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video Baker Tilly’s private wealth leaders Duncan Campbell and Ed Drake were joined by Dr. Lee Hausner, an internationally recognized clinical psychologist, family wealth/family business advisor, frequent keynote speaker and co-founder of a nationally recognized consulting group, for an interactive discussion on family wealth planning. Throughout the discussion, Duncan, Ed and Lee provide unique perspectives while answering key wealth planning questions, including:
For more information or to learn how Baker Tilly specialists can help, reach out to your Baker Tilly professional or   contact our team.  Join Baker Tilly’s private wealth leaders Duncan Campbell and Ed Drake for casual conversations featuring private wealth professionals. Don’t miss the next event! 
   Baker Tilly Financial, LLC, is a registered investment advisor. Baker Tilly refers to Baker Tilly Financial, LLC, a wholly owned subsidiary of Baker Tilly US, LLP. Baker Tilly US, LLP, is an independently owned and managed member of Baker Tilly International. © 2020 Baker Tilly Financial, LLC Investment advisory services are offered through Baker Tilly Financial, LLC (“BTF”), a registered investment adviser. BTF does not provide tax or legal advice. BTF is not an attorney. Estate planning can involve a complex web of tax rules and regulations. Consider consulting a tax or legal professional about your particular circumstances before implementing any tax or legal strategy. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. ©2020 Baker Tilly US, LLP

On-demand interactive discussion on family wealth planning and succession issues, including the psychological effects of inheriting wealth and how to coach and develop next gen financial skills.

How not to ruin the next generation

video Download the presentation There have been a number of disruptions to the global economy. These present both challenges and planning and investment opportunities in the near term. Are you ready for the challenges, and more importantly, able to take advantage of the opportunities? Baker Tilly’s private wealth leaders Duncan Campbell and Ed Drake along with Kurt Brown from TownSquare Capital hosted an interactive discussion on the economy, and the challenges and opportunities it may present. For more information or to learn how Baker Tilly specialists can help, reach out to your Baker Tilly professional or  contact our team.  Join Baker Tilly’s private wealth leaders Duncan Campbell and Ed Drake for casual conversations featuring private wealth professionals. Don’t miss the next event!
 Baker Tilly Financial, LLC, is a registered investment advisor. Baker Tilly refers to Baker Tilly Financial, LLC, a wholly owned subsidiary of Baker Tilly US, LLP. Baker Tilly US, LLP, is an independently owned and managed member of Baker Tilly International. © 2020 Baker Tilly Financial, LLC  Investment advisory services are offered through Baker Tilly Financial, LLC (“BTF”), a registered investment adviser. BTF does not provide tax or legal advice. BTF is not an attorney. Estate planning can involve a complex web of tax rules and regulations. Consider consulting a tax or legal professional about your particular circumstances before implementing any tax or legal strategy. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. ©2020 Baker Tilly US, LLP Town Square Capital, LLC (“Town Square”) is a registered investment adviser. Town Square and BTF are not affiliated, they are separate and distinct entities.

On-demand interactive discussion covering the recent disruptions to the global economy. What are the challenges and how can you take advantage of the opportunities?

