) exercises a dual mandate: to control employment and keep inflation down. If the economy weakens, the Fed usually responds by stepping in and lowering rates to stimulate growth. Conversely, when the economy heats up, more money is circulating in the system and inflationary conditions can develop. To manage inflation the Fed may raise rates to control and stabilize the economy. When the economy is healthy, the Federal Reserve is less inclined to lower interest rates, to prevent the risk of the economy overheating.

Trump also proposes to impose tariffs on imports; a move that unlikely to prompt the Fed to lower rates and may even have the opposite effect. Tariffs are inherently inflationary, as they raise the cost of imported goods; and that cost ultimately finds its way to the consumer in the form of higher sticker prices. When prices rise, the Fed would be careful to avoid further rate cuts and instead would consider moving rates upward to counter inflationary pressures.

Based on the above, the environment created by Trump’s proposals, while beneficial to businesses and taxpayers, is at odds with conditions that would motivate the Federal Reserve to lower interest rates. Improving the economy will benefit the country – but are unlikely to warrant a decrease in interest rates.

That said, there’s room for an alternative perspective. A strong economy is a double-edged sword when it comes to interest rates. In a stable and non-volatile economy, Treasury rates fall. Investors are seeking safer assets, the increased demand for Treasury bonds drives their prices higher and yields lower. This decline in Treasury rates creates a ripple effect throughout the financial system, influencing other rates.  As Treasury rates decline the global lending environment reacts. International borrowers are drawn to the US’s favorable market rates and increasing demand for US debt drives down lending rates further, including consumer and mortgage rates. Treasury rates, global lending, and consumer rates share a  reciprocal relationship. The ‘zero risk rate’ set by the Treasury becomes the baseline for lending, when it is at a low, borrowing becomes cheaper for everyone.

Potential chain reactions from fluctuations in the 10-year Treasury bond market and the Federal Funds Futures remain uncertain and may have broader economic benefits. Lower consumer and mortgage rates spur growth by increasing disposable income. More disposable income translates into more discretionary purchasing – a boost for the retail and service industries. Businesses will take advantage of more affordable lending terms and can invest in big-ticket projects, expansion, and technology – which promotes employment across many sectors.

Additionally, a potential inflation buster that could lead to lower rates is Trump’s proposal to ease drilling restrictions to boost domestic oil and gas production. Energy prices are a significant driver of inflation. Lower energy costs will also result in reduced price increases and more disposable income for taxpayers to spend on consumer goods.

While on the campaign trail, Trump proposed that the president should have influence over  the Federal Reserve’s interest rate decisions. In response, Chairman Powell, a Presidential Appointee, made clear that he would continue to run the Fed as an independent entity. Trump may be motivated to dismiss Powell and replace the Fed Board with more dovish appointees who are more sympathetic to lowering rates. However, there is no legal mechanism to remove an appointee, and the President cannot directly discharge the Fed Chair without legal cause. Trump may contend that Powell was appointed by a president and therefore, a president can remove him. Alternately, he may attempt to publicly pressure Powell to resign. I believe that both alternatives would fail and would provoke market instability and public criticism.

What can we conclude from our current combination of economic and political landscape? Optimists can stay hopeful, but even while market predictors prophesize a steady gradual decline in interest rates, I believe it is improbable that the Trump administration will be the catalyst for steeper cuts than those already built into market predictions.  My advice to clients is to refrain from making assumptions or business decisions based on the expectations of drastically lower rates.  Exercise caution when underwriting or investing in deals that depend heavily on significant rate declines. Instead, investors should focus on making decisions that prioritize long-term growth and remain sustainable across a variety of economic scenarios.

 

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.

November 27, 2024 BY Moshe Schupper, CPA

Medicare Advantage Plans: Are They Sabotaging the Skilled Nursing Home Industry?

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The Medicare Advantage Plan is an alternative to traditional Medicare that allows eligible participants to access their benefits through private insurance plans within Medicare. Medicare Advantage (MA) Plans have become an increasingly popular choice for participants because of the lower rates and added benefits offered. But for the skilled nursing homes responsible for delivering the services covered by MA plans, the fallout is far more unfavorable. Will MA plans irreparably damage the SNF industry?

Skilled nursing facilities generally receive lower reimbursement rates under MA plans than under traditional Medicare. The Federal government, through CMS, pays MA plans a fixed, or ‘capitated’, monthly amount per beneficiary – a per person, per month rate to cover health care services for each individual participant. Because the payments are fixed, there is the inherent risk that costs for a participant will exceed the capitated payment. If there’s a deficit, the SNF has to absorb it.

Managed care reduces the average revenue per patient day, but the staffing and administrative requirements to deliver the same level of care remain the same. The result? Tighter profit margins resulting from the shortfall put pressure on facilities to control expenses and avoid providing excess services. To effectively tackle this challenge, my colleague, Shulem Rosenbaum CPA/ABV, partner with Roth&Co’s Advisory division, shares that “SNFs must rethink their cost structures. Many SNFs have historically relied on a per-patient-day (PPD) variable cost model, where expenses fluctuate with occupancy and patient demand. This approach leaves facilities exposed to the instability of fixed or inconsistent reimbursement rates frequently seen with Medicare Advantage.”

One of our clients, a long-time SNF operator with over 50 facilities, shared his perspective about how MA plans have disrupted the financial landscape for skilled nursing facilities. “We’re left juggling to meet patient needs while navigating a system that doesn’t account for the real costs of care. It’s a challenge to stay financially viable.” The numbers prove him right. According to calculations made by Zimmet Healthcare, the dollar amount of SNF Medicare reimbursements lost this year to MA comes to over $10 billion nationally, with Pennsylvania losing almost $500 million and New York out by $634 million.

While SNFs revenues will always be restricted by federal and state requirements, there are ways to alleviate concerns about MA reimbursement and reduce volatility through strategic initiatives. SNF’s can maximize their revenues by building strong relationships with MA plan providers to negotiate better reimbursement rates or value-based contracts. They can work to reduce their reliance on MA plans and improve profitability by diversifying their patient base and attracting more self-pay and private insurance patients. As with any business operation, they can optimize efficiency by streamlining administrative practices, integrate technology, and brainstorm for additional cost-saving measures that won’t compromise the quality of care.

“A compelling solution is to adopt a fixed-expense model that reduces reliance on operational leverage,” Rosenbaum adds. “By reassessing and standardizing specific cost centers, SNFs can establish a more stable financial framework that is less affected by patient volume.” Another of our clients, a small, local SNF owner, had a different take on current challenges. “MA plan participation is growing, and we must learn to work with that. The evolution of the industry has made us take a hard look at how we manage our resources, pushing us to reassess and work smarter— which is something every operation needs to do from time to time.”

Ultimately, while Medicare Advantage plans may effectively help participants manage their healthcare costs, they restrict revenues and patient care options for SNFs. Will the rise in MA plans push the SNF industry to its breaking point? Times may be lean for SNF’s, but we believe that agile and creative facilities can effectively modify operations, maintain patient care, and adapt to working with MA plans to achieve a sustainable business model for the long term.

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.

November 04, 2024 BY Our Partners at Equinum Wealth Management

Homes or Jobs?

Homes or Jobs?
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When you peek under the hood at inflation data and the latest cost-of-living trends, you might feel some relief upon noticing that, while some high prices still sting, costs are stabilizing overall. All except for one notable, stubborn exception: housing.

Since the pandemic, home prices have shot up dramatically, pushing the dream of homeownership further out of reach for many Americans. Every market has its quirks, but on the whole, the median home price across the U.S. tells the same story – prices are up, and they aren’t trending downward.

To add insult to injury, interest rates were raised in 2022 and 2023 as a mechanism to quell inflation. The natural result should have been a downswing in housing prices. Yet, despite the hikes, home prices didn’t budge. So, now we’re getting hit with the classic one-two punch: higher home prices are prevailing and interest rates have been climbing.

Here’s a typical real-world example: Imagine you had your eye on a $600,000 house back in 2021. With a 30-year mortgage at a 3% rate and a $200,000 down payment, your mortgage bill would have come to an estimated $1,686 a month. Fast forward and today, that same house would likely be priced closer to $800,000, with mortgage rates now hovering around 6.5%. Assuming that the same down payment was applied, the monthly mortgage cost would jump from $1,686 to $3,792 – a staggering difference.

The Fed-fund rate is regulated by the Federal Reserve, while Treasury and Bond rates tend to be controlled by the market – and the rates typically align. However, when the Fed announced a recent half-percent rate cut on September 18th — intended to signal economic stability and control over inflation—many hoped it would signal some relief, especially with the Feds  projection of more cuts on the horizon. But ironically, the market has pushed back and treasury bond yields and mortgage rates have actually risen. Economists are practically falling over each other to explain this strange turn of events.

At Equinum, we believe that, while rates might dip a little, the only way we’re likely to see a meaningful drop in home prices or mortgage rates, would be through a recession. In a recession, employment drops and there is less money circulating in the economy; people cannot afford homes and real estate prices fall. The Fed generally responds by cutting interest rates, hoping to stimulate the economy and pull it out of its inertia. While a period of recession may be good news for those seeking to purchase real estate, it comes at the expense of joblessness and unemployment. This solution presents a difficult dilemma: choosing between affordable housing and job stability, an uneasy balancing act that none of us wants to experience.

November 04, 2024 BY Yisroel Kilstein, CPA

When Generosity Gets Hijacked: Charity Scams and How to Avoid Them

When Generosity Gets Hijacked: Charity Scams and How to Avoid Them
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Global crises and natural disasters are on the rise and in response, people all over the country are opening their hearts and their wallets to support those in need. But this rise in altruism has its challenges. In the wake of Hurricanes Milton and Helene, the Internal Revenue Service recently warned taxpayers to beware of scammers who exploit public generosity by creating fake charities that gather donations and steal sensitive personal and financial information. According to recent data from the Federal Trade Commission, in 2023, nearly 10,000 reports of charitable solicitation fraud were filed in the United States, resulting in a loss of approximately $22.5 million to donors. Scammers commonly take advantage of peoples’ generosity during the holiday season, and when natural disasters or other tragic events occur; and their victims are often the easier marks – seniors and groups with limited English proficiency.

Scammers are imaginative and don’t limit themselves to pulling on heartstrings only as a response to a natural crisis. In a shameful example of fake charity fraud, in 2023, student Madison Russo, fraudulently raised nearly $40,000 by claiming to have multiple cancers, including stage 2 pancreatic cancer and leukemia. She publicized her story on TikTok and set up a GoFundMe page for donations. Ultimately, she was challenged and, after failing to provide medical records or proof of her diagnosis, was convicted and sentenced to probation and restitution to her donors.

Sham charities can go corporate too. In a March 2024 announcement, the Federal Trade Commission, along with ten other states, brought suit against Cancer Recovery Foundation International, also known as Women’s Cancer Fund, and its operator, Gregory B. Anderson. The suit alleges that from 2017 to 2022, the organization collected more than $18 million from donors to support women cancer patients. It only spent 1.1%, or approximately $196,000, on financial support to patients, while a cool $775,139 went to pay Anderson, its operator.

The FBI warns citizens to avoid making financial contributions to groups that support terrorism. Foreign Terrorist Organizations (FTOs) are foreign organizations that are designated by the Secretary of State in accordance with section 219 of the Immigration and Nationality Act (INA). The US Department of State provides a public list of  Designated Foreign Terrorist Organizations and warns donors to keep their distance.

“We all want to help innocent victims and their families,” said IRS Commissioner Danny Werfel. “Knowing we’re trying to aid those who are suffering, criminals crawl out of the woodwork to prey on those most vulnerable – people who simply want to help. Especially during these challenging times, don’t feel pressured to immediately give to a charity you’ve never heard of. Check out the charity first and confirm it is authentic.”

To that end, the IRS offers the Tax-Exempt Organization Search (TEOS) tool, which taxpayers can access on the IRS website to help them find or verify qualified, legitimate charities. Beyond this, how can a donor make sure that his or her charitable donations reach their intended recipients? The wise donor will do their research and will stick with charities they know and trust. It’s best to make targeted donations, designated towards specific purposes instead of to a general fund. Cyber-safety should always be paramount; never click on links or open attachments in unsolicited e-mails, texts, or social media posts. Also know that most legitimate charity websites end in “.org” rather than “.com.” Charities that ask for cash or wire payments raise a red flag. It is always more prudent to pay by credit card or write a check directly to a charity; and never make a charitable donation check out to an individual.

As charitable scams continue to evolve, it is vital for donors to stay vigilant and informed about how to identify potential fraud. Always verify the legitimacy of a charity through reliable resources, such as the Tax-Exempt Organization Search, Better Business Bureau or Charity Navigator, and be wary of unsolicited requests for donations. By staying aware and conducting due diligence, you can ensure that your contributions reach those who genuinely need support, while safeguarding yourself against scammers.

November 04, 2024 BY Chuck Gartenhaus, President of RothTech

Power BI vs. Excel: Which Will Serve Your Business Best?

Power BI vs. Excel: Which Will Serve Your Business Best?
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Excel and Power BI are both powerful Microsoft tools used in data analysis and reporting, but each has its distinct strengths and applications.

Excel, as a spreadsheet program, offers strong capabilities used for basic analysis and reporting; it features detailed, manual data entry and calculations. Excel is suitable for small to medium datasets for use in financial analysis, and it’s a comfortable choice for users who are already familiar with its functions and formulas. The program is commonly used by businesses and students for creating budgets, tracking expenditures, calculations and analyses, and other statistical functions.

Power BI is the go-to choice for advanced analytics and visualization. It offers more automation and scalability for large datasets and its interactive functions are used for advanced data analysis, forecasting, tracking key metrics and other tasks that require manipulating and sharing data.

Power BI vs. Excel: Why Power BI Stands Out

While Excel remains a popular tool for data analysis, Power BI offers several advantages that make it a superior choice for modern businesses:

  • Enhanced Visualizations: Power BI’s advanced visual tools make it easier to present complex data in a visually appealing and interactive way.
  • Real-Time Data Integration: Unlike Excel, which often requires manual data refreshes, Power BI can connect to live data sources for continuous updates.
  • Scalability: Power BI handles large datasets more effectively than Excel, making it ideal for businesses that deal with high volumes of data.
  • Seamless Integration: Power BI supports a wide range of data sources, including cloud services like Azure, and enterprise systems like SAP and Salesforce, making it more versatile than Excel.

Who’s got the Advantage?

Whereas Excel is the workhorse we all know and love, Power BI provides attractive bells and whistles. Its extensive features for formatting, natural language queries, and editing and filtering are visually appealing – with a customized dashboard offering a 360-degree view. Users can more easily drill down into data with Power BI and automate and share interactive reports across teams and organizations. Ultimately, these capabilities can help businesses make better-informed, data-driven decisions. While Excel’s calculation and spreadsheet functionalities make it ideal for studying data, Power BI is a better choice for performance and sharing.

Why Choose?

Excel and Power BI, both created by Microsoft, can complement each other effectively and integrate well. There’s no real need to choose between them – they can be used together for optimal results.

Data created in Excel can easily be shared with Power BI without transition glitches. The same goes for other Microsoft Office applications, like Power Query and Power Pivot. An amalgam of these tools can save a business time, automate its processes, and allow it to optimize and upgrade its data management.

Ask us about how RothTech can help your organization leverage the full potential of Power BI for deeper insights and better decision-making.

October 31, 2024 BY Aaron Galster, CPA

Recapture: The Tax Implications of a Sale

Recapture: The Tax Implications of a Sale
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Cost segregation is a key tool that allows a business to reclassify certain property components and potentially reduce its tax burden through accelerated depreciation. Property owners who have developed, acquired, expanded, or renovated real estate can optimize their depreciation deductions and defer income taxes at both federal and state levels. While cost segregation is common in office, hotel, and retail spaces, it can benefit any type of commercial property.

For tax purposes, residential rental properties typically depreciate over 27.5 years, while commercial properties depreciate over 39 years. However, properties include more than the building structure itself—elements like plumbing, flooring, and sidewalks can be depreciated on accelerated timelines. By separating specific property components, investors can fast-track depreciation deductions, cut taxable income, and improve cash flow. This method is especially valuable in commercial real estate, where larger investments yield substantial tax savings. Cost segregation is one way private-market real estate provides unique tax advantages, making it a particularly appealing asset class.

When selling property used in your business, understanding the sale’s tax implications is essential, especially given the complex rules involved.

Basic rules

As an example, consider a property for sale that is either land or depreciable property used in your business and has been held for more than a year. Under tax law, gains and losses from sales of business property are netted against each other. The tax treatment is as follows:

  1. If the netting of gains and losses results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. Long-term capital gain treatment is generally more favorable than ordinary income treatment.
  2. If the netting of gains and losses results in a net loss, that loss is fully deductible against ordinary income. (In other words, none of the rules that limit the deductibility of capital losses apply.)

