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Rental Real Estate Owners-Guidance Related to the 20% Pass-through Deduction

On January 18, 2019, the IRS issued a notice providing “safe harbor” conditions under which rental real estate activities will be treated as a trade or business for purposes of the IRC Section 199A deduction.

To qualify for the safe harbor:

  1. Separate Books and records must be maintained for each rental real estate enterprise.
  2. At least 250 hours of rental services must be performed by the taxpayer and/or workers for the taxpayer during the tax year for each rental real estate enterprise.  To clarify, a real estate enterprise may be one rental or multiple rentals.  Commercial and residential rentals cannot be combined in the same real estate enterprise.  Qualifying rental services counting toward the 250 hour requirement include advertising, negotiating and executing leases, verifying tenant applications, collecting rent, daily operation, maintenance and repair of the property, management, purchase of materials for repairs and supervision of employees and independent contractors.  The services can be performed by owners, employees, agents and/or independent contractors working for the owners.  We recommend filing 1099s by January of the following year for any services performed by non-owners.
  3. The taxpayer must maintain contemporaneous records including time reports, logs or similar support to document the hours of services performed, a description of the services performed, dates on which the services were performed and who performed the services.  This will require tracking everything, your personal time and the time of those you employ.  A log book and a file for all invoices from others should be maintained.

Further clarification in the notice:

Triple Net Leases are not eligible for the safe harbor.

Vacation rentals (residences used by the owners) are not eligible for the safe harbor.

A statement is required to be attached to the taxpayer’s tax return and be signed by the taxpayer declaring that all the safe harbor requirements have been met and must include the following language:  “Under penalties of perjury, I declare that I have examined the statement and to the best of my knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure and such facts are true, correct and complete.”

Lastly, an enterprise that fails the safe harbor requirements may still qualify as a trade or business under the regulations for purposes of the 199A deduction.  If you are unsure about your rental real estate enterprise, consult with a WFY tax advisor.

© Copyright 2019. All rights reserved.

New International Tax Laws Now in Effect Under TCJA

Under the new tax changes for The Tax Cuts and Job Act (TJCA) there were several new provisions that impact US companies performing business internationally.  Below are few selected key provisions.

Under the Foreign Derived Intangible Income, or FDII, a deduction is created for certain foreign income earned by U.S. companies. This only applies to U.S. C-corporations with either a U.S. or foreign parent with an incentive to use U.S. workers.  In result, this creates a preferential rate of 13.125% on qualifying foreign income, or QFI.  QFI includes income derived from sale of property to foreign sources and, also, includes income from services performed for foreign sources by a U.S. company, not through a foreign branch. For example, if the FDII is $1,000, the tax on the FDII is $131.25 rather than $210.

Global intangible low-taxed income, or GILTI, creates a minimum annual tax on controlled foreign corporations operating in low taxing countries. This applies to all U.S. owners of foreign GILTI companies including C-corporations, S-corporation, LLC, and even individuals. If a foreign country’s tax is above 13.125% then in general there’s no GILTI.  However, if a foreign country’s tax rate is below 13.125% then this tax will apply.  Assume a country with 0% tax rate then the U.S. parent will pay 10.5% GILTI tax which will be reported and paid with the US tax return. This discourages U.S. companies from operating in low or no tax countries.

Finally under the new territorial tax system a US C-corporation only can exclude income earned by its foreign subsidiaries which is not subject to Subpart F income or GILTI tax.  For example, assume a U.S. C-Corporation has 100% ownership in a foreign entity and generates $1,000 profit with taxes of $150. The net cash of $850 can be repatriated back to the U.S. tax free as 100% dividend exclusion.  The U.S. C-corporation then distributes the $850 to its individual shareholders who only pay dividend rate tax of 23.8% federal plus state taxes.    This 100% foreign owned company dividend exclusion does not apply to U.S. parent companies who are S-corporation or LLC’s as well as individuals.

To discuss more about your international tax situation, please contact Hani Sharestan at (949) 910-2727.

 

Making Large Gifts Now Won’t Harm Estates After 2025

On November 20th, the IRS announced individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to levels before 2018.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA).  As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

In general, gift and estate taxes are calculated, using a unified rate schedule, on taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount.

The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute, and other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.

The TCJA temporarily increased the BEA from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted BEA is $11.18 million. In 2026, the BEA will revert to the 2017 level of $5 million as adjusted for inflation.