Understanding today’s global economy and opportunity it presents

Authored by Bruce Hutler and Paul Daddio We are in unprecedented times. The COVID-19 pandemic’s impact on our society and on businesses around the globe has been rapid, severe and complex. The ultimate duration and depth of the current economic downturn is unknowable, casting uncertainty across the U.S. and global economy and depressing valuations across most industries.  Though each business will be impacted differently by the current economic downturn, it is certain that the valuations of small- to mid-sized closely held businesses in particular—which generally lack the capitalization, diversification, and general resources of large public companies—have been quite significantly affected. As valuation and transaction advisors to thousands of businesses, we are seeing this firsthand. Other factors such as lack of availability of debt and private equity investors moving to the sidelines will also place downward pressure on valuations. In such an environment, now may be an optimal time to pursue certain estate planning strategies that will provide for the future financial well-being of loved ones. In other words, now may be the time to effectuate wealth transfer strategies that will minimize tax implications and protect the passage to family members of financial assets, ownership interests in closely held operating companies and real estate and investment securities holding entities, and other property. Also considering that the Estate & Gift Lifetime and GST exemptions are $11,580,000 per person, for some families there may never be a better time to pursue these opportunities.  The following provides a summary of how the current economic downturn is impacting the valuation of closely held businesses. Income approach The income approach is fundamental to any valuation analysis. Typically taking the form of the “Discounted Cash Flow Method,” under the income approach, value is determined based on a projection of the future financial performance of a business, discounted to present value using a “discount rate” estimated to reflect the rate of return investors would require to compensate for the level of risk inherent in the business.  In the current environment, projection modelling — which is a challenging task in any time—has taken on an added layer of complexity. Because we are in such unprecedented times, it is difficult to use historical financial and operating trends as reliable indicators of future performance. The impact of the economic downturn will certainly have a negative impact on the forecasts of nearly all companies. However, careful support for projections is always critical. Key inputs and assumptions must be logically and adequately supported to withstand scrutiny and include both top-down analysis (macroeconomic factors, aggregate customer demand, competitive landscape, etc.) and bottom-up analysis (volume and pricing, cost of inputs/direct labor, overhead, operating metrics, etc.). The added level of risk and uncertainty faced by investors today has certainly contributed to declines in the value of companies. Professor Aswath Damodaran of New York University estimates that the equity risk premium (ERP)[1] was 6.0% at the start of April, up from 4.9% at the start of February.[2] While this may not sound like a drastic difference, the downward impact on the valuation of companies of this increase is quite significant. Discount rates must be carefully considered in relation to overall market risk and company-specific risk factors and supported for each valuation, as every business will be impacted differently by the current environment. Market approach The market approach arrives at an indication of value based upon multiples paid in recent transactions of ownership interests in guideline companies similar to the company being valued in terms of industry and operations. Guideline valuation multiples can be based upon acquisitions of companies or stock transactions of publicly traded companies. Value multiples from these guideline public companies and M&A transactions are then applied to the financial information of the subject company to arrive at an indication of value.   As we mentioned previously, we have observed a significant decline in the value of the overall S&P 500 and the resulting multiples. For example, as evidenced in the chart below, the median last 12 months (LTM) price-to-earnings multiple for the S&P 500 has declined by over 20%, from 22.2x on January 20, 2020, to 17.2x on March 20, 2020, resulting in lower investment portfolios and lower valuations.    The M&A market has also been deeply affected. While not enough time has passed to have observable private company transaction multiples reported, based upon conversations with industry participants and our own observations as transaction advisors, while some transactions are closing with or without a change in terms, continuing uncertainty has led many deal processes to halt or to be put “on pause.” The current situation may cause buyers and sellers to reassess valuations and adjust pricing mechanisms, resulting in lower implied multiples for the transactions and corresponding lower indications of value for closely held companies. Additional valuation considerations Another important factor that could potentially result in lower equity values is the increased use of interest-bearing debt, as many companies have needed to draw on their line of credit or other forms of leverage to meet short term cash flow needs. The U.S. government has also provided potential sources of additional debt, such as the Paycheck Protection Program loan or the Economic Injury Disaster Loan. The use of additional leverage causes a decline in the net value of the equity of a company. Finally, discounts for lack of marketability that are applied to the value of fractional interests in the ownership of closely held companies and interests transferred could increase due to increased volatility and illiquidity in the marketplace. Lack of marketability discounts measure the diminution of value attributable to the lack of a ready market for a closely held ownership interest. An ownership interest in a closely held company has no ready market given the lack of a secondary market, and there are significant impediments to marketability due to the restrictions on the transfer of the ownership interests. The market-clearing price of a non-marketable investment is discounted relative to the price of its otherwise identical, but marketable, counterpart. Risk is commonly accepted as a key factor in the determination of discounts. Potential estate and gift planning opportunities We are currently in an unprecedented situation creating a uniquely optimal time to pursue certain wealth transfer and estate planning strategies to transfer additional wealth at depressed values before they begin appreciating again. Specifically, consider pursuing the following opportunities: Gifting and other transfer strategies of ownership interests in closely held operating companies while typical valuation methods would lead to lower valuations;  Creation and transfer of ownership interest in real estate and investment securities holding entities (LLCs and FLPs) while the public securities markets are depressed and real estate values have declined due to higher capitalization rates and lower income; and    Electing to value the estate’s assets as of the alternate election date (IRC 26 U.S. Code Section 2032) for estates for individuals who have died within the past six months.  There is reason to believe that the window of opportunity to take advantage of these strategies may be relatively short. A recent Reuters poll of over 50 economists suggested the U.S. economy is forecast to rebound by 10.5% Q3 2020, followed by a 3.2% expansion in 2021.[3] A favorable low interest rate environment and access to financing, and continued digital transformation and technological disruption are expected to continue to drive the economy and transaction volumes. Summary The uncertainty surrounding COVID-19 has forced many individuals to consider and address their current health and estate planning concerns. The situation also provides a unique opportunity to consider unprecedented wealth transfer and tax-minimization opportunities as the result of unanticipated depressed assets values. For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
 [1] Incremental rate of return investors require above risk-free securities such as Treasury Bonds to compensate them for the risk of investing in equity securities. [2] Duff & Phelps also increased its U.S. ERP recommendation from 5.0% to 6.0% when developing discount rates beginning on March 25, 2020 and thereafter; however, Duff & Phelps notes that several of the economic and financial risk factors were already present during the week of March 9, 2020. [3] Coronavirus-led global recession to be deeper than thought but hopefully short: Reuters Poll, Reuters, Business News, April 3, 2020.