The availability of long-term capital gain treatment for business property net gain is limited by “recapture” rules. Under these rules, amounts are treated as ordinary income, rather than capital gain, because of previous ordinary loss or deduction treatment.

The beauty of utilizing cost segregation to accelerate depreciation is that it offsets income – until it is time to sell. That’s when the recapture rule kicks in. There’s a special recapture rule that applies only to business property. Under this rule, to the extent you’ve had a business property net loss within the previous five years, any business property net gain is treated as ordinary income instead of long-term capital gain.

Different types of property

Under the Internal Revenue Code, different provisions address different types of property. For example:

  1. Section 1245 property. This consists of all depreciable personal property, whether tangible or intangible, and certain depreciable real property (usually real property that performs specific functions). If you sell Section 1245 property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset.
  2. Section 1250 property. In general, this consists of buildings and their structural components. If you sell Section 1250 property that’s placed in service after 1986, none of the long-term capital gain attributable to depreciation deductions will be subject to depreciation recapture. However, for most noncorporate taxpayers, the gain attributable to depreciation deductions, to the extent it doesn’t exceed business property net gain, will (as reduced by the business property recapture rule above) be taxed at a rate of no more than 28.8% (25% plus the 3.8% net investment income tax) rather than the maximum 23.8% rate (20% plus the 3.8% net investment income tax) that generally applies to long-term capital gains of noncorporate taxpayers.

Other rules apply to, respectively, Section 1250 property that you placed in service after 1980 and before 1987, and Section 1250 property that you placed in service before 1981.

Even with the simple assumptions presented in this article, the tax treatment of the sale of business assets can be complex. Tools like cost segregation, combined with a solid grasp of tax rules, can make a significant difference in tax outcomes and improve a business’ overall financial strategy when it sells business property.

October 31, 2024 BY Hershy Donath, CPA

Commercial Real Estate Under Pressure: Balancing Falling Rates and Escalating Debt

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

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

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

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

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

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

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

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

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.

October 07, 2024 BY Chuck Gartenhaus, President of RothTech

Harnessing the Power of Power BI for Business Intelligence – Part 1

Harnessing the Power of Power BI for Business Intelligence – Part 1
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In today’s data-driven world, businesses of all sizes—from small startups to large conglomerates—collect vast amounts of data. However, the true challenge lies in transforming this raw data into actionable insights that drive informed decision-making. Microsoft’s Power BI is a powerful business intelligence tool designed to help organizations convert data into meaningful reports and visualizations, making data analysis more accessible, insightful, and actionable.

Why Power BI is Essential for Modern Businesses

1) Data Consolidation Across Multiple Sources: Power BI allows businesses to integrate data from multiple sources, such as Excel, cloud services, databases, and even the web. This unified data access means that businesses can analyze sales, operations, finance, and customer data all in one place, enabling cohesive decision-making across departments.

2) Real-Time Analytics: Power BI provides real-time data streaming, meaning businesses can track key performance indicators (KPIs) and metrics as they happen. This allows companies to respond proactively to changes in market conditions or internal performance issues, rather than relying on static, outdated reports.

3) Advanced Data Visualization: While tools like Excel can visualize data to a degree, Power BI takes this a step further with interactive, highly customizable dashboards. These dashboards provide a clear view of complex datasets and help users easily identify trends, outliers, and opportunities through modern visuals like heatmaps, treemaps, and geographic maps.

4) Self-Service Business Intelligence: One of the greatest advantages of Power BI is its ease of use. Users across the organization, not just those in IT, can create their own reports and dashboards. This empowers all team members to make data-driven decisions and fosters a culture of data literacy throughout the organization.

5) Scalability and Affordability: Power BI is built on scalable data engines capable of handling large datasets without performance degradation. Additionally, its pricing structure is progressive, offering free options for small organizations using Power BI Desktop, and affordable licensing for larger enterprises that need cloud sharing and collaboration.

How to Set Up Power BI for Success

To maximize the potential of Power BI, proper setup and ongoing optimization are critical. Here’s a step-by-step approach:

1) Define Clear Objectives: Before jumping into Power BI, businesses should outline their goals. What key metrics are you tracking? What decisions do you hope to influence with your data? Aligning Power BI with these objectives ensures you are focused on the right data and insights.

2) Data Integration and Cleaning: Power BI excels when data is clean and consistent. Use tools like Power Query to prepare data from various sources, ensuring accuracy and reliability before analysis. Once cleaned, Power BI can pull in data from sources such as SAP, Oracle, Azure, and even websites.

3) Establish Roles and Permissions: To protect sensitive data, businesses should set up appropriate user roles in Power BI. The platform allows administrators to grant different permissions, ensuring that data is secure while still enabling collaboration across departments.

4) Foster a Data-Driven Culture: Training employees to use Power BI is essential for unlocking its full potential. Encourage team members to build their own reports and dashboards, fostering a culture where data literacy thrives.

Best Practices for Power BI Optimization

Even after setting up Power BI, ongoing refinement is essential to ensure the tool evolves alongside your business. Here are some optimization tips:

– Automate Data Refreshes and Alerts: Set up automatic data refreshes to ensure your dashboards always display the latest information. Use alerts to notify key stakeholders when KPIs reach critical thresholds, enabling faster responses to emerging trends.

– Optimize Report Performance: As data volumes grow, it’s important to optimize reports for performance. Techniques like DirectQuery and incremental refreshes can help keep reports running smoothly, even with large datasets.

– Design with Simplicity: Power BI dashboards should be clear and concise. Avoid overloading users with too much information, and focus on the most critical data points. Use consistent visualizations, round numbers, and clean layouts to enhance readability.

– Security and Governance: Power BI offers robust data security features, such as row-level security, allowing businesses to protect sensitive data while still leveraging the platform’s collaborative features.

Conclusion: Unlock the Power of Your Data with Power BI

Power BI transforms data into actionable insights, making it a critical tool for businesses looking to gain a competitive edge in today’s data-driven world. By integrating data across multiple sources, offering real-time insights, and enabling self-service reporting, Power BI helps businesses make informed decisions that drive growth, efficiency, and profitability.

With proper setup, ongoing optimization, and a commitment to fostering a data-driven culture, your organization can fully unlock the power of Power BI and harness the full potential of your data.

Ask us about how RothTech can help your organization leverage the full potential of Power BI for deeper insights and better decision-making.

 

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.

October 01, 2024 BY Ahron Golding, Esq.

ERC Voluntary Disclosure 2.0: Is this the opportunity you’ve been waiting for?

ERC Voluntary Disclosure 2.0: Is this the opportunity you’ve been waiting for?
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The IRS defines voluntary disclosure as “a way for taxpayers with previously undisclosed income to contact the IRS and resolve their tax matters.” It’s their way of offering remiss taxpayers the opportunity to mitigate potential penalties.

This new program refers specifically to the COVID-era Employee Retention Credit (ERC). If you claimed and received the Employee Retention Credit (ERC) for 2021 tax periods, but you are, in fact, ineligible, you will need to repay the credit. The Voluntary Disclosure Program, or VDP, may be your chance to regroup.

An analysis conducted by the IRS found that a whopping 60% to 70% of applications for the ERC show an unacceptable “level of risk.” This is IRS lingo for claims they believe have a high likelihood of being ineligible for the credit. Tens of thousands of these are slated to be denied in the coming months. This high percentage of erroneous filings has inspired the IRS to temporarily reopen the Voluntary Disclosure Program and give businesses the chance to repair or retract their improperly filed claims to avoid potential civil penalties, audit costs and possible litigation.

Round two of the Voluntary Disclosure Program (VDP) was launched on August 15, 2024 and will close soon – on November 22, 2024​. The VDP offers a 15% discount on the repayment of a claimant’s errant claim and the opportunity to avoid penalties, audits, or fees associated with that incorrect claim.

The IRS is marketing this “discount” as defraying the high expenses that many businesses needed to pay their (overly aggressive) advisors or promoters in order to get the ERC in the first place. Couched in another way, the IRS is willing to pay 15% of the claim in order to get their hands on the other 85% and to get the business to rat on the promoters of ineligible claims.

The first ERC VDP earlier this year offered a more generous 20% discount, but that offer is gone. If a taxpayer believes that it is eligible for the ERC, but wants to recalculate to claim a different amount, it will have to file an amended return to report that reduced amount.

Only those who have claimed ERC for 2021 (not 2020) and have received the refund or the credit against their employment taxes, are eligible to take advantage of VDP 2.0. If a claimant has already received an IRS “clawback” notice demanding repayment, they’re out of luck. If they are in the middle of an employment tax exam for the credit period or are under criminal investigation, they have also lost their chance. When a claimant is accepted to the Voluntary Disclosure Program, they must execute a closing agreement explicitly stating that they are not entitled to the ERC – and the IRS doesn’t stop there. In its efforts to identify potentially abusive ERC promotors, the claimant will have to provide the names and contact information of the preparer or advisor who helped them submit the claim.

If you’ve applied for the ERC but have not yet received a credit or refund or have received a check but have left it uncashed, then you are not eligible for this program. Instead, the IRS offers a withdrawal process. This process effectively reverses your claim, treating it as if it was never filed. The IRS will graciously hold back from imposing penalties or interest as well. However, you won’t get the 15% “discount.” To date, the claim withdrawal process has led to more than 7,300 entities withdrawing $677 million.

The IRS continues hunting for erroneous or fraudulent ERC claims and has already mailed out thousands of letters disallowing unpaid ERC claims to businesses in these last few months. This deluge of letters represents more than $1 billion in ERC claims.

It is interesting to note that the IRS seems to be targeting only those that have already received their credits. For many businesses that have already received (and in most cases, spent) the monies, it would be very hard to part with what they already have in hand.

Do you need to rethink your ERC claim? Was your preparer above board? Was he or she knowledgeable about your business and informed about ERC qualifications? Was your eligibility based on “general supply chain disruptions?”

Our recent experience handling numerous ERC audits have shown us that the IRS has been operating under a policy of “deny first, ask questions later.” Your claim may deserve a revisit, and the Voluntary Disclosure Program may be your return ticket to proper compliance.

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.

September 30, 2024 BY Our Partners at Equinum Wealth Management

Democracy’s Price Tag

Democracy’s Price Tag
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Democracy is the theory that the common people know what they want and deserve to get it good and hard.

— H. L. Mencken

It’s that season again — when those running for public office start making promises of all shapes and sizes, even those that defy the laws of economics. But let’s not forget their ultimate goal: to get more votes. As Churchill lamented, “The best argument against democracy is a five-minute conversation with the average voter.”

Let’s examine a few recent examples:

Vice President Harris, in her “economic plan” released on August 15th, promised to ban price gouging. This term usually refers to sellers exploiting market power to unfairly raise prices. With grocery prices up 26% since 2020, addressing this issue sounds appealing. However, even The New York Times felt compelled to critique this proposal, quoting economist Jason Furman: “This is not sensible policy, and I think the biggest hope is that it ends up being a lot of rhetoric and no reality.” Harris’s economic advisers surely know that price gouging bans have never and will never work, but they’re banking on voters not noticing.

Then there’s former President Trump’s tariff proposal: a 10% tariff on all imported goods. While this might appeal to voters who favor “America First” policies and resist globalization, these tariffs would ultimately raise prices for consumers. Although certain adverse measures can be justified in certain areas like computer chips (national security) or medicine (as seen during COVID), they ignore the fact that importing cheaper goods has long kept American lifestyles more affordable.

A final example is the bipartisan silence on the solvency of Social Security and the national debt. Telling seniors they might face pay cuts, or juniors that they need to pay more into the system, doesn’t win votes. As a result, these topics remain taboo until they become ticking time bombs.

Historian Niall Ferguson recently highlighted his “personal law of history:” “Any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Habsburg Spain, t ancient régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the U.S. beginning this very year.” Tackling this issue isn’t politically advantageous, so it’s conveniently ignored.

While were not here to predict the future, it is important to recognize the incentives driving political stances. To draw from the Churchill well once again, “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” It’s high time for voters to wake up to economic reality – politics is often a game of fantasy.

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.

September 30, 2024 BY Shulem Rosenbaum, CPA, ABV

Recent FTC Rule Could Affect Value of Non-Compete Agreements

Recent FTC Rule Could Affect Value of Non-Compete Agreements
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Non-compete agreements have always been considered a valuable business tool, especially after a merger or acquisition. However, these agreements have become more complicated in the wake of a new and controversial final rule, issued in April 2024, by the Federal Trade Commission (FTC) proposing a ban on noncompete agreements for most employees and independent contractors. The rule would have gone into effect in September 2024.

To counter the FTC’s effort, the U.S. Chamber of Commerce and several business groups filed federal lawsuits challenging the final rule, arguing that the FTC lacked the authority to enact the ban and that it violated the Constitution. By August 20, 2024, they prevailed, and the rule was struck down. The Court concluded that the FTC’s decision was “arbitrary and capricious,” stating that the Non-Compete Rule was “unreasonably overbroad.” The Court was specifically offended by the rule’s “one size fits all” solution to the potential hazards of a non-compete.

This ruling will not impact state laws on non-competes. Several states have already limited their use. Minnesota banned workplace non-competes in July 2023, and New York nearly passed a similar ban before it was vetoed. States like Indiana have also restricted non-competes in specific cases.

Non-compete agreements have been around for decades. Some are required at the get-go, as a prerequisite for employment, and some kick in upon termination of employment. The employer will require an employee to sign a non-compete agreement to protect the employer’s business interests, guard against disclosure of trade secrets, and prevent the employee from poaching customers or clients. These agreements will generally limit employment activities in the same field, for a specified period, and their goal is to protect the employer.

Non-competes also may come into play in business combinations. These agreements typically prevent the seller from competing with the buyer within a specified geographic area for a certain time period (usually five years or less).

A non-compete agreement may be estimated in various circumstances, including legal disputes, mergers, financial reporting and tax matters. The most common approach to valuing a non-compete agreement is the ‘with-and-without’ method. Without a non-compete agreement, the worst-case scenario is that competition from the employee or seller will drive the company out of business. Therefore, the value of the entire business represents the highest ceiling for the value of a non-compete.

The business’  tangible assets possess some value and could be liquidated if the business failed, and it is unlikely that the employee or seller will be able to steal 100% of a business’s profits. So, when valuing non-competes, experts typically run two discounted cash flow scenarios — one with the non-compete in place, and the other without.

The valuation expert computes the difference between the two expected cash flow streams and includes consideration of several other factors:

  • The company’s competitive and financial position
  • Business forecasts and trends
  • The employee’s or seller’s skills and customer relationships

Next, each differential must be multiplied by the probability that the individual will subsequently compete with the business. If the party in question has no incentive, ability, or reason to compete, then the non-compete can be worthless. Factors to consider when predicting the threat of competition include the individual’s age, health, financial standing and previous competitive experience. When valuing non-competes related to mergers and acquisitions, the expert will also consider any post-sale relocation and employment plans.

A critical factor to consider when valuing non-competes is whether the agreement is legally enforceable. The restrictions in the agreement must be reasonable. For example, some courts may reject non-competes that cover an unreasonably large territory or long period of time. What is “reasonable” varies from business to business, and is subject to the particulars of the business, the terms of the agreement, state statutes and case law.

What does this mean for your business? The legal battle over non-competes has drawn attention to their use, prompting the corporate world to reconsider work relationships without restrictive covenants. Non-competes will likely be viewed differently moving forward. As with all business-related legislation, businesses should stay updated and informed of changes and revisions that may affect its employment practices and its bottom line.

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.

September 03, 2024 BY Moshe Seidenfeld, CPA

Navigating Tax Complexities: Craft Partnership Agreements and LLC Operating Agreements with Precision

Navigating Tax Complexities: Craft Partnership Agreements and LLC Operating Agreements with Precision
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Partnerships, and some multi-member LLCs, are a popular choice for businesses and investments because of the federal income tax advantages they offer – particularly pass-through taxation. In return, they must also follow specific, and sometimes complex, federal income tax rules.

Governing documents
A partnership is governed by a partnership agreement, which specifies the rights and obligations of the entity and its partners. Similarly, an LLC is governed by an operating agreement, which specifies the rights and obligations of the entity and its members. These governing documents address certain tax-related issues that dictate how profits and losses are allocated, outline tax responsibilities, and ensure compliance with relevant tax laws.

Partnership tax basics
The tax numbers of a partnership are allocated to the partners. The entity issues an annual Schedule K-1 to each partner to report his or her share of the partnership’s tax numbers for the year. The partnership itself doesn’t pay federal income tax. This arrangement is called pass-through taxation because the tax numbers from the partnership’s operations are passed through to the partners who then take them into account on their own tax returns (Form 1040 for individual partners). Partners can also deduct partnership losses passed through to them, subject to various federal income tax limitations, such as the passive loss rules.