To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

To discuss more about your gift and estate tax situation, contact WFY’s Estates and Trusts Partners, Marisa Alvarado and Kevin Wiest, at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

Tax Saving Moves to Improve Your Tax Situation

Since 2018 is coming to a close now is the time to take action to proactively reduce your tax liability before the new year.  Included are a few strategies that may help with your tax situation:

  1. Harvest stock losses while substantially preserving one’s investment position. This can be accomplished by selling the shares and buying other shares in the same company or another company in the same industry to replace them, or by selling the original shares, then buying back the same securities at least 31 days later.
  2. Apply a bunching strategy to deductible contributions and/or payments of medical expenses. Beginning in 2018 the standard deduction has been increased and the itemized deduction of state and local taxes limited to $10,000 which will cause many taxpayers to lose the benefit of their itemized deductions. By bunching multiple years of charitable contributions and medical expenses into one year a taxpayer may create a taxable benefit that would not otherwise exist.  For example, a taxpayer who expects to itemize deductions in 2018 and usually contributes a total of $10,000 to charities each year, should consider refunding 2019 and 2020 charitable contributions by contributing a total of $30,000 into a donor advised charitable fund and then distribute the funds to the charities over the following two years.
  3. Take required minimum distributions (RMDs). Taxpayers who have reached age 70-½ should be sure to take their 2018 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70-½ in 2018 can delay the first required distribution to 2019, however, this can result in taking a double distribution in 2019 (the required amount for 2018 and 2019).
  4. Use IRAs to make charitable gifts. Taxpayers who have reached age 70-½, own IRAs, and are thinking of making a charitable gift should consider arranging for the gift to be made by way of a qualified charitable contribution, or QCD—a direct transfer from the IRA trustee to the charitable organization. Such a transfer (not to exceed $100,000) will neither be included in gross income nor allowed as a deduction on the taxpayer’s return. A qualified charitable contribution before year end is a particularly good idea for retired taxpayers who don’t need all of their as-yet undistributed RMD for living expenses.
  5. Make year-end gifts. A person can give any other person up to $15,000 for 2018 without incurring any gift tax. The annual exclusion amount increases to $30,000 per donee if the donor’s spouse consents to gift-splitting. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so.

These are broad suggestions that will benefit some but not all taxpayers.  To discuss and create a personalized tax strategy be sure to contact a WFY tax specialist at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

WFY Welcomes New Partner Cyndi LeBerthon

Wright Ford Young & Co. would like to welcome our newest addition to the firm: Cyndi LeBerthon, CPA.  With more than 15 years of public accounting experience, Cyndi has joined WFY as Partner in the Audit Department.

Cyndi is responsible for planning and supervising audit and review engagements in a wide range of industries, including distribution, manufacturing, professional service, technology and hospitality.  Having extensive experience in Employee Benefit Plan audits and ERISA regulations, she also works with plan sponsors in private and public sectors performing annual DOL required audits of their 401(k), 403(b), ESOP, and Pension and Welfare Benefit Plans.

Cyndi is an AICPA authorized peer reviewer and works with other CPA firms throughout California and Arizona, performing their peer reviews and providing consultant services on quality control.  She is also a committee member of the CalCPA Peer Review Committee.   This committee has oversight responsibilities of all peer reviews performed throughout California, Arizona and Alaska.

To learn more about Cyndi LeBerthon, go to https://www.cpa-wfy.com/who-we-are/practice-leaders/cyndi-leberthon/

California Competes Tax Credit

The California Competes Tax Credit is an income tax credit for businesses wanting to stay and grow in California. The purpose is to attract and retain employers in California industries with high economic multipliers and that provide their employees good wages and benefits. Any business can apply.

The credit applies to any type of business expecting to increase headcount and/or make a capital investment in California.  Businesses compete for these tax credits by asking for a percentage return on investment.

California plans to grant $230 Million in Cal Competes tax credits to California businesses over three separate application rounds in 2018.  Typically, a business can get up to 20% ROI.

If you think your company may qualify for this tax credit and would like to learn more about how to take advantage of this cost savings opportunity, please contact us today at srobinson@cpa-wfy.com or call 949-910-2727.

© Copyright 2018. All rights reserved. 

WFY Expands Firm with Three New Hires

Wright Ford Young & Co. continues to grow the firm with three new hires: Andrew Abeyta, Cameron Lee, and Jennifer Nguyen.  All three are the newest additions to WFY’s Tax Department.  WFY is pleased to welcome these new hires to the WFY team.

Andrew Abeyta

In the beginning of July, Wright Ford Young & Co. welcomed Andrew Abeyta as Tax Staff. He graduated from Cal State Fullerton in 2016 and jumped into public accounting straight after that. Andrew’s previous experience in accounting includes working at another CPA firm after college. In his spare time, he’s passionate about photography and teaches 5th & 6th grade Sunday school at his church.

Cameron Lee

This month, Wright Ford Young & Co. had the pleasure of adding Cameron Lee as one of the newest Tax Staff. Before coming to WFY, Cameron graduated from Cal State Fullerton with his Bachelor’s degree in accounting, worked as an intern at another tax firm and worked in finance as a loan officer. Outside of the office, he enjoys volunteering and playing in a city basketball league.

Jennifer Nguyen

In mid-July, Jennifer Nguyen joined the Wright Ford Young & Co. team as a Tax Intern. She’s currently a senior at Cal State Fullerton and plans to graduate this fall with a degree in Business Administration with an emphasis on Accounting. Jennifer’s previous tax experience includes working as a Tax Administrative Assistant at a family office for 2 years. In her spare time, she likes volunteering and fostering cats from OC Animal Care in Tustin.