In the current economic environment, now may be an optimal time to pursue certain estate planning strategies to minimize tax implications and provide for the future financial well-being of loved ones.

Family Business

Construction

Real Estate

Banking

Dealerships

Retail

Multifamily Housing

Real Estate Investors

Lodging

Valuations

Small and family business coronavirus resources

Construction coronavirus resources

Real estate coronavirus resources

Automotive and mobility company coronavirus resources

Manufacturing and distribution coronavirus resources

Business valuation impacts and estate and gift planning opportunities in the current economic downturn

On April 9, 2020, the IRS and Treasury Department issued Notice 2020-23, granting an automatic extension until July 15, 2020, to comply with several federal filing and payment obligations in addition to those already extended (please see our previous tax alert), as well as to perform certain time-sensitive actions. The relief generally applies to all obligations that otherwise would have been due on or after April 1, 2020, and before July 15, 2020, including 2020 second-quarter estimated tax payments. It also extends to both calendar-year and fiscal-year filers. The notice clarifies “all schedules, returns, and other forms” that must be attached to the returns that are automatically extended are covered (such as Schedules H and SE, and Forms 3520, 5471, 5472, 8621, 8858, 8865 and 8938). This relief includes any installment payments of repatriation tax liabilities due on or after April 1, 2020, and before July 15, 2020. In addition, elections that are made or required to be made on a timely filed covered return are extended as well. This relief is automatic: affected taxpayers do not have to call the IRS, file extension forms, or send letters or other documents to receive this extension. Taxpayers may continue to file for additional extensions beyond July 15, 2020, but the extension date may not go beyond the original statutory or regulatory extension date. For example, a request for an extension to file an individual tax return may be filed by July 15, 2020, to extend the time to file the return, but that extension will only be to Oct. 15, 2020. It will not extend the time to pay federal income tax beyond July 15, 2020. Caution: This relief applies to federal obligations only. Each state will have its own deadlines. Please visit our state tax-filing extension matrix to see if your state has extended its deadlines in response to COVID-19. Tax returns and payments covered by the notice include, but are not limited to: Individual income tax payments and filings on Forms 1040, 1040-SR and 1040-NR, Calendar- or fiscal-year corporate income tax payments and filings on Form 1120, 1120-S, 1120-C, 1120-F, 1120-RIC and 1120-REIT, Calendar- or fiscal-year partnership return filings on Form 1065, Estate and trust income tax payments and return filings on Form 1041, Estate and generation-skipping transfer tax payments and return filings on Form 706, Gift and generation-skipping transfer tax payments and return filings on Form 709, Exempt organization business income tax and other payments and return filings on Form 990-T, and Excise tax payments on investment income and return filings on Form 990-PF. Time-sensitive taxpayer actions extended include, but are not limited to: Filing Form 8752 by fiscal-year partnerships and S corporations and making any required deferral period deposits, Filing Form 5500 by certain fiscal-year employee benefit plans (calendar-year 2019 plan filings are due without extension on July 31, 2020, and have not been further extended as of this time), The 45-day period to identify replacement property, and 180-day period to execute a like-kind exchange pursuant to Internal Revenue Code section 1031, Any act relating to the adoption, election, retention or change of any accounting method or period, or to the use of an accounting method or period, Filing Form 3115 for consent of a nonautomatic accounting method change, The 180-day period for investing eligible capital gains in a qualified opportunity zone, Filing a petition with the Tax Court, or for review of a decision rendered by the Tax Court, Filing a claim for credit or refund of any tax, and Bringing suit upon a claim or refund of any tax. This relief is limited to the items specifically provided for by the notice and other official guidance released to date. Any other type of federal tax, return or time-sensitive act has not been extended.  We encourage you to reach out to your Baker Tilly tax advisor to discuss how these extensions may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS and Treasury Department issued a notice that automatically extends several federal filing and payment obligations to July 15, 2020.