Special tax allocations
Partnerships are allowed to make special tax allocations. This is an allocation of partnership loss, deduction, income or gain among the partners that’s disproportionate to the partners’ overall ownership interests. The best measure of a partner’s overall ownership interest is the partner’s stated interest in the entity’s distributions and capital, as specified in the partnership agreement.

An example of a special tax allocation is when a 50% high-tax-bracket partner is allocated 80% of the partnership’s depreciation deductions while the 50% low-tax-bracket partner is allocated only 20% of the depreciation deductions. All unique tax allocations should be set forth in the partnership agreement and must comply with complicated rules in IRS regulations.

Distributions to pay partnership-related tax bills
Partners must recognize taxable income for their allocations of partnership income and gains — whether those income and gains are distributed as cash to the partners or not. Therefore, a common partnership agreement provision is one that calls for the partnership to make cash distributions to help partners cover their partnership-related tax liabilities. Of course, those liabilities will vary, depending on the partners’ specific tax circumstances.

The partnership agreement should specify the protocols that will be used to calculate distributions intended to help cover partnership-related tax bills. For example, the protocol for long-term capital gains might call for distributions equal to 15% or 20% of each partner’s allocation of the gains. Such distributions may be paid out in early April of each year to help cover partners’ tax liabilities from their allocations of income and gains from the previous year.

When creating a partnership or LLC, it’s crucial to document tax considerations in a formal agreement to avoid future complications. This includes clearly outlining how income, losses, and deductions will be allocated among members, as well as specifying the tax responsibilities each member will bear. By addressing these tax issues upfront, partners and members can avoid potential conflict and ensure compliance with federal tax regulations.

September 02, 2024 BY Jacob Halberstam, CFP

Politics and Portfolios: A Recipe for Confirmation Bias

Politics and Portfolios: A Recipe for Confirmation Bias
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Political passions run deep but allowing them to dictate investment decisions can be perilous. A 2020 UBS poll revealed that nearly half (46%) of American investors planned to adjust their portfolios based on the outcome of the presidential election. This highlights a concerning trend: letting political affiliation influence financial strategy. Beyond the inherent difficulties of market timing, throwing political aspects into the mix can lead to even greater risk.

Then there’s the research that exposes a more insidious enemy: confirmation bias.

Confirmation bias is the cognitive tendency to seek out, interpret, and favor information that confirms our pre-existing beliefs, while disregarding or downplaying contradictory evidence. In simpler terms, we often see what aligns with our established views, and readily reinforce them while dismissing anything that may challenge them. The thinking is always that if the “other guy” wins, markets will crash.

Even more concerning, party affiliation often colors perceptions of the national economy, with the party in power typically receiving higher approval ratings.

This chart illustrates a persistent trend: we tend to feel good about the economy if our party is in power, and vice versa. So it’s not only a divide in regard to what will happen in the future, we can’t even agree on what is happening right now! The last time public opinion was in agreement regarding the economy was during the Clinton administration, when strategist James Carville famously declared, “It’s the economy, stupid!” Apart from that, there’s always been a clear divide.

What may be surprising is that historically, investing only under a democratic president yielded a much higher return than investing under only republican administrations. The growth of a $10,000 investment in 1950 would have been $405,540 under the Democrats, versus only $77,770 under the Republicans. But here’s the kicker – had you remained invested the whole time, the growth of that $10,000 investment would have come to $3.15 million dollars!

Does the president actually have any sway on this? Or are market cycles the main actor? It’s hard to say that President Bush was at fault for the great recession and housing crisis of 2008, and it was definitely good luck for President Obama, to be in office during the recovery. Markets and business cycles sing to their own tune, and don’t care who is warming the chair in the oval office.

Despite being informed and educated, investors will often still want to base their “thematic investing” decisions, where they invest in a certain sector or theme, on their projected election outcome.

Consider someone who believed President Trump’s “drill, baby, drill” slogan would boost the oil and gas industry. Despite this expectation, the SPDR Fund Energy Select Sector (ticker XLE) plummeted by 48% during his tenure. Similarly, those who assumed natural gas would thrive under President Biden have been disappointed, with most ETFs tracking natural gas being down by about 70% during his time in office.

The takeaway? When it comes to your investment accounts, leave confirmation bias at the login screen. Focus on what truly matters: your financial goals. By employing a well-defined strategy tailored to your individual needs and risk tolerance, you can navigate the markets with greater clarity and avoid the pitfalls of political influence.

September 02, 2024 BY Michael Wegh, CPA

Maximizing Tax Savings: The Advantages of Section 179 and Bonus Depreciation Deductions in Year One

Maximizing Tax Savings: The Advantages of Section 179 and Bonus Depreciation Deductions in Year One
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Maximizing current-year depreciation write-offs for newly acquired assets is a must for every business. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1.

Here’s how to coordinate these write-offs for optimal tax-saving results.

Sec. 179 deduction basics

  • Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software, and fixtures — qualify for the first-year Sec. 179 deduction.
  • Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems.
  • Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP).

QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework.
The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.)

Bonus depreciation basics
Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer.

  • For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023.

Sec. 179 vs. bonus depreciation
The current Sec. 179 deduction rules are generous, but there are several limitations:

    •  The phase-out rule mentioned above,
    • A business taxable income limitation that disallows deductions that would result in an overall business taxable loss,
    • A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and
    • Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations.

First-year bonus depreciation deductions aren’t subject to any complicated limitations but, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively.

So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can.

Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000.

    • You can deduct the $300,000 on your corporation’s 2024 federal income tax return.
    • You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation.

So, your corporation can write off $420,000 in 2024 [$300,000 + (60% x $200,000) = $420,000]. That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year.

Manage tax breaks
Coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea and a useful tool in a business’ tax strategy toolbox. Applied correctly, this strategy may allow your business to potentially write off some or all of its qualifying asset expenses in Year 1. That’s good for your books and good for your business.

September 02, 2024 BY Ahron Golding, Esq.

Is Anyone Home? TAS Telephone Operations Scores an All Time Low

Is Anyone Home? TAS Telephone Operations Scores an All Time Low
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Taxpayers and practitioners agree that attempting to contact the IRS by phone can be a frustrating endeavor. Every year, millions of taxpayers seek IRS assistance by reaching out to the IRS’ toll-free and international telephone lines with their federal tax questions, requests for tax forms, to check on the status of their refunds, or to follow up with IRS correspondence or notices. All too often, they are met with long wait times, disconnected calls and general anxiety. The Taxpayer Advocate Service, an independent organization within the IRS, was created to champion the taxpayers’ cause by mediating between taxpayers and the IRS to help resolve tax issues. But a recent study of TAS phone lines conducted by the Treasury Inspector General for Tax Administration (TIGTA), found that catching TAS for a heart to heart talk is equally as challenging as contacting the IRS directly.

With the Inflation Reduction Act (IRA) of 2022, $80 billion in supplemental funding was allocated to help the IRS up its game. One area of improvement focused on increasing the level of service via IRS telephone lines. In November of 2023, the Treasury Inspector General issued a report on the quality of customer service with the objective of determining whether IRS help lines were operational and able to provide taxpayers simple, fast, and accessible customer service.

Testers called 102 IRS customer service telephone numbers during the 2023 tax filing season to evaluate the quality of customer service and found that 21 of them placed the caller on hold for more than 30 minutes, before the caller ultimately ended the call. Other flaws emerged; taxpayers were referred to incorrect phone lines, the offer to provide messages in either English or Spanish was inconsistent, taxpayers did not always receive a return call as promised and hold times were excessive. In its Objectives Report to Congress for fiscal year 2025, the National Taxpayer Advocate service cited flaws in IRS taxpayer communications and advocated for the IRS to, “do a more comprehensive measure of phone service that includes the quality of the caller’s experience.”

Despite the Advocates Service’s best intentions, when TIGTA turned its spotlight on TAS itself, it didn’t fare much better. In July of 2024, TIGTA issued an evaluation report about how ready and responsive TAS phone lines were; the results sounded familiar.

TAS telephone lines were found to be inconsistent in providing taxpayers with the ability to speak with a TAS representative. TIGTA called all 76 local TAS telephone lines in the United States, using the telephone numbers listed on the TAS and IRS websites. Some telephone lines were found to be out of service, voicemail boxes were often full and unable to address the call, and recorded scripted messaging and callback times were inconsistent. Of the 76 calls made, only two were answered by a TAS representative. Automatic voicemail prompts promised that callbacks would be received anywhere between one business day to as long as four weeks. TIGTA also compared contact information for telephone numbers, fax lines, and local addresses between what was listed on the TAS and the IRS website and found several discrepancies. It identified voicemail messaging that had significant differences in the information being communicated.

After reviewing TIGTA’s draft report, TAS stepped up to the plate and agreed with much of its results and recommendations. TAS took corrective actions to make changes to voicemail messages, made updates to the IRS and TAS websites, and is striving to provide more consistent information to taxpayers. However, as claimed by its compatriot, the IRS, TAS management contends that it is short staffed and cannot adopt all of TIGTA’s recommendations.

Despite ongoing efforts to improve, IRS-taxpayer communications remain a messy business. In our experience, communicating with the IRS is best achieved by utilizing their call-back feature; which we have found to be fairly dependable and helpful. Nevertheless, when attempting to work out your issues with the IRS, patience and perseverance must rule the day.

August 23, 2024 BY Hershy Donath, CPA

Commercial Real Estate Crisis Leaves Banks and Bonds Floundering

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

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

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

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

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

 

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.

August 01, 2024 BY Yisroel Kilstein, CPA

Excess Benefit Transactions and How They Can Undermine Your Nonprofit

Excess Benefit Transactions and How They Can Undermine Your Nonprofit
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Most not-for-profit entities are familiar with the hazards of excess benefit transactions, but this brief refresher may enhance vigilance and compliance. The stakes are high. 501(c)(3) organizations determined by the IRS to have violated the rules governing excess benefit transactions can be liable for penalties of 25% to 200% of the value of the benefit in question. They may also risk a revocation of their tax-exempt status — endangering both their donor base and community support.

Private inurement

To understand excess benefit transactions, you also need to comprehend the concept of private inurement. Private inurement refers to the prohibited use of a nonprofit’s income or assets to benefit an individual that has a close connection to the organization, rather than serving the public interest. A private benefit is defined as any payment or transfer of assets made, directly or indirectly, by your nonprofit that is:

• Beyond reasonable compensation for the services provided or goods sold to your organization, or

• For services or products that don’t further your tax-exempt purpose.

If any of your organization’s net earnings privately benefit an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose.

Private inurement rules extend the private benefit prohibition to “insiders” or “disqualified persons” — generally any officer, director, individual or organization (including major donors and donor advised funds) in a position to exert significant influence over your nonprofit’s activities and finances. The rules also cover their family members and organizations they control. A violation occurs when a transaction that ultimately benefits the insider is approved.

Examples of violations could include a nonprofit director receiving an excessive salary, significantly higher than what is typical for similar positions in the industry; a nonprofit purchasing supplies at an inflated cost from a company owned by a trustee, or leasing office space from a board member at an above-market rate.

Be reasonable

The rules don’t prohibit all payments, such as salaries and wages, to an insider. You simply need to make sure that any payment is reasonable relative to the services or goods provided. In other words, the payment must be made with your nonprofit’s tax-exempt purpose in mind.

It is wise for an organization to ensure that, if challenged, it can prove that its transactions were reasonable, and made for valid exempt purposes, by formally documenting all payments made to insiders. Also, ensure that board members understand their duty of care. This refers to a board member’s responsibility to act in good faith; in your organization’s best interest; and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties. One best practice is to ask all board members to review and sign a conflict-of-interest policy.

Appearance matters

Some states prohibit nonprofits from making loans to insiders, such as officers and directors, while others allow it. In general, you’re safer to avoid such transactions, regardless of your state’s law, because they often trigger IRS scrutiny. Contact your accounting professional to learn more about the best ways to avoid excess benefit transactions, or even the appearance of them, within your organization.

 

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.

July 31, 2024 BY Our Partners at Equinum Wealth Management

Are We Headed For a Debt-Apocalypse?

Legal Showdown: Courts to Decide IRS Penalty Authority on Foreign Tax Non-Filing
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One of the most pressing financial questions facing the United States today is about its outstanding national debt, which recently crossed the $35 trillion mark. That translates into about $270,000 per taxpayer—a figure that many say is downright terrifying. What will happen when this debt “comes home to roost”? How will it all end? These are critical questions, and the answers are far from simple.

Some people subscribe to Modern Monetary Theory (MMT), a macroeconomic theory suggesting that a country issuing its own currency can never run out of money in the same way a business or individual can. Without diving too deeply into this view, it’s important to note that this theory is highly controversial and has more critics than supporters. Just because you can print more money doesn’t mean you will never need to pay it back. At the very least, issuing more dollars could lead to inflation and in a dire scenario, might cause the dollar to lose its global reserve currency status.

While MMT economists advocate for a calm and collected couch-potato approach to this predicament, others take a more extreme stance. Let’s call these preppers “The Three G’s” Squad—those who are hoarding “Gold, Groceries, and Guns” for when the wheels of the U.S. system come off. These folks are preparing for something as drastic as a proper zombie invasion, focusing on stockpiling tangible assets and ensuring self-sufficiency in case of a severe scenario.

While there may be some merit to stockpiling canned food in your basement, we’d prefer a more strategic and less doomsday-oriented approachThis isn’t the first time the U.S. has been in a difficult spot. The great experiment known as the U.S.A., established by the Founding Fathers, has faced its share of challenges before, but it has always pulled through.

So, while you might feel the urge to “do something” and potentially overprepare, our strategy focuses on investing in the largest, most efficient companies in the U.S. These companies are well-equipped to navigate financial crises due to their resources, experience, and operational efficiencies. While the possibility of an extreme event leading to total chaos always exists, it’s more likely that circumstances will create a financial crisis requiring robust and adaptive responses. And who better to manage these challenges than the most capable and resourceful companies?

Consider this: In January 1980, an ounce of gold was trading at $800. Today, that same ounce is worth about $2,400. However, to have merely kept pace with inflation since 1980, gold would need to be priced at $3,200 an ounce. By contrast, $800 invested in the S&P 500 in January 1980, and left to compound (with taxes paid from another source), would be worth about $117,000 today. While noisy preparation might provide comfort now, it has historically come at a steep cost to our long-term serenity.

So, although no one can claim to know how the national debt situation will play out—it’s a complex and daunting issue—what may feel like underpreparing today can be the best preparation. You can choose to take dramatic steps and watch events unfold on TV from your basement (with all the baby corn, of course), but true preparation might actually lie in betting on a brighter future and on those that are best suited to realize it.

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.

July 31, 2024 BY Shulem Rosenbaum, CPA, ABV

Alternative Indicators of Business Value

Legal Showdown: Courts to Decide IRS Penalty Authority on Foreign Tax Non-Filing
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When valuing a business, experts often go beyond the company’s financial statements and will interview management and request relevant documents to gain insight into the owners’ perceived value of the business. While this information should not replace a comprehensive valuation analysis, it can help identify discrepancies that need to be reconciled.

There are alternative indicators of value that experts may consider when valuing a business, and they are more common than one would think:

1. Buy-sell agreements

Owners often protect their business interests with buy-sell agreements. These agreements can provide a specific value for the business and may even contain valuation formulas to be used on an owner’s death or termination.

2. Prior sales

Arm’s-length transfers of ownership interests and offers to buy the company (or a portion of it) can shed light on a company’s value. Courts tend to give significant weight to prior sales and offers, especially when evaluating fair value for dissenting or oppressed shareholder claims. In some cases, courts may even consider transactions that happen after the valuation date. For data to be meaningful, the transaction should occur within a reasonable time frame; involve unrelated, credible buyers; and include business interests of comparable size and rights.

3. Past valuation reports

Valuation reports prepared for other purposes can provide insight into a company’s value. Comparability and timeliness are imperative.

4. Life insurance policies

Life insurance coverage can provide a useful indicator of value. When selecting adequate life insurance coverage amounts, most companies estimate the costs of buying out the owner or of losing a key individual.

5. Personal loan applications

Personal loan applications may be subpoenaed to provide evidence of a business interest’s value for owner disputes and marital dissolutions. When borrowers list personal assets on loan applications, they want to appear as creditworthy as possible. Conversely, when buying out another shareholder or obtaining a divorce, owners have a financial incentive to undervalue their business interests. When the amounts shown on loan applications and valuation reports differ substantially, the data may need further review.

Reliance

Though these indicators are a valuable tool in a valuation analysis, relying on them without a proper review of the terms and context may lead to inaccuracies. These metrics may not reflect current market conditions, financial health, or operational changes of the business. Buy-sell agreements could be outdated, prior sales may have been driven by unique, one-time circumstances, and life insurance policies might not reflect a true measure of a business’s worth. In Connelly v. United States, the court emphasized the importance of context, noting that these indicators must be carefully examined to ensure they represent a fair and accurate valuation.