Not-for-Profit

Federal Tax

Federal tax coronavirus resources

Not-for-profit coronavirus resources

Employee Benefit Plan Audit

IRS significantly expands tax return filing and payment due date relief

Authored by Liz Black Tax code section 139 enables employers to make nontaxable qualified disaster relief payments to employees for reasonable and necessary expenses resulting from the coronavirus pandemic. Generally, payments made by an employer to, or for the benefit of, an employee must be included in the employee’s taxable income and cannot be treated as a nontaxable.  Section 139 was enacted in the aftermath of the Sept. 11 terrorist attacks. When triggered, it overrides the broad income inclusion principles and allows employers to provide direct financial assistance to employees impacted by a qualified disaster without adverse tax consequences On March 13, 2020, the president declared a national emergency concerning the COVID-19 outbreak. The magnitude and rapid spread of the illness temporarily closed businesses, leaving employers little choice but to lay off certain employees for the foreseeable future. Merely a few weeks into this unprecedented “new normal,” employers want to know about the types of hardship assistance they can provide to their employees in this difficult time. With the elevation of the outbreak to a federally declared disaster, employers can explore a few avenues. Section 139 payments Traditionally, section 139 has been used by employers whose businesses and employees have been affected by a natural disaster, such as a hurricane or tornado. Section 139 defines qualified disaster relief payments to include the quoted items noted above but also those that are reasonable and necessary for the repair of a personal residence or the replacement of its contents. With a natural disaster, it is not hard for employers to prove that the payments were made, for example, for housing costs.  Employers have not historically relied upon section 139 during a pandemic (except in Notice 2014-65, which designated the Ebola virus outbreak in Guinea, Liberia and Sierra Leone as a qualified disaster), resulting in little guidance from the IRS. In a pandemic, employees are in need, but direct payments to employees without proof of how the payments were spent by the employees could result in regulators deeming the payments taxable wages. A revenue ruling from 2003, Revenue Ruling 2003-12, 2003-1 C.B. 283, also confirms that relief grants received by individuals, which are intended to pay or reimburse medical, housing or transportation needs incurred due to a disaster, are not includible in gross income. The types of expenses covered by section 139 payments are somewhat unclear. Individuals are not required to account for actual expenses in order for the payments to be excluded from gross income. However, employers may want to consider a requirement that employees account for the use of the section 139 payments. The default for regulators on these payments may be that “undocumented payments are the equivalent of taxable wages.” It is important to note section 139 payments do not include income replacement wages (such as lost wages, lost business income or unemployment compensation) or expenses otherwise paid for by insurance or other reimbursement. The COVID-19 pandemic does not have the visible disaster evidence of an earthquake or a hurricane. A best practice for employers is to document need by the employee and have the employee document the use of the section 139 payment. With the passage of the Families First Coronavirus Response Act, some employers may be required to provide emergency paid sick leave to employees affected by COVID-19. Those employers are then eligible to receive a credit against payroll taxes. Paying sick leave to those employees would disqualify them from receiving disaster relief payments because their expenses would be deemed otherwise covered. Charitable aid to individuals From a different angle, charitable organizations can serve disaster victims and those facing emergency hardship situations in a variety of ways. Except for employer-sponsored foundations, the disaster or hardship situation need not be a presidentially declared disaster, as outlined in section 139. In contrast to public charities, private foundations typically have a single major source of funding that usually comes from one family or corporation. Historically, private foundations are created as a way for one family to continue its legacy for many years. They are often formed to make grants to other section 501(c)(3) organizations to address community needs and other charitable goals. In some cases, private foundations can provide assistance to individuals. Generally, a private foundation that intends to make grants to individuals must obtain advance approval from the IRS (typically on the private foundation’s Form 1023, Application for Recognition of Exemption). The private foundation must also maintain meticulous records to support the charitable purpose of grants paid to individuals and that the grants were in furtherance of the private foundation’s exempt purpose. In the most common scenario, a private foundation is formed as a classic grant-making foundation, thus the intention from inception is to provide funds to other section 501(c)(3) organizations. In the unfortunate circumstance that a disaster strikes the local community, private foundation managers often question whether they can provide financial assistance directly to individuals affected by the disaster.  An organization that is qualified under section 501(c)(3) may engage in other activities that accomplish charitable purposes even though those activities were not described in its exemption application, without having to obtain permission from the IRS. However, the private foundation should report these new activities on its annual return. Specifically, private foundations should describe the services provided in its summary of direct charitable activities if the disaster relief activities are one of the private foundation’s four largest programs. In the case of a disaster or hardship situation, the private foundation may provide assistance in the form of funds, services or goods to ensure that victims have the necessities [such as food, clothing, housing (including repairs), transportation and medical assistance (including psychological counseling)]. The type of aid that is appropriate depends on individual need and resources.  The following types of assistance, if based on individual need, are consistent with charitable purposes: Assistance to allow a surviving spouse with young children to remain at home with the children to maintain the psychological well-being of the family, Assistance with elementary and secondary school tuition and higher education costs to permit a child to attend school, Assistance with rent, mortgage payments or car loans to prevent loss of a primary home or transportation that would cause additional trauma to families already suffering, and Travel costs for family members to attend funerals and to provide comfort to survivors. As outlined in Publication 3833, the IRS defines specific guidelines and safeguards a private foundation must follow when providing financial aid to individuals: The potential pool of beneficiaries (the charitable class) must be large enough or sufficiently indefinite that no preselected group of individuals can be identified. In other words, the private foundation’s disaster relief or emergency hardship organization cannot target or otherwise limit its assistance to specific individuals. Charitable funds must be distributed to individuals based on a “needy or distressed test.” While individuals do not have to be completely insolvent in order to be financially needy, the private foundation must make an objective evaluation of the individual’s needs at the time the grant is made. 
a. It is important to note that charitable funds cannot be distributed to individuals simply because they are victims of a disaster.  The private foundation must maintain adequate records to support that financial aid paid to individuals furthers the private foundation’s exempt purpose. Generally, the private foundation should maintain records of the following:
a. Complete description of the assistance provided
b. Costs associated with providing the assistance
c. Purpose for which the aid was given
d. The objective criteria used for disbursing assistance
e. How the recipients were selected
f. Name, address and amount distributed to each recipient
g. Any relationship between a recipient and officers, directors or key employees of, or substantial contributors to, the private foundation
h. The composition of the selection committee approving the assistance The private foundation cannot make payments to (or for the benefit of) individuals who are directors, officers, or trustees of the private foundation or members of the private foundation’s selection committee. Employer-sponsored private foundations With respect to employer-sponsored private foundations, providing disaster relief payments to employees of a certain employer are subject to more intense scrutiny by the IRS. Prior to Sept. 11, 2001, the IRS ruled that having an employee relief fund aided employers in recruiting and retaining potential employees, resulting in a significant private benefit to the sponsoring companies. There were concerns, however, that employers could exercise undue influence over the selection of recipients. These employer-sponsored private foundations could not make payments to individual employees. However, after the Sept. 11 terrorist attacks, Congress took the position that employer-sponsored private foundations should be able to provide assistance to employees in certain situations. These provisions were codified in section 139; a presidentially declared disaster is one of those situations. Unlike non-employer-sponsored private foundations described above, employer-sponsored private foundations can only make payments to employees or their family members affected by qualified disasters as defined by section 139. They cannot make payments to their employees in nonqualified disasters or in emergency hardship situations — like other private foundations can.  In addition to the requirements listed above as outlined by Publication 3833, the IRS added an additional layer of requirements that must be adhered to when an employer-sponsored private foundation provides disaster relief payments to its employees: If the group of eligible beneficiaries is limited to, for example, employees of a particular employer, the group of individuals eligible for disaster assistance (the class) must be indefinite. Otherwise, the charitable class would consist of a group of preselected individuals, which is prohibited.
a. To be an indefinite charitable class, the relief program must be open-ended and include employees affected by the current disaster and those who may be affected by a future disaster.
b. It is important to note that if the facts and circumstances indicate that a newly established disaster relief program is intended to benefit only current beneficiaries without any intention to provide for future disasters, a charitable class would not be present.  The selection of beneficiaries is made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous.
a. The private foundation’s selection committee is independent, if a majority of the members of the committee consist of persons who are not in a position to exercise substantial influence of the affairs of the employer. Even though an employer-sponsored private foundation meets the presumption described above, the IRS may still review the facts and circumstances to ensure that any benefit to the employer is tenuous and incidental.  Whether the private foundation is employer-sponsored or not, and assuming the private foundation was not formed specifically to provide disaster relief, the ability of the private foundation to provide evidence that it has met the requirements listed above will be enhanced if the private foundation develops a disaster relief policy and commits the policy to writing.  If a private foundation was formed by a business owner and/or family, but not formed specifically as an employer-sponsored private foundation and that business owner wants to use the foundation funds for that owner’s employees, the foundation should follow the employer-sponsored private foundation rules. For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Employers have several channels in which they can financially help their employees during a national emergency.