Transparency is Key

Most valuation reports address these indicators of value, but sometimes they are overlooked, unavailable, or even withheld by the valuator’s client. It’s important to share all relevant information with your valuation professional. Alternative indicators of value may can be used to corroborate or refute a value conclusion. Analyzing financial statements, making time to review alternative indicators of value, and a good dose of common sense are invaluable in calculating accurate business value.

 

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.

July 31, 2024 BY Ahron Golding, Esq.

Legal Showdown: Courts to Decide IRS Penalty Authority on Foreign Tax Non-Filing

Legal Showdown: Courts to Decide IRS Penalty Authority on Foreign Tax Non-Filing
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In April 2023, taxpayers and tax professionals were elated by news that the U.S. Tax Court had ruled in favor of businessman Alon Farhy in his suit against the IRS. Farhy asserted that the IRS had no authorization to assess and impose penalties for failure to file foreign information returns. Their collective joy was tempered a year later when in May 2024, the U.S. Court of Appeals for the D.C Circuit reversed the Tax Court’s initial ruling.

Farhy failed to report his ownership in two foreign entities in Belize and was assessed hefty Section 6038(b) penalties. The penalty scale for infringements under Section 6038(b) includes initial penalties of $10,000 for each annual accounting period, for every foreign entity for which the required information is not provided. Additional penalties include $10,000 for each 30-day period that the infraction occurs, up to a maximum of $50,000.

Farhy’s argument to the courts was unique; he did not deny his lack of compliance. Rather, he challenged the IRS’ authority to independently assess and issue Section 6038(b) penalties directly, for failing to file certain foreign tax information. If the IRS sought to collect penalties, he contended, it would have to pursue civil action by filing a lawsuit in federal court under Title 28 of the U.S. Code. In its surprising ruling, the Tax Court agreed with Farhy’s position, and acknowledged that Section 6038(b), unlike other penalty sections, does not include a provision authorizing assessment of penalties.

Farhy’s victory didn’t last long. A year later, the Washington, D.C. Circuit Court of Appeals reversed the decision, based on context and history. “… penalties imposed under section 6038(b) … are assessable. This conclusion is buttressed by more than forty years of congressional acquiescence to the IRS’s practice of assessing section 6038(b) penalties.”

Apparently, silence is acquiescence. The court decided that the responsibility to clarify, change, or reinterpret a statute falls upon Congress. If Congress hasn’t revisited this statute in forty years, it must have no objection to its interpretation. The Court of Appeals utilized the “tools of statutory interpretation” and looked “to contextual clues” to assess whether this specific penalty provision could be challenged. It concluded that that Congress meant for Section 6038(b) penalties to be assessable, “Read in light of its text, structure, and function, section 6038 itself is best interpreted to render assessable the fixed-dollar monetary penalties subsection (b) authorizes.” On June 4, 2024, Farhy filed a petition for a rehearing, but it was denied.

While Farhy v Commissioner was on appeal, the ruling was successfully applied in Raju J. Mukhi v. Commissioner. Mukhi racked up $11 million of foreign reporting penalties and brought several claims to court, a fraction of which were Section 6038(b) penalties. In regard to those penalties, the Tax Court reaffirmed its decision in Farhy, finding that the IRS lacked authority to assess the penalties under Section 6038(b). Farhy was heard in U.S. Tax Court and deals with tax law interpretation, while Mukhi was heard by the U.S. Court of Appeals for the Second Circuit and involves immigration law. The overlap between the two cases highlights how rulings in one area can simultaneously impact decisions in other areas, influencing both IRS enforcement practices and federal law.

Litigation revolving around the IRS’ assessment authority for Section 6038(b) is likely to continue; but until there is a conclusive decision by the Supreme Court, taxpayers and practitioners can and should challenge IRS authority to assess these penalties in US Tax Court cases, where they fall outside of the D.C. Circuit. Ultimately, regardless of the courts’ decisions, the requirement to file still remains. Serious players in the international business space must be scrupulous in their tax compliance and stay mindful and aware of changing judicial interpretations of tax law.

 

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.

July 17, 2024 BY Moshe Schupper, CPA

AHCA Goes to Court

AHCA Goes to Court
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In a May 24, 2024, press release the American Health Care Association (AHCA) announced that, in conjunction with the Texas Health Care Association (THCA) and several Texas long term care facilities, it has filed suit against the U.S. Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS). In June, trade association LeadingAge, which represents more than 5,400 nonprofit aging service providers, joined the fray and announced that it has joined as co-plaintiff with AHCA. No surprises here. Since CMS’ April 22 release of its final mandate establishing new requirements for nursing homes staffing, healthcare associations and operators have been gearing up for a fight.

“We had hoped it would not come to this; we repeatedly sought to work with the Administration on more productive ways to boost the nursing home workforce,” said Mark Parkinson, President and CEO of AHCA. “We cannot stand idly by when access to care is on the line and federal regulators are overstepping their authority. Hundreds of thousands of seniors could be displaced from their nursing home; someone has to stand up for them, and that’s what we’re here to do,”

AHCA’s complaint argues that the agencies’ decision to adopt the one-size-fits-all minimum staffing standards is “arbitrary, capricious, or otherwise unlawful in violation of the APA.” Further, the lawsuit argues that the rule exceeds CMS’s statutory authority and imposes unrealistic staffing requirements.

The final mandate demands a minimum of 3.48 hours per resident per day (HPRD) of total staffing, with specific allocations for registered nurses (RN) and nurse aides. The allocations call for significant HPRD of direct RN care, and direct nurse aide care, and require the presence of an RN in all facilities at all times. Nursing home operators around the country claim that these requirements are unattainable, unsustainable, and unlawful; they could lead to widespread closures that will put the country’s most vulnerable population at risk.

Partnering with Texas nursing home industry leaders was a fitting move by AHCA as more than two-thirds of Texas facilities cannot meet any of the new requirements and suffer from a nursing shortage that is not expected to abate. The lawsuit emphasizes that, “Texas simply does not have enough RNs and NAs to sustain these massive increases. On the other hand, Texas has a relatively high proportion of licensed vocational nurses (“LVNs”) but the Final Rule largely ignores their important contributions to resident care.”

LeadingAge, with a membership spanning more than 41 states, represents the aging services continuum, including assisted living, affordable housing, and nursing homes. Katie Smith Sloan, president and CEO of LeadingAge, was vociferous in LeadingAge’s stance on the mandate. “The entire profession is completely united against this rule,” she said in a statement. LeadingAge voiced its opposition to the proposed mandate back in 2022, at the outset of Biden’s administration, and now joins the legal battle against its implementation, claiming that, “it does not acknowledge the interdependence of funding, care, staffing, and quality.”

At inception, the new mandate triggered strong opposition from industry leaders and lawmakers. Industry leaders claim the rural areas will take a harder hit than urban areas. Rural facilities are grappling with an unprecedented and acute shortage of registered nurses (RNs), rising inflation, and insufficient reimbursement. Additionally, both Republican and Democratic Congressmen joined in protest of the mandate and threw their support behind the Protecting Rural Seniors’ Access to Care Act (H.R. 5796) which would have effectively suspended the proposal. Ultimately, the staffing mandate was finalized before the House of Representatives took it up.

On the other side of the courtroom, the Centers for Medicare & Medicaid Services’ (CMS) officials maintain that facilities will be able to comply with the mandate because the three phase plan will “allow all facilities the time needed to prepare and comply with the new requirements specifically to recruit, retain, and hire nurse staff as needed.” The lawsuit counters this assertion stating that a delay in deadlines will do nothing to fix the underlying problem.

“To be clear, all agree that nursing homes need an adequate supply of well-trained staff,” the lawsuit states. “But imposing a nationwide, multi-billion-dollar, unfunded mandate at a time when nursing homes are already struggling with staffing shortages and financial constraints will only make the situation worse.”

In conversations with our healthcare clients, the consensus that seems to be forming is that the new staffing mandate’s attempt to address healthcare staffing issues is simply not feasible. The mandate only exacerbates the post-Covid, turbulent environment of the healthcare industry. It is most likely that the legal assault against the mandate has only just begun as nursing home owners and healthcare companies turn to the courts to mitigate the effects of the mandate and to strongarm CMS into drafting a more equitable ruling. How the mandate will ultimately be implemented, which of its components may be reversed, and what adjustments and policy updates will arise, is yet to be seen. Stay ready for updates as the situation evolves.

 

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.

July 02, 2024 BY Aaron Galster, CPA

Taking Back the Keys

Taking Back the Keys
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While bankruptcies are widely publicized and must follow the established governing codes, there is much more privacy and procedural flexibility when it comes to receiverships. And as we see more portfolios struggling in the current environment of higher interest rates, it’s critical to understand what receivership is and more importantly what it means for you.

Whereas bankruptcy is a method used by debtors to protect themselves from collection; receivership is a remedy that creditors employ to preserve interest upon a breach of contract i.e loan default. Once a breach has occurred, and the parties are unable to come to an agreement otherwise, the creditor will submit a claim to seek receivership in their state court. While a creditor also has the authority to file for involuntary bankruptcy, the receivership process is timelier, less expensive and more importantly, allows the creditor to nominate a receiver of their choice, albeit with the court’s ultimate approval. All these factors are crucial in accomplishing the lender’s goal of restoring their asset’s value.

The responsibilities, rights and compensation of the receiver are subject to the discretion of the court and not bound by strict procedures as seen in bankruptcies. Once finalized, the appointed receiver assumes complete management of the distressed company, controlling all its financial and operating functions. Depending on the litigation proceedings, as the business stabilizes, the lender will look to return the property to the debtor or transition the asset to a new permanent operator. While the company retains its principals in the interim, their authority and insight is limited, to their detriment. Should the business return to profitability or be sold for a gain, they will ultimately be responsible for any taxable income without the ability to proactively tax plan.

Courts view receivership as a drastic step and will encourage the lender and borrower to come to an equitable agreement instead. Should a portion of the debt be forgiven as part of such an agreement, this may result “cancellation of debt” income reported by the borrower. The additional tax liability can be a crushing blow for an already struggling taxpayer.

The two most popular exclusions under Code Section108 are to demonstrate that the company is insolvent or, more commonly, utilizing the ‘qualified real property business indebtedness exclusion.’ This exclusion can apply when real property that secures a debt is held for use in a trade or business and not primarily held for sale. The downside of utilizing this exclusion is that the taxpayer must reduce the tax basis of its depreciable real property by the amount of income he is aiming to exclude; resulting in a decrease in depreciation expense. While this is a worthy trade-off in the short term and can provide necessary breathing room, there are long-term ramifications the taxpayer needs to be aware of. A deteriorated tax basis translates into a higher capital gain should the property eventually be sold. All said, diligent tax compliance and strategic planning are essential to minimize adverse tax consequences during receivership.

While receivership might be perceived as a company’s death knell, it can also present unique opportunities for the company itself, as well as for entrepreneurs and other industry players. Economist Joseph Schumpeter introduced the economic principle of “creative destruction,” which describes how failures or disruptions in income for one entity or sector can create success for others. An entity that enters receivership has the chance to recover, redevelop and thrive. If it does not, others will take full advantage. Those looking to quickly repay creditors present savvy entrepreneurs with an opportunity to acquire assets that can significantly appreciate in value, at discounted prices, and under favorable terms. In business, there are always winners and losers, but opportunities are ever-present. Recognize them and position yourself as a winner.

 

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.

July 02, 2024 BY Mendy Wegh, CPA

The ESG Concept – Hype or Value?

The IRS Grapples with Fraud, Ineligibility, and Processing Backlog. Will We Ever get Our ERC Money?
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The usual question posed by business owners and their leadership teams when they meet to discuss strategic planning is something along the lines of, “How can we safely grow our company to reach the next level of success?” While that is certainly a good launching point, there are other basics to consider. One of them is the environmental, social and governance (ESG) concept.

3 critical components of ESG

ESG generally refers to how companies handle three critical activities:

• Environmental practices. This includes the use of energy, production of waste and consumption of resources.

• Social practices. This includes fair labor practices; worker health and safety; diversity, equity and inclusion. It’s all about a company’s relationships with people, institutions and the community.

• Governance practices. This refers to business ethics, integrity, openness, transparency, legal compliance, executive compensation, cybersecurity, and product or service quality and safety.

Missteps or miscommunications in these areas can spell disaster for a company if it draws public scrutiny or raises compliance issues with regulatory agencies; while integrating robust ESG practices into a company’s strategic planning and daily operations addresses this possible danger and offers many potential advantages.

Benefits

Strong ESG practices could lead to stronger financial performance and offers the following benefits:

Higher sales. Many customers — particularly younger ones — consider ESG when making purchasing decisions. Some may even be willing to pay more for products or services from businesses that declare their ESG policies.

Reduced costs. A focus on sustainability can help companies reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently. Conversely, bad publicity associated with government intervention, discrimination or harassment claims, can be costly and damaging.

Improved access to capital. Clear and demonstrable ESG practices can provide growing companies with access to low-cost capital. Some investors consider a company’s ESG when making additions to their portfolios and may perceive those with ESG initiatives as lower-risk investments.

More success in hiring and retaining employees. As climate change remains in the public eye, certain job candidates may favor companies that can clearly demonstrate sound environmental practices. Once hired, these employees will likely be more inclined to stay loyal to businesses that are addressing the issue.

Other aspects of ESG also speak to the current concerns and values of workers. Many of today’s employees want more than a paycheck. They expect employers to care for their well-being and protect them from threats such as corruption, unethical behavior and cybercriminals. Comprehensive ESG practices may reassure such employees and keep them close.

Your choice

The importance of ESG practices is not universally agreed upon in the business world. Some approach ESG formally and diligently, while others slide through potential issues. ESG practices are unique to each business and are subject to a company’s leadership team’s judgement. Nonetheless, as a business engages in strategic planning, taking time to consider the impact of ESG-related practices is time well spent. Its potential benefits can only add value in the long run.

 

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.

July 02, 2024 BY Our Partners at Equinum Wealth Management

Reasons to Buy

Reasons to Buy
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When it comes to investment discussions, it often seems as if the “bearish” voices have the upper hand. They sound smarter, more cautious, and more in tune with potential risks. It’s easy to feel that by dismissing their concerns, you look like you’re ignoring the data.

The same negative tone is also prevalent in financial media reporting. For example, the first two headlines that popped up in my search for this article were: “Nvidia’s Ascent to Most Valuable Company Echoes Dot-Com Boom” and “Megacap Stocks Are Extremely Overbought and Could Be Due for a Near-Term Pullback.” The news tends to be painted with a broad, negative brush – always highlighting the next big worry.

Financial blogger Michael Batnick has an insightful chart he calls, “Reasons to Sell.” The chart plots major news stories that have pushed the market down, alongside the S&P 500. It is fascinating that, while these stories did cause the market to drop for a week, or even a few months, they appear as only blips on the long-term chart. This demonstrates a crucial point: the market tends to recover from short-term shocks and continues its upward trajectory over the long haul.

Negative new stories that yell “Sell!” are ever present, but if you were to attempt to create a chart titled “Reasons to Buy,” the news stories in this category would be few and far between. The steady, long-term belief in the American economy, and its robust ability to rebound (potentially titled “Belief in Human Innovation”), rarely makes headlines. Yet, this enduring strength is the true reason to ‘Buy’.”

Believing that the economy will continue to grow over time may not be a strong counterargument when faced with short-term crises, but for long-term optimists, it means that the timing is always right. This thought is rooted in the concept of economic resilience and human ingenuity. The economy, particularly the American economy, has shown a remarkable ability to recover from downturns, and to innovate and grow. From the Great Depression to the 2008 financial crisis, every major economic setback has been followed by periods of significant growth and innovation.

The “bearish” team may sound more convincing and more focused on risks, but remember that while the market might dip due to legitimate concerns, history shows it tends to bounce back. Maintaining a long-term perspective, and faith in the economy’s growth and in human innovation, can provide a solid foundation for your investment decisions. Investing is not about timing the market; it’s about time in the market. The longer you stay invested, the more you benefit from the economy’s natural growth and the compounding effect of your investments.

While it’s crucial to be aware of risks and to stay informed, it’s equally important to maintain a balanced view. The negative headlines will always be there, but so will the underlying strength and potential of the economy. Trusting in long-term growth and human innovation can help you stay focused on your financial goals, even when the market feels uncertain.

 

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.

July 02, 2024 BY Ahron Golding, Esq.

The IRS Grapples with Fraud, Ineligibility, and Processing Backlog. Will We Ever get Our ERC Money?

The IRS Grapples with Fraud, Ineligibility, and Processing Backlog. Will We Ever get Our ERC Money?
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Back in September of 2023, the IRS declared a moratorium on the processing of new ERC claims, declaring that a substantial portion of the new claims were ineligible and were a product of clueless businesses lured in by promises from aggressive promoters and ‘ERC mills’. Aggressive promotion campaigns by ERC mills instigated a surge of problematic claims, ultimately obstructing IRS’ processing of legitimate claims for deserving businesses. Fast forward to June 2024 and, after coming under pressure from Congress, the IRS has announced that, in an attempt to crawl through the enmired, fraud-ridden ERC program, it will step up its processing and payments of older ERC claims.

Beleaguered IRS Commissioner Danny Werfel clarified that, “We decided to keep the post-September moratorium in place because we continue to be deeply concerned about the substantial number of claims coming in so long after the pandemic. We worry that ending the moratorium might trigger a renewed marketing push by aggressive promoters that could lead to a new round of improper claims. That would be a bad result to taxpayers and tax administration. By continuing the moratorium, we will use this time to consult with Congress and seek additional help from them on the ERC program. Based on what we are seeing, we believe closing the ERC program down to additional applicants would be the right thing to do.”

Werfel says that the IRS continues to be deluged by 17,000 new claims a week, despite the moratorium, and its inventory of claims stands at 1.4 million. According to the law, businesses can still apply for the credit until April 15, 2025, despite the fact that the pandemic is history. The IRS anticipates that tens of thousands of improper high-risk claims for the ERC will be denied. It conducted a review to assess a group of over 1 million ERC claims representing more than $86 billion filed and found that 10% to 20% of claims fell into the highest-risk group, with clear signs of ineligibility or possible fraud. Another 60% to 70% of the claims showed, “an unacceptable level of risk” which will draw extra analysis and scrutiny from the IRS.

Red flags tagging a claim as high risk are those that declare too many employees and wrong ERC calculations, claims based on a supply chain disruption, businesses that claim the ERC for too much of a tax period, or claims from businesses that did not pay wages or did not exist during the eligibility period. Claiming the ERC for partial shutdowns, where a segment of a business was partially shutdown, is also suspect.

Werfel assures taxpayers that the situation is not completely bleak. “For those with legitimate claims, this review helps the IRS with a path forward, and we’re taking action to help. Our review showed between 10% and 20% of the ERC claims show a low risk of red flags. So, for those with no eligibility warning signs, and received before last September, the IRS will begin judiciously processing more of these claims.” The IRS will work on a first-in-first-out basis, with older claims addressed first. It will not process claims that were submitted after Sept. 14, 2023, post-moratorium. Werfel advises taxpayers to lay low and wait for the IRS to sort things out instead of inundating the IRS toll-free line or contacting their accounting professionals to try to speed up the payment process.

While Werfel’s team sorts out its processing issues, the IRS Criminal Investigation unit is hard at work. It has already initiated 450 criminal cases of potentially fraudulent claims totaling a dollar value of almost $7 billion. Of these cases, 36 have resulted in federal charges. At the same time, the IRS has thousands of audits in the pipeline. “So, the bottom line for us on ERC is that we’re continuing to work on many different angles.” Werfel says. “And today’s announcement illustrates that we have a slow but steady path forward to help small businesses with no red flags on their claims, while denying clearly incorrect claims to continuing your work on those claims with question marks.”

 

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.

July 02, 2024 BY Ben Spielman, CPA

Will the New 485X Tax Credit Lure Developers Back Into Construction Mode?

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

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

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

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

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

 

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.

June 04, 2024 BY Ahron Golding, Esq.

Moving Out of State? NYS May Not Want to Say Goodbye

Moving Out of State? NYS May Not Want to Say Goodbye
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Yogi Berra famously quipped, “Nobody goes there anymore; it’s too crowded.” That pretty much sums up how many people view living in New York. Long time residents are leaving New York in droves. However, although people are trying to escape high taxes, cold weather and congestion, they often want to keep some of the benefits and conveniences that New York has to offer. They often want to keep their (former) home in New York.

If you’ve moved away from New York but still have a home there, you may think you’ve abandoned the Empire state. But New York State might not have abandoned you (at least not your money). If you maintain a permanent home in New York, you may still be considered a resident for tax purposes.

This article will address the frequently asked question of “How do I get Albany’s hands out of my pocket?” Taxpayers often think that if they buy a Florida home and change their driver’s license and voter’s registration to Florida, they are no longer NYS residents for tax purposes. That doesn’t fly according to the NYS tax dept.

Like many states, New York has strict residency laws that will determine your tax obligations. If you’ve recently moved out of NY or are considering moving you should be aware of the legalities dictating residency and be prepared to defend your position in case of audit.

NYS has two tests to determine whether you are a NY taxpayer – the Domicile Test and the Statutory Residency Test. They can get you on either one.

One’s domicile is his place of permanent legal residence. It’s the place where one has the most family and professional ties and that one considers their home.

Five factors define whether a person is considered domiciled in NY State. None of these factors stand alone in determining what a domicile is, rather, they are considered in their totality. It is all about intention, as evidenced by your actions.

The first factor considered is your physical home. What location do you intend to use as your personal home? Where do you return to after you’ve been away? What is the size of your NY home as opposed to your non-New York home? Is one owned and one rented?

The second criterion revolves around your active business involvement. Where is your primary workplace? Where do you work from on a day-to-day basis? Working from a second home is still considered as though one is working in New York for tax purposes, unless a separate business location is established in the secondary location.

The third factor that NYS will review is how the taxpayer spends his or her time. Taxpayers are expected to spend more time in his or her new home state rather than in New York. A location tracker App like Monaeo can be helpful to support this.

The fourth criteria is ‘near and dear’. One’s domicile is the place where one keeps significant possessions. Where are your significant monetary and sentimental possessions located? New York State will not be convinced that you’ve moved if you keep your Picasso in your former home.

One’s family is the final factor. Where do your family members reside? Where do you host significant events and holidays? Are your children registered for school in your new hometown or in NY State?

Under law, one can only have one domicile. A New York domicile does not change until it is established that it has been abandoned and that a new domicile outside New York State has been established.

A “statutory resident” is defined as one who is not domiciled in NY State but maintains a permanent place of abode (regardless of ownership) in the state, and spends, in the aggregate, more than 183 of the taxable year there. Under audit, NYS will review calendars, expense reports, credit card statements, passports, cell phone records, and EZ PASS activity to make an accurate count of how many days you’ve spent in NY State. Partial days will count as a full day when making the count, with only very limited travel and medical exceptions.

If an auditor determines that a taxpayer is not domiciled in NY State, he will still attempt to establish that the Taxpayer is a statutory resident. In either case, whether being domiciled in NY State or being a statutory resident of NY State, the taxpayer is considered a NY State resident for tax purposes. If you are preparing to move out of NYS, but still plan to have some kind of continuing relationship with your former home, it would be wise to confer with your accountant and develop a preventative strategy to defend yourself in case your residential tax obligations are challenged.

 

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.

May 31, 2024 BY Denis Susac

Harnessing AI: Revolutionizing Business Operations

Harnessing AI: Revolutionizing Business Operations
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The Evolution and Impact of Artificial Intelligence
Artificial Intelligence (AI) has transitioned from a niche area of academic research to an essential tool that is transforming how businesses operate. For accountants and other business professionals, AI represents a powerful ally in streamlining operations, improving accuracy, and enhancing decision-making processes.

Understanding AI in Business
AI refers to the ability of machines to perform tasks that typically require human intelligence. This includes understanding language, recognizing patterns, solving problems, and making decisions. Over the past few years, AI has become more accessible and practical, particularly with the rise of tools like ChatGPT and other AI assistants. These tools can automate repetitive tasks, provide quick answers to queries, and even generate insightful reports, all of which are invaluable in the business world.

The Role of AI in Business Operations
AI is not a futuristic concept; it is already making a significant impact in various business operations. For instance, AI can assist in:
Financial Analysis and Reporting: AI tools can sift through large datasets to identify patterns and generate detailed reports, helping businesses make informed financial decisions.
Risk Management: AI systems can analyze historical data to predict potential risks and recommend mitigation strategies, thereby enhancing the overall risk management framework.
Customer Service: AI chatbots can handle customer inquiries round-the-clock, providing timely and accurate responses that improve customer satisfaction.

The Practical Benefits of AI for Accounting
For business professionals, the integration of AI can bring several tangible benefits:
Efficiency and Automation: AI can handle routine tasks such as data entry, invoice processing, and reconciliation. This frees up time for professionals to focus on more strategic activities, like financial planning and analysis.
Accuracy and Consistency: AI systems reduce the risk of human error in data processing and calculations, ensuring that records are accurate and consistent. This is crucial for maintaining compliance and preparing precise financial statements.
Enhanced Decision-Making: AI can analyze vast amounts of data quickly, uncovering trends and insights that might not be immediately obvious. This supports better decision-making and strategic planning.
Improved Client Interaction: AI-powered chatbots can provide instant support to clients, answering common questions and performing basic tasks. This enhances the client experience and allows human staff to handle more complex inquiries.

Challenges and Considerations
While AI offers numerous benefits, its implementation comes with challenges, particularly in sensitive fields like healthcare. In these areas, AI must be used with caution due to privacy concerns, the need for regulatory compliance, and the critical importance of accuracy. Businesses must ensure that their AI systems are secure, reliable, and compliant with all relevant regulations.

Transformative AI Solutions
Part of the suite of AI-driven software solutions that RothTech has developed caters specifically to the needs of modern businesses. Here’s a closer look at how these technologies work and some of the benefits they deliver:

1. Advanced User Support with AI Chatbots
Our chatbots utilize Retrieval-Augmented Generation (RAG) models, which combine the best of retrieval-based and generative AI systems. Here’s how it works: when a customer query comes in, the RAG model first retrieves relevant information from a vast database of knowledge. This knowledge is usually kept private by organizations using the tool, so “ordinary” AI models like ChatGPT have no access to it. It then uses this information to generate a response that is not only accurate but contextually aware. This process enhances the chatbot’s ability to conduct complex, multi-turn conversations and provide responses that feel natural and intuitive, thereby improving customer service interactions and efficiency. In addition, this type of chatbot can recognize user’s intents and perform actions ranging from simple API calls to orchestrated and complex workflows.

2. Revolutionizing Knowledge Management
Our knowledge exchange platform transforms how information is curated, accessed, and utilized within an organization. It acts much like an AI-driven mentor that is available round-the-clock. It can ingest data from a variety of sources, including internal reports, emails, databases, and even external publications, to build a comprehensive knowledge base. Real-time analytics on user queries and the system’s responses help identify gaps in information and areas for improvement, ensuring that every team member has the most accurate and relevant information at their fingertips. If needed, this system can seamlessly transfer control to a human operator, resulting in enhanced user experience.

3. AI-Driven Recruitment: Enhancing HR Efficiency
Using deep learning, we employ HR systems which are able to analyze a multitude of data points from job descriptions and resumes to match candidates with job opportunities. This AI-driven approach not only expedites the hiring process but also improves the quality of matches, which can enhance workforce stability and satisfaction.

4. Automated Monitoring of Web Applications
Our automated systems proactively monitor the health and performance of web applications, ensuring they deliver a seamless user experience. By identifying and addressing issues before they affect users, these tools maintain high standards of application reliability and security.

5. AI in Fraud Detection and Financial Auditing
Our AI systems analyze transactional data for patterns indicative of fraud and scrutinize financial documents using natural language processing to detect inconsistencies. These capabilities enhance the security and accuracy of financial operations.

6. Streamlining Insurance Processes
AI-driven automation in insurance workflows helps manage claims, underwriting, and customer service tasks more efficiently, reducing the burden on staff and improving client satisfaction.

7. Enhanced Reporting and Business Analytics
Our tools use advanced LLMs to process both structured and unstructured data, enabling comprehensive business analysis, database querying and insight generation, which supports informed decision-making.

8. AI in Medicine
We have successfully implemented an advanced computer vision project for MRI analysis. This project aims to assist clinicians in analyzing MRI scans more accurately and efficiently by leveraging AI to interpret medical imaging nuances.

The Future of AI: Agents and Agency

As AI technology continues to evolve, the concept of AI agents — semi-autonomous systems that can perform a variety of business functions — and AI agency, where AI represents businesses in interactions, is becoming more prominent. In addition, the newest Large Language Models presented just days ago are making a big step towards much more natural human-computer interaction—for example, GPT 4o accepts as input any combination of text, audio, image, and video and generates any combination of text, audio, and image outputs. Such advances of AI development will further redefine the boundaries of what machines can do in a business context, offering new opportunities for innovation and efficiency.

As AI technology continues to evolve, its potential to redefine business operations grows exponentially, promising unprecedented innovation and efficiency. However, businesses must also navigate the associated risks, including data privacy concerns and the need for robust regulatory compliance, to fully leverage AI’s transformative power while mitigating potential downsides.

 

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.

May 02, 2024 BY Michael Wegh, CPA

CFOs and Tax Leaders: A Synergy That Generates Better Tax Function

CFOs and Tax Leaders: A Synergy That Generates Better Tax Function
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CFOs and Tax Leaders share responsibilities and goals – but need to do a better job collaborating. These two pivotal business roles share responsibility for the financial stability, profitability, and growth of their businesses, but when they are not aligned on the strategic value of the tax function, the company will suffer the consequences.

BDO’s Tax Strategist Survey found that 78% of CFOs believe that the tax function offers strategic value to the broader business, and 75% believe the tax function is invited to weigh in on business decisions before they are made. In both instances, there is a clear signal that CFOs see the merits of fully engaging with the tax function.

However, tax leaders’ responses to the same survey seemed to tell a different story. Only 27% of tax leaders say that they were sufficiently involved in a wide enough range of business decisions to meet the threshold of a “tax strategist” — the type of tax leader who regularly takes a seat at the table to provide strategic input outside the traditional areas of responsibility of the tax function.

This disconnect creates an interesting challenge: if CFOs believe tax leaders are already adding sufficient strategic value, they may fail to include them in the wider decision-making process. This oversight could prevent leveraging the full potential of a tax team, leading to missed tax opportunities or even increased tax risk or liability. Tax leaders, for their part, believe they can be more involved, so something appears to be lost in translation. How can CFOs and tax leaders work together to enable a more strategic tax function?

Expanding Roles: CFOs and Strategic Tax Functions

The tax function’s role is expanding and becoming more complicated. Tax leaders must navigate increasing regulatory complexity, as major domestic U.S. tax policy changes occur with greater frequency. International trade treaties and regulations have changed markedly due to new presidential administrations and expanding geopolitical conflicts.

Tax leaders are increasingly involved in reputation management amid heightened demand for tax transparency from regulators and other stakeholders. Tax leaders and CFOs must work together to manage competing priorities of maximizing shareholder value and ensuring the company is not overpaying tax, while at the same time managing public scrutiny related to total tax contribution.

Tax Leaders: Learn to Speak the Same Language

In turn, tax leaders need to understand how the CFO’s role is evolving. Learning to speak the language of business and finance beyond tax means understanding the strategic priorities of the CFO and the business and how the tax function can positively impact those goals. Tax leaders must make sure that their highly technical tax language translates across the business so that tax planning strategies can be effectively communicated to the C-suite and accurately deployed.

Expanding the range of metrics and key performance indicators (KPIs) used to measure the tax function’s impact on the company can also help align goals and foster communication. Alongside essential benchmarks like effective tax rate or accuracy of tax returns, new benchmarks may dovetail with the CFO’s other goals – like capital allocation and risk management, helping to bring the tax function’s insights to a wider audience.

Developing the ability to calculate and communicate the tax implications of business decisions and policy shifts in terms that matter to the broader business is key to the tax leader becoming a trusted advisor to the CFO. Showing leaders across the company that the tax team can focus on bottom-line impacts while attending to technical tax details can demonstrate how the tax function’s abilities extend beyond compliance and into strategic value.

CFOs: Keep the Lines of Communication Open and Provide the Right Support

For CFOs, keeping the lines of communication open with tax leaders is essential to successful strategic tax planning. Inviting tax leaders to the table when major decisions are made is important, but will be merely symbolic if tax leaders do not have the resources they need to make strategic contributions. The CFO should work closely with tax leaders to ensure the tax team is equipped with the necessary resources, including skilled personnel, an effective staffing model, advanced technology, and ongoing training and development. This kind of support simplifies dealing with complex tax situations and allows tax leaders to focus on strategic contributions by automating routine tasks and providing actionable data insights.

CFOs and Tax Leaders: Foster Alignment in Action

When CFOs and tax leaders set goals together, communicate, and keep each other accountable, the magic can start to happen. Their alignment will drive better business outcomes, enhance decision-making, mitigate tax risk, and improve operational resilience. When well-aligned CFOs and tax leaders are strategic partners, they can unlock the full potential of the tax team and leverage highly technical knowledge to provide bottom-line value to the entire business.

 

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.

May 02, 2024 BY Ahron Golding, Esq.