Disaster Recovery

State & Local Tax

Coronavirus Resource Center

Health plan coronavirus resources

Healthcare provider coronavirus resources

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State and local tax coronavirus resources

Offering hardship assistance during a federally declared disaster 

Authored by Randi Schuster and Rowland Smith Recently, the COVID-19 pandemic has caused massive uncertainty in the market between the shifts in the stock market and potential legislative changes. However, while so much is uncertain, for those subject to federal and/or state estate tax, the current market conditions provide an excellent estate planning opportunity. While assets are (hopefully) temporarily depressed in value, more value can be transferred out of the estate with an increased likelihood of appreciation being passed to beneficiaries.   Below are some estate and gift planning ideas to help you through this uncertain time. Create and fund grantor retained annuity trusts (GRATs): with the decrease in asset values coupled with low interest rates, this statutory vehicle can be used to pass value to the next generation Convert IRA to ROTH IRA: tax is paid on the value of the assets on the conversion, but then the assets continue to grow tax-free and all withdrawals are income-tax-free  Make outright gifts or gifts in trust with the currently depressed FMV of assets Make or refinance loans, including intra-family loans: again, with interest rates being low, loans and sales of assets in exchange for notes are attractive estate-planning techniques Remember use of discounts with gifts still applies: use partnerships or other type of entities for discounted giving Harvest capital losses: talk to your financial advisors and prepare tax projections that would help you determine whether this is appropriate for your situation Make transactions with grantor trusts: swap a depressed FMV asset into a trust removes the recovery in FMV outside a taxable estate Make transactions with family or trusts: sales between less efficient and more efficient trusts may better position the assets and future appreciation Create a charitable gift plan Talk to your Baker Tilly advisor for more information and personalized advice regarding implementing these estate and gift planning tactics.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Current market conditions created by the COVID-19 pandemic provide for estate and gift planning opportunities

Family Office

Automotive and mobility coronavirus resources

Estate and gift planning amid COVID-19

Video The newly enacted Setting Every Community Up for Retirement Enhancement (SECURE) Act is the first major retirement legislation since the Pension Protection Act of 2006.  The SECURE Act makes important changes to employer sponsored retirement plans, plan administration and IRAs by expanding opportunities to increase retirement savings and changing distribution requirements. Components of the Act have different effective dates so taxpayers and advisors should pay careful attention as to when they can take advantage of the new rules.  Join us as our employee benefit and private wealth professionals dissect the SECURE Act to help employers and individuals better understand the implementation issues and how it may change the path toward retirement. From this webinar, you will learn how the act: Encourages employer-provided retirement plans Affects IRAs and estate planning Simplifies retirement plan administration
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