A Look at Some of This Year’s Dirty Dozen

A Look at Some of This Year’s Dirty Dozen
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The IRS’ annual  “Dirty Dozen” list informs taxpayers about current tax scams, schemes, and dodges that could put their money, personal data, and security at risk.  The purpose of the IRS’ Dirty Dozen is to warn taxpayers away from tax traps designed for them by corrupt promoters and shifty tax practitioners.

What schemes made the list for 2024? Here are some areas of impropriety that the IRS wants you to know about:

Social media: Not the ideal place for solid tax advice

Want some bad tax advice? There’s a lot to be found on social media. Scouring social media for answers to your tax problems could lead to identity theft and onerous tax debts.

Two of the recent schemes circulating online relate to the misuse of your W-2 wage information. One scheme involves encouraging people to use Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals) to claim a credit based on income earned as an employee and not as a self-employed individual.  This credit was valid for Covid years 2020 and 2021 but is no longer operative. The second scheme encourages the invention of fictional household employees and the filing of Schedule H’s (Form 1040), Household Employment Taxes, to claim a refund based on false sick and family medical leave wages that they never paid. The IRS is on the lookout for these deceptions and will work with payroll companies, employers, and the Social Security Administration to verify W-2 information.

Beware of ghost preparers

“Ghost preparers” are a common scourge that emerges during tax season. These are unqualified, and sometimes unscrupulous preparers, without valid preparer tax identification numbers (PTINs), who offer filing services. They will often encourage taxpayers to take advantage of tax credits and benefits for which they do not qualify.

“By trying to make a fast buck, these scammers prey on seniors and underserved communities, enticing them with bigger refunds by including bogus tax credit claims or making up income or deductions,” says IRS Commissioner Danny Werfel. “But after the tax return is filed, these ghost preparers disappear, leaving the taxpayer to deal with consequences ranging from a stolen refund to follow-up action from the IRS.”

The IRS encourages taxpayers to check their tax preparer’s credentials and qualifications. A qualified preparer will always ask for the taxpayer’s receipts, records, and tax forms to determine his or her total income, and proper deductions and tax credits. Stay on top of your own data; an unethical tax preparer may try to boost your refund by taking false deductions or creating bogus income to claim more tax credits. E-filing a tax return using a pay stub instead of a Form W-2 is against IRS e-file rules and should serve as a bright red flag to the taxpayer.

 

 

The IRS warns taxpayers to beware of preparers that utilize shady payment terms like ‘cash-only’ payments or fees based on a percentage of the taxpayer’s refund. Taxpayers should also be suspicious if a tax preparer encourages them to have their refund deposited with them, instead of depositing it directly into their own personal bank account.

Beware of offer in compromise “mills”

Internal Revenue Service also renewed its warning to taxpayers regarding Offer in Compromise (OIC) “mills”. These are the unscrupulous preparers you’ve heard all over the media promising to make your tax debts disappear.

“These mills try to pull in steep fees while raising false expectations and exploiting vulnerable individuals with promises that tax debt can magically disappear,” says IRS Commissioner Danny Werfel.

The IRS’ Offer in Compromise is a viable option for the taxpayer who can’t meet his tax obligations, provided that he is able to justify financial hardship.  The IRS evaluates every OIC application on a case-by-case basis and considers each taxpayer’s unique circumstances, factoring in the taxpayer’s income, expenses, asset equity, future earning potential and ability to pay. Taxpayers must be able to support and document their claim and pay an application fee to start the process. To confirm eligibility and prepare a preliminary proposal, taxpayers can use the IRS’ online OIC Pre-Qualifier Tool found here: https://irs.treasury.gov/oic_pre_qualifier/

While the OIC offers a chance for negotiation with the IRS, allowing taxpayers to present reasons for their inability to pay their full tax debt, it is a complex and time-consuming procedure governed by IRS guidelines. Aggressively marketed OIC mills that promise to resolve outstanding tax debts for pennies on the dollar are deceptive. Taxpayers who fall victim to these schemes may find themselves in even worse financial situations, facing increased debt and legal repercussions.

If you need to reduce your tax liability, reach out to your accounting professional and steer clear of  predatory OIC mills.

 

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.

February 29, 2024

Webinar Recap | The IRS Strikes Back

Webinar Recap | The IRS Strikes Back
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Roth&Co  hosted a webinar on February 28, 2024, featuring Tax Controversy Manager Ahron Golding, Esq. The webinar discussed the recent approach that the IRS has been taking towards the Employee Retention Credit (ERC), scrutinizing ERC claims for abuse and fraud. Audits and criminal investigations on promoters and businesses filing questionable claims are intensifying, with thousands of audits already in the pipeline.

What is the IRS looking for?  Here is what the IRS refers to as the ‘suspicious seven:’

  1. Too many quarters being claimed

Some promoters have urged employers to claim the ERC for all 7 quarters that the credit was available. Since the IRS believes that it is rare for a business to legitimately qualify for all quarters, making a claim for all of them is a red flag.

  1. Government orders that don’t qualify

In order for a business to qualify for the ERC due to a government order that compromised their operations:

  • the order must have been in effect for the periods claimed
  • the order must have been directed towards the business rather than towards the customer
  • the full or partial shutdown must have been by order and not simply via guidance or recommendation
  • the IRS is looking for the negative financial impact on the business

Claiming that an entire segment of a business was shut down, though that segment was not significant compared to the entire business, will cause a claim to be disallowed.

  1. Too many employees and wrong ERC calculations

The laws are complex, and have changed throughout 2020 and 2021. Dollar limits, credit amounts, and the definition of qualified wages changed as well. Make sure your calculations are accurate.

  1. Supply chain issues

The IRS is not looking kindly at claims based on general supply chain disruption.

  1. Business claiming the ERC for too much of a tax period

If eligibility is based on full or partial suspension, then a business can only claim the ERC for wages paid during the period of actual suspension, not necessarily the whole quarter.

  1. Business did not pay wages or did not exist during the eligibility period 

If the business did not exist or pay any wages during the period of the claim, the claim will be disallowed by the IRS and prosecuted for fraud.

  1. Promoter says there’s nothing to lose 

Promoters that urged businesses to claim the ERC because they had “nothing to lose” were mistaken. Incorrectly claiming the ERC invites repayment requirements, penalties, interest, audits, and the expense of hiring someone to help resolve the error, amend returns, and represent the business in an audit.

The IRS has a comprehensive ERC eligibility checklist here.

Many businesses have neglected to take into account the issue of aggregation as it applies to the ERC credit. This can potentially effect employee count, revenue, and other crucial calculations.

Overall, the IRS is not too pleased with ERC promoters. IRS auditors have been trained to start an audit by asking who the taxpayer used to help prepare their claim. The IRS expects a taxpayer to utilize a trusted tax professional, rather than a dubious ‘ERC mill’.

What if the employer has an opinion letter to back up his claim? Generally, opinion letters are only as valuable as the backup data they provide. If a claim can be justified by hard numbers, it will help the employer if challenged.

If a business determines that it incorrectly claimed the Employee Retention Credit, it can use the ERC claim withdrawal process outlined here, so long as the business has not yet received the credit or hasn’t deposited an ERC check. Requesting a withdrawal means a business is asking the IRS not to process their entire adjusted return that included the ERC claim. If the IRS accepts the request, the claim will be treated as if it was never filed.

If a business incorrectly received the ERC before December 21, 2023, and deposited the check, they can apply for the ERC Voluntary Disclosure Program before March 22nd, 2024. This program allows participants to repay only 80% of the ERC they received as a credit on their return or as a refund. Click here for more details.

If your business received an opinion letter regarding ERC eligibility that you would like us to review, please email engage@rothcocpa.com.

This summary has been presented for educational purposes only and does not constitute a comprehensive study of the ERC tax laws or serve as a legal opinion or tax advice. 

December 25, 2019

Wayfair Revisited — It’s Time to Review Your Sales Tax Obligations

Wayfair Revisited — It’s Time to Review Your Sales Tax Obligations
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In its 2018 decision in South Dakota v. Wayfair, the U.S. Supreme Court upheld South Dakota’s “economic nexus” statute, expanding the power of states to collect sales tax from remote sellers. Today, nearly every state with a sales tax has enacted a similar law, so if your company does business across state lines, it’s a good idea to reexamine your sales tax obligations.

What’s nexus?

A state is constitutionally prohibited from taxing business activities unless those activities have a substantial “nexus,” or connection, with the state. Before Wayfair, simply selling to customers in a state wasn’t enough to establish nexus. The business also had to have a physical presence in the state, such as offices, retail stores, manufacturing or distribution facilities, or sales reps.

In Wayfair, the Supreme Court ruled that a business could establish nexus through economic or virtual contacts with a state, even if it didn’t have a physical presence. The Court didn’t create a bright-line test for determining whether contacts are “substantial,” but found that the thresholds established by South Dakota’s law are sufficient: Out-of-state businesses must collect and remit South Dakota sales taxes if, in the current or previous calendar year, they have 1) more than $100,000 in gross sales of products or services delivered into the state, or 2) 200 or more separate transactions for the delivery of goods or services into the state.

Nexus steps

The vast majority of states now have economic nexus laws, although the specifics vary:Many states adopted the same sales and transaction thresholds accepted in Wayfair, but a number of states apply different thresholds. And some chose not to impose transaction thresholds, which many view as unfair to smaller sellers (an example of a threshold might be 200 sales of $5 each would create nexus).

If your business makes online, telephone or mail-order sales in states where it lacks a physical presence, it’s critical to find out whether those states have economic nexus laws and determine whether your activities are sufficient to trigger them. If you have nexus with a state, you’ll need to register with the state and collect state and applicable local taxes on your taxable sales there. Even if some or all of your sales are tax-exempt, you’ll need to secure exemption certifications for each jurisdiction where you do business. Alternatively, you might decide to reduce or eliminate your activities in a state if the benefits don’t justify the compliance costs.

Need help?

Note: If you make sales through a “marketplace facilitator,” such as Amazon or Ebay, be aware that an increasing number of states have passed laws that require such providers to collect taxes on sales they facilitate for vendors using their platforms.

If you need assistance in setting up processes to collect sales tax or you have questions about your responsibilities, contact us.

December 23, 2019

Congress Gives a Holiday Gift in the Form of Favorable Tax Provisions

Congress Gives a Holiday Gift in the Form of Favorable Tax Provisions
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As part of a year-end budget bill, Congress just passed a package of tax provisions that will provide savings for some taxpayers. The White House has announced that President Trump will sign the Further Consolidated Appropriations Act of 2020 into law. It also includes a retirement-related law titled the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Here’s a rundown of some provisions in the two laws.

The age limit for making IRA contributions and taking withdrawals is going up. Currently, an individual can’t make regular contributions to a traditional IRA in the year he or she reaches age 70½ and older. (However, contributions to a Roth IRA and rollover contributions to a Roth or traditional IRA can be made regardless of age.)

Under the new rules, the age limit for IRA contributions is raised from age 70½ to 72.

The IRA contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (the same as 2019 limit).

In addition to the contribution age going up, the age to take required minimum distributions (RMDs) is going up from 70½ to 72.

It will be easier for some taxpayers to get a medical expense deduction. For 2019, under the Tax Cuts and Jobs Act (TCJA), you could deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (AGI). This floor makes it difficult to claim a write-off unless you have very high medical bills or a low income (or both). In tax years 2017 and 2018, this “floor” for claiming a deduction was 7.5%. Under the new law, the lower 7.5% floor returns through 2020.

If you’re paying college tuition, you may (once again) get a valuable tax break. Before the TCJA, the qualified tuition and related expenses deduction allowed taxpayers to claim a deduction for qualified education expenses without having to itemize their deductions. The TCJA eliminated the deduction for 2019 but now it returns through 2020. The deduction is capped at $4,000 for an individual whose AGI doesn’t exceed $65,000 or $2,000 for a taxpayer whose AGI doesn’t exceed $80,000. (There are other education tax breaks, which weren’t touched by the new law, that may be more valuable for you, depending on your situation.)

Some people will be able to save more for retirement. The retirement bill includes an expansion of the automatic contribution to savings plans to 15% of employee pay and allows some part-time employees to participate in 401(k) plans.

Also included in the retirement package are provisions aimed at Gold Star families, eliminating an unintended tax on children and spouses of deceased military family members.

Stay tuned

These are only some of the provisions in the new laws. We’ll be writing more about them in the near future. In the meantime, contact us with any questions.

November 19, 2019

Flex plan: In an unpredictable estate planning environment, flexibility is key

Flex plan: In an unpredictable estate planning environment, flexibility is key
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The Tax Cuts and Jobs Act (TCJA) made only one change to the federal gift and estate tax regime, but it was a big one. It more than doubled the combined gift and estate tax exemption, as well as the generation-skipping transfer (GST) tax exemption. This change is only temporary, however. Unless Congress takes further action, the exemptions will return to their inflation-adjusted 2017 levels starting in 2026.

What does this mean for your estate plan? If your estate is well within the 2019 exemption amount of $11.40 million ($11.58 million for 2020), the higher exemption won’t have a big impact on your estate planning strategies. But if your estate is in the $6 million to $11 million range, it’s important to build some flexibility into your plan to address potential tax liability after 2025.

An uncertain future

Anything can happen between now and 2026. Lawmakers may allow the exemption amount to revert to its pre-TCJA level, reduce it even further (some have suggested $3.5 million) or make the current amount permanent. Or they may repeal the gift, estate and GST taxes altogether.

This uncertainty makes planning a challenge. Let’s say your estate is worth $8 million. If you die between now and 2025, you’ll avoid estate taxes. But suppose you live beyond 2025 and the exemption drops to an inflation-adjusted $5.75 million. Your estate will be hit with a $900,000 tax liability. A $3.5 million exemption would double the tax to $1.8 million.

One option is to take advantage of the higher exemption by giving away assets (either outright or in trust) during your lifetime. These gifts would be shielded from gift and GST taxes by the current exemption. And the assets (together with any future appreciation in value) would be removed from your estate, avoiding estate taxes even if the exemption decreases in the future.

The problem with this approach is that gifts of appreciated assets retain your tax basis, subjecting your beneficiaries to capital gains taxes if they’re sold. Assets transferred at death, on the other hand, enjoy a “stepped-up basis” and can be sold with lower or no capital gains. If you make substantial lifetime gifts and the exemption amount remains at its current level in the future (or the estate tax is repealed), you’ll have triggered capital gains taxes needlessly.

Staying flexible

One strategy to use to build flexibility into your plan is to use an irrevocable trust. This can enable you or your representatives to switch gears once the future of the estate tax becomes clearer. With this strategy, you transfer assets to an irrevocable trust, taking advantage of the current exemption amount. But you give the trustee the authority to take certain actions that would cause the assets to be included in your estate — such as granting you a power of appointment or naming you as successor trustee. The trustee would exercise this authority if it turns out that estate inclusion would produce a better tax outcome.

Contact us to learn about this or other strategies to build flexibility into your estate plan.

May 15, 2019

Consider a Roth 401(k) plan — and make sure employees use it

Consider a Roth 401(k) plan — and make sure employees use it
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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.

May 13, 2019

Comparing internal and external audits

Comparing internal and external audits
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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.

April 17, 2019

Deducting Business Meal Expenses Under Today’s Tax Rules

Deducting Business Meal Expenses Under Today’s Tax Rules
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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:

  1. 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.
  2. 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.
  3. 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.

February 27, 2019 BY Michael Rabinowitsch

New IRS Requirement For Rental Real Estate To Qualify For 20% Pass Through Deduction

New IRS Requirement For Rental Real Estate To Qualify For 20% Pass Through Deduction
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The IRS has recently provided clarity for owners of rental properties on how they can qualify for the new 20% pass through deduction.

As per the IRS, in order to qualify for the new 20% pass through deduction, an activity must raise to the level of being a trade or business. An activity is generally considered to be a trade or business if it is regular, continuous, and considerable.

Determining whether a rental real estate enterprise meets these criteria can be difficult. The IRS has therefore provided a safe harbor whereby an enterprise will be treated as a trade or business for the purposes of the 20% pass through deduction if certain conditions are met.

Under the safe harbor, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year:

(1) Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.

(2) 250 or more hours of rental services are performed per year with respect to the rental enterprise. Note that these hours of service do not have to be performed by you personally.

(3) The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement does not apply to the 2018 tax year.

For purposes of the safe harbor, rental services include:

  • Advertising to rent or lease the real estate
  • Negotiating and executing leases
  • Verifying information contained in prospective tenant applications
  • Collection of rent
  • Daily operation, maintenance, and repair of the property
  • Management of the real estate
  • Purchase of materials
  • Supervision of employees and independent contractors.

Some types of rental real estate are not eligible for the safe harbor.

Accordingly, it is very important to maintain contemporaneous records to qualify for the 20% pass through deduction.