Healthcare & Life Sciences

Understanding the SECURE Act

Authored by Paul Dillon, Christine Faris, Michelle Hobbs, Mike Schiavo and Michael Wronsky Congress attached numerous tax provisions to a series of government funding bills (collectively, “the bill”), including repeal of three Affordable Care Act (ACA) taxes, a long list of so-called “tax extenders,” and various technical changes to the retirement plan rules. Both chambers have now passed the bill, which is expected to be signed into law by the end of this week. The spending bill does not include other priorities that Democrats and Republicans were hoping to have in year-end legislation. Democrats had been pushing for tax extenders to be paired with the expansion of tax credits benefiting low- and middle-income families as well as renewable energy tax credits. Republicans had been pressing for technical corrections for drafting errors in the 2017 Tax Cuts and Jobs Act (TCJA). Most notably, the bill did not correct the qualified improvement property glitch; consequently, such property is still ineligible for bonus depreciation.  ACA taxes The bill repealed three taxes that were part of the ACA – the “Cadillac” tax, the health insurance industry fee and the medical device tax. The Cadillac tax, a 40% levy on generous health insurance plans, was intended to help drive down healthcare spending by incentivizing employers to lower costs to avoid being subject to the tax. Due to strong opposition from a broad coalition in both parties, the Cadillac tax was repeatedly delayed and never went into effect.  Second, the health insurance industry fee, originally enacted as part of the ACA to help fund the marketplace exchanges, has been revoked. This fee was scheduled to be collected from insurance companies offering fully insured health plans beginning in 2018 and had been given a one-year moratorium by Congress. Finally, the 2.3% tax on medical devices was canceled. This tax drew bipartisan opposition from lawmakers who warned it harmed innovation by hurting small medical device companies.  With the repeal of these three taxes, as well as the TCJA’s repeal of the individual mandate, many of the significant funding sources of the ACA have now been eliminated.  Tax extenders More than 30 tax extenders were included in the package -- most of which expired at the end of 2017, as well as some that were not set to expire until the end of 2019. The majority of these provisions were enacted through Dec. 31, 2020. With most 2018 tax returns already filed, it is unclear how the IRS will accommodate amended returns to take advantage of these newly reinstated tax benefits. In addition, many forms and instructions could need revisions to address this legislation. Extenders that have been temporarily reinstated include: New Markets Tax Credit Employer credit for paid family and medical leave Exclusion from income of discharge of qualified principal residence indebtedness Reduction in medical expense deduction floor to 7.5% from 10% Deduction of qualified tuition and related expenses Classification of race horses as three-year property Empowerment zone tax incentives Biodiesel and renewable diesel incentives Energy-efficient homes credit Energy-efficient commercial buildings deduction (a.k.a. the section 179D deduction) Work Opportunity Tax Credit Credit for health insurance costs of eligible individuals Provisions for disaster tax relief were also included in the bill. Retirement provision changes Congress also included the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 in the spending bill. The SECURE Act is the first major retirement legislation since the Pension Protection Act of 2006.  Some of the highlights include: The maximum age for making contributions to an IRA is repealed Any employer sponsoring a 401(k) plan is required to offer long-term, part-time employees the opportunity to make elective deferral contributions The default contribution limit under an automatic enrollment safe harbor 401(k) plan is increased to 15%  The beginning age for required minimum distributions increases to age 72, from 70½ The safe harbor notice requirement for 401(k) plans with non-elective safe harbor contributions is eliminated Employers that are not part of a controlled group or affiliated service group may establish pooled employer plans (open multiple employer plans (MEPs))  Small employers receive tax credits for establishing retirement plans New annual disclosure requirement for defined contribution plans to provide lifetime income stream based on participant’s account balance Deadline for adopting a qualified retirement plan is extended to the due date for filing the employer’s tax return for the taxable year, including extensions Important tax update for not-for-profits that provide parking benefits As part of a deal to extend certain tax credits, lawmakers and administration officials agreed to fix a provision in the TCJA that taxed qualified transportation fringe benefits provided by not-for-profits as unrelated business income, subject to the 21% unrelated business income tax (UBIT). This agreement, released Dec. 17, 2019, had bipartisan support and the support of not-for-profits across the country, including the National Council of Nonprofits. Retroactively effective to Jan. 1, 2018, qualified transportation fringe benefits provided by not-for-profit organizations for their employees will no longer be taxed as unrelated business income subject to the 21% tax. Qualified transportation fringe benefits include: Transportation in a commuter highway vehicle Transit pass Qualified parking We encourage you to meet with your Baker Tilly advisor to discuss how these provisions may impact your tax situation.

Congress passed some major year-end changes that could affect your tax bill.

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Congress enacts tax and retirement changes

The U.S. Supreme Court ruled that a North Carolina statute imposing income tax on a trust based solely on the residency status of the trust’s beneficiaries violated the due process clause of the 14th Amendment to the U.S. Constitution as applied to the “specific facts presented.”  In North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, U.S., No. 18-457, 6/21/19, the geographic footprint of the Kaestner trust spanned four states. The beneficiaries were residents of North Carolina; the trustee was located in Connecticut; the assets (all intangibles) were located in Boston; the settlor was a New York resident at the time the trust was created; the books and records, tax returns, legal documents were kept in New York; and the trust itself was governed under New York law. The trustee filed a $1.3 million refund on behalf of the trust for tax years 2005 through 2008, asserting that North Carolina could not impose income tax based solely on the beneficiaries’ residency status. North Carolina Code section 105-160.2 states in relevant part: “The tax is computed on the amount of the taxable income of the estate or trust that is for the benefit of a resident of this State … ”  The court noted that “when a State seeks to base its tax on the in-state residence of a trust beneficiary, the Due Process Clause demands a pragmatic inquiry into what exactly the beneficiary controls or possesses and how that interest relates to the object of the State’s tax.”  The court emphasized the following key factors in rendering its opinion: the beneficiaries did not receive any income from the trust during the years at issue the beneficiaries had no right to demand trust income or otherwise control, possess or enjoy the trust assets in the tax years at issue the decision of when, whether and to whom the trustee would distribute the trust’s assets was left to the trustee’s absolute discretion the trust agreement explicitly authorized the trustee to distribute funds to one beneficiary to the exclusion of others with the effect of cutting one or more beneficiaries out of the trust the agreement authorized the trustee, not the beneficiaries, to make investment decisions regarding trust property the trust agreement prohibited the beneficiaries from assigning to another person any right they might have to the trust property The court noted that its decision only addressed “the circumstances in which a beneficiary receives no trust income, has no right to demand that income, and is uncertain necessarily to receive a specific share of that income.” While limited in scope, the Kaestner ruling may present refund opportunities in North Carolina or other states with similar imposition statutes for similarly drafted trusts. We advise reviewing any trust agreement with your advisor to see if the decision affects your trust. The case also provides some planning opportunities in North Carolina particularly as concerns the beneficiaries’ rights to income and trustee powers as granted by the trust documents. For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

A June 2019 Supreme Court ruling said a state can’t impose an income tax on a trust just because a beneficiary lives there. So how does the decision affect you?