Please contact a Roth&Co adviser for further information or discussion about the new safe harbor rule.

February 19, 2019

Some of your deductions may be smaller (or nonexistent) when you file your 2018 tax return

Some of your deductions may be smaller (or nonexistent) when you file your 2018 tax return
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While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers. Here are five deductions you may see shrink or disappear when you file your 2018 income tax return:

1. State and local tax deduction. For 2018 through 2025, your total itemized deduction for all state and local taxes combined — including property tax — is limited to $10,000 ($5,000 if you’re married and filing separately). You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.

2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. For 2018 through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with some limited exceptions.

3. Home equity debt interest deduction. Before the TCJA, an itemized deduction could be claimed for interest on up to $100,000 of home equity debt used for any purpose, such as to pay off credit cards (for which interest isn’t deductible). The TCJA effectively limits the home equity interest deduction for 2018 through 2025 to debt that would qualify for the home mortgage interest deduction.

4. Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018 through 2025. If you’re an employee and work from home, this includes the home office deduction. (Business owners and the self-employed may still be able to claim a home office deduction against their business or self-employment income.)

5. Personal casualty and theft loss deduction. For 2018 through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.

Be aware that additional rules and limits apply to many of these deductions. Also keep in mind that the TCJA nearly doubles the standard deduction. The combination of a much larger standard deduction and the reduction or elimination of many itemized deductions means that, even if itemizing has typically benefited you in the past, you might be better off taking the standard deduction when you file your 2018 return. Please contact us with any questions you have.

February 04, 2019

Investment interest expense is still deductible, but that doesn’t necessarily mean you’ll benefit

Investment interest expense is still deductible, but that doesn’t necessarily mean you’ll benefit
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As you likely know by now, the Tax Cuts and Jobs Act (TCJA) reduced or eliminated many deductions for individuals. One itemized deduction the TCJA kept intact is for investment interest expense. This is interest on debt used to buy assets held for investment, such as margin debt used to buy securities. But if you have investment interest expense, you can’t count on benefiting from the deduction.

3 hurdles

There are a few hurdles you must pass to benefit from the investment interest deduction even if you have investment interest expense:

1. You must itemize deductions. In the past this might not have been a hurdle, because you may have typically had enough itemized deductions to easily exceed the standard deduction. But the TCJA nearly doubled the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018. Plus, some of your other itemized deductions, such as your state and local tax deduction, might be smaller on your 2018 return because of TCJA changes. So you might not have enough itemized deductions to exceed your standard deduction and benefit from itemizing.

2. You can’t have incurred the interest to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.

3. You must have sufficient “net investment income.” The investment interest deduction is limited to your net investment income. For the purposes of this deduction, net investment income generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included. However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.
You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

Will interest expense save you tax?

As you can see, the answer to the question depends on multiple factors. We can review your situation and help you determine whether you can benefit from the investment interest expense deduction on your 2018 tax return.

January 29, 2019

What will your marginal income tax rate be?

What will your marginal income tax rate be?
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While the Tax Cuts and Jobs Act (TCJA) generally reduced individual tax rates for 2018 through 2025, some taxpayers could see their taxes go up due to reductions or eliminations of certain tax breaks — and, in some cases, due to their filing status. But some may see additional tax savings due to their filing status.  (more…)

January 16, 2019

2 major tax law changes for individuals in 2019

2 major tax law changes for individuals in 2019
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While most provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018 and either apply through 2025 or are permanent, there are two major changes under the act for 2019. Here’s a closer look. (more…)

January 02, 2019

A review of significant TCJA provisions impacting individual taxpayers

A review of significant TCJA provisions impacting individual taxpayers
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Now that 2019 has begun, there isn’t too much you can do to reduce your 2018 income tax liability. But it’s smart to begin preparing for filing your 2018 return. Because the Tax Cuts and Jobs Act (TCJA), which was signed into law at the end of 2017, likely will have a major impact on your 2018 taxes, it’s a good time to review the most significant provisions impacting individual taxpayers.

Rates and exemptions

Generally, taxpayers will be subject to lower tax rates for 2018. But a couple of rates stay the same, and changes to some of the brackets for certain types of filers (individuals and heads of households) could cause them to be subject to higher rates. Some exemptions are eliminated, while others increase. Here are some of the specific changes:

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
  • Elimination of personal and dependent exemptions
  • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers for 2018
  • Approximate doubling of the gift and estate tax exemption, to $11.18 million for 2018

Credits and deductions

Generally, tax breaks are reduced for 2018. However, a few are enhanced. Here’s a closer look:

  • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
  • Near doubling of the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018
  • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes
  • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income or sales taxes; $5,000 for separate filers)
  • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
  • Elimination of the deduction for interest on home equity debt
  • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
  • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
  • Elimination of the AGI-based reduction of certain itemized deductions
  • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
  • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year

How are you affected?

As you can see, the TCJA changes for individuals are dramatic. Many rules and limits apply, so contact us to find out exactly how you’re affected. We can also tell you if any other provisions affect you, and help you begin preparing for your 2018 tax return filing and 2019 tax planning.

December 31, 2018

A refresher on major tax law changes for small-business owners

A refresher on major tax law changes for small-business owners
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The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly.

With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.

Taxation of pass-through entities

These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
  • A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)
  • Changes to many other tax breaks for individuals that will impact owners’ overall tax liability

Taxation of corporations

These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:

  • Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Replacement of the flat PSC rate of 35% with a flat rate of 21%
  • Repeal of the 20% corporate alternative minimum tax (AMT)

Tax break positives

These changes generally apply to both pass-through entities and corporations:

  • A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction”
  • A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
  • New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Preparing for 2018 filing

Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too.

August 21, 2018

Keep an eye out for extenders legislation

Keep an eye out for extenders legislation
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The pieces of tax legislation garnering the most attention these days are the Tax Cuts and Jobs Act (TCJA) signed into law last December and the possible “Tax Reform 2.0” that Congress might pass this fall. But for certain individual taxpayers, what happens with “extenders” legislation is also important.

Recent history

Back in December of 2015, Congress passed the PATH Act, which made a multitude of tax breaks permanent. However, there were a few valuable breaks for individuals that it extended only through 2016. The TCJA didn’t address these breaks, but they were retroactively extended through December 31, 2017, by the Bipartisan Budget Act of 2018 (BBA), which was signed into law on February 9, 2018.

Now the question is whether Congress will extend them for 2018 and, if so, when. In July, House Ways and Means Committee Chair Kevin Brady (R-TX) released a broad outline of what Tax Reform 2.0 legislation may contain. And he indicated that it probably wouldn’t include the so-called “extenders” but that they would likely be addressed by separate legislation.

Mortgage insurance and loan forgiveness

Under the BBA, through 2017, you could treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This was an itemized deduction that phased out for taxpayers with AGI of $100,000 to $110,000.

The BBA likewise extended through 2017 the exclusion from gross income for mortgage loan forgiveness. It also allowed the exclusion to apply to mortgage forgiveness that occurs in 2018 as long as it’s granted pursuant to a written agreement entered into in 2017. So even if this break isn’t extended, you might still be able to benefit from it on your 2018 income tax return.

Tuition and related expenses

Also available through 2017 under the BBA was the above-the-line deduction for qualified tuition and related expenses for higher education. It was capped at $4,000 for taxpayers whose adjusted gross income (AGI) didn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI didn’t exceed $80,000 ($160,000 for joint filers).

You couldn’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you were eligible for all three breaks, the American Opportunity credit would typically be the most valuable in terms of tax savings.

But in some situations, the AGI reduction from the tuition deduction might prove more beneficial than taking the Lifetime Learning credit. For example, a lower AGI might help avoid having other tax breaks reduced or eliminated due to AGI-based phaseouts.

Still time . . .

There’s still plenty of time for Congress to extend these breaks for 2018. And, if you qualify and you haven’t filed your 2017 income tax return yet, there’s even still time to take advantage of these breaks on that tax return. The deadline for individual extended 2017 returns is October 15, 2018. Contact us with questions about these breaks and whether you can benefit.

July 30, 2018

Why the “kiddie tax” is more dangerous than ever

Why the “kiddie tax” is more dangerous than ever
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Once upon a time, some parents and grandparents would attempt to save tax by putting investments in the names of their young children or grandchildren in lower income tax brackets. To discourage such strategies, Congress created the “kiddie” tax back in 1986. Since then, this tax has gradually become more far-reaching. Now, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become more dangerous than ever.   (more…)

August 15, 2018 BY Michael Rabinowitsch

UPDATED: E-Commerce Tax Law Change by State

UPDATED: E-Commerce Tax Law Change by State
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You’ve probably heard about the recent U.S. Supreme Court decision allowing state and local governments to impose sales taxes on more out-of-state online sales. The ruling in South Dakota v. Wayfair, Inc. is welcome news for brick-and-mortar retailers, who felt previous rulings gave an unfair advantage to their online competitors., and state and local governments are pleased to potentially be able to collect more sales tax.

Below please find an up to date list on current rulings by state:

Hover over your state for current updated tax change information, and click a state to be directed to their website for more information (when available)

AL AK AZ AR CA CO CT DE FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY DC

June 26, 2018

Choosing the best business entity structure post-TCJA

Choosing the best business entity structure post-TCJA
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For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%. The TCJA also reduced individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%.  (more…)

June 21, 2018

BREAKING: Supreme Court Rules States Can Force Online Retailers to Collect Sales Tax

BREAKING: Supreme Court Rules States Can Force Online Retailers to Collect Sales Tax
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Internet retailers can now be required to collect sales and use tax even in states in which they lack a physical presence, after the U.S. Supreme Court overturned a 1992 ruling that enabled much of e-commerce to be a tax-free zone. (more…)

June 13, 2018

The tax impact of the TCJA on estate planning

The tax impact of the TCJA on estate planning
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The massive changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have garnered the most attention. But the new law also made major changes to gift and estate taxes. While the TCJA didn’t repeal these taxes, it did significantly reduce the number of taxpayers who’ll be subject to them, at least for the next several years. Nevertheless, factoring taxes into your estate planning is still important.  (more…)

June 06, 2018 BY Esther Wolman

Tax Accounting Methods Modified under the Tax Reform Bill

Tax Accounting Methods Modified under the Tax Reform Bill
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The Tax Cuts & Jobs Act (TCJA) involves several changes to the rules governing choice of accounting method for businesses.

Specifically the gross receipts threshold for Cash Basis Accounting has been raised. The details and qualifications for this law change are outlined below. (more…)

May 31, 2018 BY Samuel Goldschmidt

Effects of Tax Reform on Taxation Related To Foreign Subsidiary Income

Effects of Tax Reform on Taxation Related To Foreign Subsidiary Income
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Prior to the Tax Cuts and Jobs Act (TCJA), income earned by U.S. shareholders of a foreign corporation has generally not been subject to U.S. tax until the income is distributed as a dividend to U.S. shareholders.

The TCJA however, has introduced two significant changes to the taxation of income earned by a foreign corporation owned by U.S. shareholders.

(more…)

May 22, 2018

The TCJA changes some rules for deducting pass-through business losses

The TCJA changes some rules for deducting pass-through business losses
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It’s not uncommon for businesses to sometimes generate tax losses. But the losses that can be deducted are limited by tax law in some situations. The Tax Cuts and Jobs Act (TCJA) further restricts the amount of losses that sole proprietors, partners, S corporation shareholders and, typically, limited liability company (LLC) members can currently deduct — beginning in 2018. This could negatively impact owners of start-ups and businesses facing adverse conditions. (more…)

May 15, 2018 BY Michael Rabinowitsch

Update on Tax Reform Act

Update on Tax Reform Act
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By way of introduction, my name is Michael Rabinowitsch, and I am the Senior Tax Manager in Roth&Co’s New York office, leading the Tax Compliance and Consulting division. I’m here to help our clients build efficient tax structures and map out effective tax plans to keep their companies compliant, productive and profitable.

(more…)

May 09, 2018

Do you need to adjust your withholding?

Do you need to adjust your withholding?
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If you received a large refund after filing your 2017 income tax return, you’re probably enjoying the influx of cash. But a large refund isn’t all positive. It also means you were essentially giving the government an interest-free loan.

That’s why a large refund for the previous tax year would usually indicate that you should consider reducing the amounts you’re having withheld (and/or what estimated tax payments you’re making) for the current year. But 2018 is a little different.

TCJA and withholding

To reflect changes under the Tax Cuts and Jobs Act (TCJA) — such as the increase in the standard deduction, suspension of personal exemptions and changes in tax rates and brackets —the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks, generally reducing the amount withheld.

The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they might cause other taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. So even if you received a large refund this year, you could end up owing a significant amount of tax when you file your 2018 return next year.

Perils of the new tables

The IRS itself cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld. If, for example, you itemize deductions, have dependents age 17 or older, are in a two-income household or have more than one job, you should review your tax situation and adjust your withholding if appropriate.

The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations. The calculator reflects changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.

More considerations

Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if:

  • You get married or divorced,
  • You add or lose a dependent,
  • You purchase a home,
  • You start or lose a job, or
  • Your investment income changes significantly.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly payments are due.)

May 07, 2018

A review of significant TCJA provisions affecting small businesses

A review of significant TCJA provisions affecting small businesses
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Now that small businesses and their owners have filed their 2017 income tax returns (or filed for an extension), it’s a good time to review some of the provisions of the Tax Cuts and Jobs Act (TCJA) that may significantly impact their taxes for 2018 and beyond. Generally, the changes apply to tax years beginning after December 31, 2017, and are permanent, unless otherwise noted.  (more…)

April 17, 2018

TCJA changes to employee benefits tax breaks: 4 negatives and a positive

TCJA changes to employee benefits tax breaks: 4 negatives and a positive
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The Tax Cuts and Jobs Act (TCJA) includes many changes that affect tax breaks for employee benefits. Among the changes are four negatives and one positive that will impact not only employees but also the businesses providing the benefits. (more…)

March 20, 2018

Defer tax with a Section 1031 exchange, but new limits apply this year

Defer tax with a Section 1031 exchange, but new limits apply this year
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Normally when appreciated business assets such as real estate are sold, tax is owed on the appreciation. But there’s a way to defer this tax: a Section 1031 “like kind” exchange. However, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment. (more…)

February 13, 2018

Claiming bonus depreciation on your 2017 tax return may be particularly beneficial

Claiming bonus depreciation on your 2017 tax return may be particularly beneficial
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With bonus depreciation, a business can recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Act (TCJA), signed into law in December, enhances bonus depreciation.  (more…)

February 12, 2018

TCJA temporarily lowers medical expense deduction threshold

TCJA temporarily lowers medical expense deduction threshold
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With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that may be hard to meet. Fortunately, the Tax Cuts and Jobs Act (TCJA) has temporarily reduced the threshold. (more…)

February 01, 2018

Meals, entertainment and transportation may cost businesses more under the TCJA

Meals, entertainment and transportation may cost businesses more under the TCJA
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Along with tax rate reductions and a new deduction for pass-through qualified business income, the new tax law brings the reduction or elimination of tax deductions for certain business expenses. Two expense areas where the Tax Cuts and Jobs Act (TCJA) changes the rules — and not to businesses’ benefit — are meals/entertainment and transportation. In effect, the reduced tax benefits will mean these expenses are more costly to a business’s bottom line. (more…)

January 25, 2018

What nonprofits need to know about the new tax law

What nonprofits need to know about the new tax law
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The number of taxpayers who itemize deductions on their federal tax return — and, thus, are eligible to deduct charitable contributions — is estimated by the Tax Policy Center to drop from 37% in 2017 to 16% in 2018. That’s because the recently passed Tax Cuts and Jobs Act (TCJA) substantially raises the standard deduction. Many not-for-profit organizations are understandably worried about how this change will affect donations. But this isn’t the only TCJA provision that affects nonprofits.

Donors have fewer incentives

In addition to reducing smaller-scale giving by shrinking the pool of people who itemize, the TCJA might discourage major contributions. The law doubles the estate tax exemption to $10 million (indexed for inflation) through 2025. Some wealthy individuals who make major gifts to shrink their taxable estates won’t need to donate as much to reduce or eliminate their potential estate tax.

UBIT takes a bigger bite

The new law mandates that nonprofits calculate their unrelated business taxable income (UBTI) separately for each unrelated business. As a result, they can’t use a deduction from one unrelated business to offset income from another unrelated business for the same tax year. However, they can generally use one year’s losses on an unrelated business to reduce their taxes for that business in a different year. The TCJA also includes in UBTI expenses used to provide certain transportation-related and other benefits. So, the unrelated business income tax (UBIT) a nonprofit must pay could go up.

High compensation risks new tax

Nonprofits with highly compensated executives may now potentially face a 21% excise tax. The tax applies to the sum of any compensation (including most benefits) in excess of $1 million paid to a covered employee plus certain large payments made to that employee when he or she leaves the organization, known as “parachute” payments. The excise tax applies to the amount of the parachute payment less the average annual compensation.