Supreme Court issues trust-friendly state income tax nexus decision

Authored by Paul Dillon and Mike Schiavo Last week, the IRS released final section 199A regulations for the 20 percent pass-through deduction enacted under the Tax Cuts and Jobs Act (TCJA). For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026, noncorporate taxpayers (individuals, trusts and estates) may take a deduction of up to 20 percent of qualified business income (QBI) from partnerships, S corporations and sole proprietorships, plus 20 percent of qualified REIT dividends and publicly traded partnership (PTP) income. There are a number of important changes and clarifications compared to the proposed regulations, which we will address in future alerts. As part of the regulations package, the IRS also provided a safe harbor in Notice 2019-07 for rental real estate to be treated as a trade or business solely for purposes of section 199A. Key takeaways Under the safe harbor, a rental real estate enterprise will be treated as a trade or business for section 199A purposes if 250 hours per year of rental services are performed with respect to the rental enterprise. Triple net leases are specifically prohibited from using the safe harbor. Triple net leases will need to be analyzed outside of the safe harbor to determine if they are eligible for the section 199A deduction. Taxpayers can rely on the safe harbor until a final revenue procedure is issued. The safe harbor is strictly limited to the application of section 199A. Taxpayers can treat each rental real estate property as a stand-alone enterprise or group together similar properties and treat each group as an enterprise. Although the safe harbor applies solely for purposes of section 199A, clients should be reminded that treating rental properties as a trade or business may require filing Form 1099 to report rental expenses and treating mortgage interest as business interest expense subject to the new limitations on the business interest expense deduction. Safe harbor for rental real estate                                             Under the safe harbor, a “rental real estate enterprise” (defined below) will be treated as a trade or business for section 199A purposes if it meets the following requirements: separate books and records are maintained to reflect income and expenses for each rental real estate enterprise; 250 or more hours of rental services (examples below) are performed per year for tax years beginning before Jan. 1, 2023, and the taxpayer maintains contemporaneous records, including time reports, logs or similar documents regarding hours of all services performed, a description of all services performed, dates on which the services were performed and who performed the services. A rental real estate enterprise is defined as an interest in real property held to produce rents and may consist of an interest in multiple properties. The individual or relevant pass-through entity must hold the interest directly or through a disregarded entity. Taxpayers can treat each rental real estate property as a stand-alone enterprise or group together similar properties and treat each group as an enterprise. Commercial and residential real estate may not be a part of the same rental real estate enterprise. Taxpayers must be consistent with this treatment unless there is a significant change in facts and circumstances. Rental services may be performed by owners, employees, agents or independent contractors. Rental services include: advertising to rent or lease the real estate; negotiating and executing leases; verifying information contained in prospective tenant applications; collecting rent; daily operation, maintenance and repair of the property; managing the real estate; purchasing materials; and supervising employees and independent contractors. Qualifying rental services do not include financial or investment management activities such as arranging financing, procuring property, reviewing financial statements or operations reports, planning, managing or constructing long-term capital improvements or travel to and from the real estate properties. Real estate rented or leased under a triple net lease is not eligible for the safe harbor. Further, real estate used by the taxpayer as a residence for any part of the year is not eligible for the safe harbor. Disclosure requirement. In order to apply the safe harbor, a taxpayer attaches a signed statement, invoking perjury penalties, to the tax return reporting the section 199A deduction. As part of the regulations package, the IRS also provided a safe harbor in Notice 2019-07 for rental real estate to be treated as a trade or business solely for purposes of section 199A. This safe harbor requires rental real estate professionals to contemporaneously track the time spent by rental real estate professionals on rental real estate activities. Baker Tilly’s sample log can be used to identify activities that qualify for the TCJA section 199A safe harbor for rental real estate activities. Please consult your Baker Tilly tax advisor to determine how best to take advantage of this new guidance. For related insights and in-depth analysis, see our Tax Reform Resource Center. For more information on these topics, or to learn how Baker Tilly tax specialists can help, contact our team.

The IRS issued final section 199A regulations with a number of changes and clarifications, including for the rental real estate safe harbor.

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New regulations provide rental real estate safe harbor for 20 percent pass-through deduction

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