Bond interest exemption revoked

The TCJA repeals the tax-exempt treatment for interest paid on tax-exempt bonds issued to repay another bond in advance. An advance repayment bond is used to pay principal, interest or redemption price on an earlier bond prior to its redemption date.

Be informed

Note that other rules and limits may apply. We can provide you with a detailed picture of the new tax law and explain how it’s likely to affect your organization.

January 23, 2018

Personal exemptions and standard deductions and tax credits, oh my!

Personal exemptions and standard deductions and tax credits, oh my!
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Under the Tax Cuts and Jobs Act (TCJA), individual income tax rates generally go down for 2018 through 2025. But that doesn’t necessarily mean your income tax liability will go down. The TCJA also makes a lot of changes to tax breaks for individuals, reducing or eliminating some while expanding others. The total impact of all of these changes is what will ultimately determine whether you see reduced taxes. One interrelated group of changes affecting many taxpayers are those to personal exemptions, standard deductions and the child credit.  (more…)

January 10, 2018

New tax law gives pass-through businesses a valuable deduction

New tax law gives pass-through businesses a valuable deduction
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Although the drop of the corporate tax rate from a top rate of 35% to a flat rate of 21% may be one of the most talked about provisions of the Tax Cuts and Jobs Act (TCJA), C corporations aren’t the only type of entity significantly benefiting from the new law. Owners of noncorporate “pass-through” entities may see some major — albeit temporary — relief in the form of a new deduction for a portion of qualified business income (QBI).
(more…)

January 02, 2018

Tax Cuts and Jobs Act: Key provisions affecting individuals

Tax Cuts and Jobs Act: Key provisions affecting individuals
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On December 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.
(more…)

December 20, 2017

Tax Cuts & Jobs Act Conference Report

Tax Cuts & Jobs Act Conference Report
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The House of Representatives voted on Tuesday afternoon to pass the Tax Cuts and Jobs Act by a vote of 227–203 and it passed in the Senate by a vote of 51-48. Due to technicalities, The House re-voted on the bill this morning, once again passing it, by a vote of 224-201, and it is now going to President Donald Trump for his signature. The president is expected to sign the bill, but the White House has not announced when he will sign. (more…)

November 22, 2017

Update On Current “Tax Cuts & Jobs Act”

Update On Current “Tax Cuts & Jobs Act”
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On November 16th , the Senate Finance Committee approved its version of the Tax Cuts and Jobs Act, sending the bill to the full Senate for debate and a vote. The Senate is expected to take up the bill after it returns from its Thanksgiving recess. Once it is approved by the Senate, these two bills will need to be reconciled and approved by Congress before it is sent to President Trump to be signed. The U.S. House of Representatives passed the Tax Cuts and Jobs Act bill, H.R. 1, by a vote of 227–205, on Thursday afternoon, November 16th with all Democrats and 13 Republicans voting no. The legislation as passed had not been amended since its approval by the House Ways and Means Committee last week.
The following extensive, but not exhaustive list compares the major differences between the House and Senate tax reform bills and current tax law.

Click here for an extensive (but not exhaustive) list which compares the major differences between the House and Senate tax reform bills and current tax law.

What’s Next?
The House and Senate must then reconcile the two bills. After reconciliation, the House and the Senate must vote on the final bill and send it to the president before the end of the year. If it doesn’t add more than $1.5 trillion to the national debt over the next ten years, it can pass the Senate with a 51-vote majority. Otherwise, it would require a 60-vote majority to pass, which would be unlikely given the Democratic opposition to the plan.
We will keep you updated as the legislative process moves forward.

 

 

 

November 09, 2017

“Tax Cuts & Jobs Act” Summary

“Tax Cuts & Jobs Act” Summary
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On November 2nd, the Republicans in Congress released a proposed tax reform bill that is designed to cut taxes and simplify the tax code. The bill, titled the “Tax Cuts and Jobs Act,” has yet to pass the House of Representatives and be reconciled with a tax reform bill that is expected to be introduced by Senate Republicans. Also, the final version must be signed by President Trump to become law. However, the bill was referred to the House Ways and Means Committee and is considered to be a framework for the tax reform that is championed by the president.

(more…)

April 27, 2017 BY Paul Bonner

President Trump’s Tax Reform Priorities Unveiled

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The White House on Wednesday issued President Donald Trump’s goals and key features for tax reform, including slashed corporate tax rates, flattened individual marginal income tax brackets, and repeal of the estate and alternative minimum taxes.

Trump outlined his proposals in a one-page sheet of bullet points headed “2017 Tax Reform for Economic Growth and American Jobs” and “The Biggest Individual and Business Tax Cut in American History.”

Speaking to reporters at the White House, Treasury Secretary Steven Mnuchin and Trump economic adviser Gary Cohn described the president’s priorities, but repeatedly rebuffed requests for details, saying those would be hammered out in negotiations with congressional leaders in the months ahead. Most of the policies hewed to those Trump put forth last fall on the campaign trail, most prominently, cutting the corporate income tax rate from its current 35% to 15% and extending it to passthrough entities, i.e., S corporations, partnerships, and entities taxed as partnerships.

Individuals
For individuals, Trump would replace the current seven graduated tiers of marginal rates (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with three: 10%, 25%, and 35%—slightly broader than the 12%, 25%, and 33% he proposed last fall. Mnuchin and Cohn declined to say at what income levels those rates would apply. Trump also reiterated his call for repeal of the net investment income tax of 3.8% imposed on unearned income and gains of high-income taxpayers by the 2010 Patient Protection and Affordable Care Act, P.L. 111-148.

The proposal would double the standard deduction; however, it would limit itemized deductions to mortgage interest and charitable contributions. It would provide “tax relief for families with child and dependent care expenses,” but neither the document nor the officials said how that might differ from the current tax credit for child and dependent care expenses available under Sec. 21.

Trump had also previously proposed repealing the alternative minimum and estate taxes. The latter currently applies only to estates larger than $5.49 million per individual. As he has previously, Trump called for ending “tax breaks that mainly benefit the wealthiest taxpayers,” but did not provide details or examples. The proposal did not specifically address the tax treatment of carried interests, which are currently taxed at capital gain tax rates. Trump, along with many Democrats, has said in the past he favors curtailing this treatment.

Businesses
For businesses, besides lowering the top tax rate to 15%, the proposal calls for a territorial system of taxation, which generally would exclude from taxation foreign earned income. It also would impose a “one-time tax” on corporate earnings realized and held overseas and on which tax is deferred, possibly the same as, or consistent with, a deemed repatriation tax that Trump has previously proposed at a 10% rate.

Absent from the proposal was any mention of a border-adjustment, or destination-based cash flow, tax, which has been a key feature of the congressional Republican “blueprint” for tax reform and that Trump has discussed as a possibility previously. The proposal, however, has been widely criticized as problematic for U.S. importers and others and likely to be challenged internationally under World Trade Organization rules.

The plan does not specifically mention passthrough entities, but when he was a candidate, Trump’s tax plan included a provision that would allow owners of passthrough entities to be taxed at the proposed 15% business rate. When asked if this would provide an incentive for individuals to form passthrough entities to avoid the higher individual tax rates, Mnuchin answered that “we will make sure that there are rules in place to make sure wealthy people can’t create passthroughs” to lower their taxes.

Mnuchin said the administration would like to “move as fast as we can and get this done this year.” Congressional leaders have expressed reservations about aspects of the proposal, notably, the depth of the cuts without specifically identified revenue offsets and prospects for their passage at the intersection of budget and procedural rules. Trump claimed during the presidential campaign that his plan was revenue-neutral; it would have to be, or the cuts would have to be temporary (typically ending within a 10-year budget window), for it to advance under the reconciliation process, by which the Senate can bypass a filibuster and pass the legislation with a bare majority instead of 60 votes. Mnuchin said the proposal would “pay for itself, with economic growth and with reduction of different deductions and closing loopholes.”

For more analysis, the following are two articles analyzing the president’s tax plan.
Likely Winners & Losers Under The Trump Tax Plan
by Kelly Phillips Erb
https://www.forbes.com/sites/kellyphillipserb/2017/04/27/likely-winners-losers-under-the-trump-tax-plan/#1bfdc945ed58

Devoid Of Details, Trump’s Latest Tax Plan Nothing But Empty Promises
by Tony Nitti
https://www.forbes.com/sites/anthonynitti/2017/04/27/devoid-of-details-trumps-latest-tax-plan-nothing-but-empty-promises/#3b71749938da

http://www.journalofaccountancy.com/news/2017/apr/trump-tax-priorities-tax-reform-201716547.html

March 13, 2017 BY Admin

House GOP Proposes To Eliminate Most ACA Taxes; Some Coverage/Credit Benefits Remain

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House Republicans have unveiled a repeal and replacement plan for the Affordable Care Act (ACA). The GOP’s American Health Care Act (AHCA) would eliminate most of the ACA’s taxes, including the penalties connected with the individual and employer mandates, the net investment income (NII) tax and the Additional Medicare tax. Left in place, although delayed, would be the excise tax on high-dollar health plans. Also left in place, would be a number of non-tax provisions related to scope of coverage, benefits and children – including allowing dependents to continue staying on their parents’ plan until age 26, prohibiting health insurers from denying coverage or raising rates to patients based on pre-existing conditions, and forbidding lifetime limits on insurance coverage.

The House GOP plan has been rejected by Democrats. Some Republicans have said the plan does not go far enough in repealing all of the ACA. As March moves forward, a vote on the House floor is eventually expected.

March 01, 2017 BY Chris Gaetano

NY Tax Department Clarifies Position on Driver’s License Requirement

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The New York State Department of Taxation and Finance (NYSDTF) clarified its position Friday on whether practitioners can check the “no applicable ID” box on a return if their client, despite having a valid driver’s license number, refuses to disclose it.

“In this transition year, the first where New York is requiring taxpayers’ driver’s license information, we will permit preparers to check the ‘No Applicable ID’ box if the taxpayer refuses to provide the information,” NYSDTF acting Commissioner Nonie Manion wrote in a statement. “IF this is necessary, contemporaneous information should be kept to document the preparer used due diligence to obtain the information and the taxpayer refused.”

Manion’s statement addressed ambiguities that have emerged in the wake of the state tax department’s new requirement that all taxpayers provide their driver’s license (or other DMV-issued ID) information on their e-filed returns as an extra layer of verification. Shortly after announcing the new requirement, which practitioners had complained came with little advance notice before tax season, the department said through various spokespersons that if a client does not want to share this information, preparers may check the “No Applicable ID” even if the taxpayer does, in fact, have an applicable ID—and the return would be accepted.

However, a Feb. 17 update to the state’s Business Taxpayer Answer Center, said otherwise. In response to the question, “If my client is known to have a valid driver license or state-issued ID, but chooses not to disclose it, can I check the No applicable ID box without repercussion? Am I required to disclose this?” the state tax department site stated that “if a tax professional knows his client has a driver’s license or non-driver’s license ID, but he client refuses to comply with the requirement to provide that information, the preparer cannot certify truthfully and submit the return with the No ID box checked.”

This caused confusion among tax professionals who suddenly were unsure about what was or was not allowed. After a conference call between Manion and NYSSCPA leadership on Friday, NYSDTF drafted the statement saying that, this year, preparers can check the box in the event that their client refuses to supply the information, so long as they retain the required documentation stating that they used due diligence to obtain the ID information. Manion said NYSDTF would update its website with the updated information shortly.

August 29, 2016

Your Inheritance Is At Risk: Uncle Sam Wants a Bigger Piece

Your Inheritance Is At Risk: Uncle Sam Wants a Bigger Piece
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Your Inheritance Is At Risk: Uncle Sam Wants a Bigger Piece

Elvis Presley may still be alive, but the Internal Revenue Service collected a whopping 73% of his estate in taxes. Financial titans and politically connected men such as J.P. Morgan, John D. Rockefeller Sr. and Frederick Vanderbilt lost a significant majority of their wealth due to estate shrinkage. All this was a result of poor estate planning. Estate planning allows an individual to transfer wealth during his life and after his death with the least possible negative tax consequences. There are various devices used to transfer property to family and friends, and an essential tool for estate planning are the valuation discounts. However, on August 2, 2016, the Treasury Department published Proposed Regulations that may substantially reduce the availability of valuation discounts for estate planning purposes.

 

What is estate planning?

Estate planning involves devising financial strategies to ensure that the decedent’s wishes are honored with respect to transferring property and business succession. In addition, an advisor can plan the transfer of property in a way that it can avoid the arduous probate process and reducing estate shrinkage by reducing the tax burden. An effective estate plan can be made by means of gifting the assets or transferring property to a trust during the lifetime of the transferor.

 

What is estate tax?

The unified federal transfer tax is a tax that is imposed on the transfer of wealth. The fair market value of an estate is subject to a tax of up to 40%, with an exemption amount of $5,450,000 for 2016 (indexed for inflation). In addition, a donor is liable to pay taxes on gift transfers during his or her lifetime in excess of the annual exclusion of $14,000. However, a gift splitting election allows married spouses to give away an amount up to twice the annual exclusion to a donee without paying gift taxes.

 

What is fair market value?

Estates and gifts are taxed on the fair market value of the transferred assets. Accordingly, transferred assets must be appraised to determine its value. The IRS (Revenue Ruling 59-60) defines fair market value as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

 

What are valuation discounts?

Valuation discounts reduce the fair value of an asset and can thus significantly diminish the tax burden. In addition, assets may be discounted to an extent so that it would not exceed the exemption amount. The two primary discounts are the discount for lack of control (also known as the minority discount) and the discount for lack of marketability (also known as the liquidity discount).

 

Discount for Lack of Control

The discount for the lack of control occurs when a transferor transfers minority interests in S corporations, family limited partnerships or limited liability companies. In theory, a person owning a 100% interest has greater control over the entity operations and would have a greater value than a person owning 51%, or limited control. This limited control is a result of having a partner or partners who must agree with business management decisions that require unanimous consent. Hence, the minority discount reflects the lack of control which includes the inability to appoint management or set policies, authorize acquisitions and liquidations of assets, or make fundamental changes. Thus, the IRS states: “In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes.” In addition, if the transferor imposed restrictions on the transfer of the assets then a minority discount is warranted. In Cravens v. Welch the Court rules that “…no consideration is given to the very apparent fact that minority stock interests in a ‘closed’ corporation are usually worth much less than the proportionate share of the assets to which they attach.”

Thus, the minority discount became a popular estate planning vehicle with the assets being discounted by 10% to 40%. For example, if Individual A owns an LLC with a net worth of $100 million, he can transfer a 10% interest ($10 million) at a 40% discount, or $4 million, to save $1.6 million in Federal gift tax.

 

Discount for Lack of Marketability

The fair value of a publicly-traded stock assumes that members can liquidate their investment and convert it into cash in a reasonable amount of time. However, interests in non-marketable, closely held investments, with no established markets complicates their conversion into cash. Accordingly, a discount for the illiquidity of the investment, or lack of marketability, can be assumed. The SEC (Accounting release No. 113) states: “Restricted securities are often purchased at a discount, frequently substantial, from the market price of outstanding unrestricted securities of the same class. This reflects the fact that securities which cannot be readily sold in the public market place are less valuable that securities which can be sold.” Indeed, studies of restricted stock of public companies, pre-IPO studies, and merger and acquisition studies indicated an historical illiquidity discount of 10%-50%. This discount, taken in seriatim with the minority discount, can result in a substantial reduction in the value of gifted or inherited assets.

 

Proposed Regulations

To address the fact that taxpayers were imposing restrictions on transferred interests in order to artificially reduce the value of assets for gift tax purposes, the Treasury Department published Proposed Regulations to Chapter 14 of the Internal Revenue Code. The Treasury Department did not like the fact that gifts were structured in a way that assets were divided between multiple family members or contain restrictions in order to trigger the minority discount. Accordingly, the proposed regulations – once enacted – will substantially limit the valuation discounts if the transferor or a related party – including members of the transferor’s family or an entity holding interests for such persons – can collectively remove or override those restrictions. Thus, family-controlled entities with business governance documents that contain restrictions that can be reversed or amended by family members or related entities (acting in unison, if necessary) will have limited use of valuation discounts.

Nevertheless, the Proposed Regulations must undergo a 90-day comment period and a public hearing is scheduled for December 1, 2016. Any final Regulations issued after this comment period will go into effect only 30 days after those final Regulations are published. Accordingly, it is now time to act and plan your inheritance in order to minimize the tax burden on your estate.

Roth&Co’s Trusts and Estates Team can assist you with all of your estate planning needs, including business succession planning, Medicaid planning, and trusts and estate planning. Speak to your account representative for more information, or contact an accountant today at 718.236.1600 to schedule an appointment.