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Authored by Mark Smith 2020 has been an interesting year for many reasons. As we approach year-end, we recommend doing a number of things from an estate and gift tax-planning standpoint. Those ideas are discussed below. However, with 2020 being a presidential election year, a significant planning opportunity might exist this year that otherwise may not occur again.  Background For 2020, the estate, gift and generation-skipping-tax exemption is set at $11.58 million per person and is scheduled to increase each year by a cost-of-living factor. However, that level of exemption is due to sunset after 2025, when it would return to half that amount. The $5 million level of exemption (adjusted annually by a cost-of-living adjustment or COLA) came into the law in 2011. Prior to then, the exemption level had reached $3.5 million. The estate tax law also allows an adjustment in basis to the date of death fair market value when one passes away. We normally think of this as a step-up in basis, since, most of the time, assets have increased in value from the time of purchase. This has been the law for many years. In this presidential election year, Democratic presidential nominee Joe Biden proposes, among other things, to “return the exemption levels to historic norms” and “eliminate the step-up in basis for inherited assets.” Whether historic exemption levels mean the $5 million level referred to above or the pre-2011 $3.5 million level is unclear.  Of course, the changes that Biden proposes would be possible only if he wins the presidency, and the Democrats take the Senate and retain majority in the House. In January 2021, new legislation could be introduced to effect these changes. New law could possibly be effective retroactively to Jan. 1, 2020. The next few months may be the last time individuals will have an exemption of $11.58 million. If it is used to shelter gifts in 2020, the use would likely be grandfathered even if the exemption level is reduced in the future. In this scenario, the use is the “excess” of the current level over what it might be reduced to, to be considered “used.” For example, gifts of $9 million in 2020 will use $4 of the “excess” over the $5 million level if the law is changed to reduce the exemption to $5 million. If gifts of only $5 million are made in 2020 and the exemption level is reduced to $5 million, the opportunity to use the “excess” will have been lost.  Use the “excess” exemption the current law provides Clients with the wealth to take advantage of this historically high exemption level have many ways to make gifts in 2020. While this article will not be able to discuss all the options in detail, there are ways to make gifts that are straightforward. Of course, there are also more complicated techniques requiring time and planning — and time is quickly running out to do so before year-end. The following strategies should be discussed with your estate planning advisors. Gifts of business interests in S corporations, partnerships or limited liability companies (LLCs) could take advantage of discounts when transferring minority interests in nonvoting stock, limited partnership interests or LLC membership interests. Use of discounts allows more value to be included in the gift.
–  This shifting of business ownership might already be part of succession planning for your business and now could be a good time to make this type of transfer. For those clients apprehensive about giving up the cash flow from assets gifted away, there are various techniques to address this, such as the spousal limited access trust (SLAT). The SLAT is an irrevocable trust which has the benefit of removing assets via gift from the estate, but allowing the spouse and other beneficiaries to have access to the assets and their income.
– The SLAT features of the trust can then be combined with longer trust terms, so the trust assets can benefit multiple generations. Finally, those trusts can be created as “grantor” trusts so the trust creator/settlor continues to pay the income taxes on the income generated by the trust assets. This allows the trust assets to grow, without the need to pay taxes, and the settlor’s taxable estate to be reduced further. 
– With a grantor SLAT, gifts can be made to the trust and assets can be sold to the trust, without recognition of gain on the sale. The sale is usually accomplished by the SLAT issuing a promissory note to the seller. 
– If the transfer is via a sale right now, that promissory note could be forgiven by Dec. 31, 2020, if there is a change in Washington that might threaten the exemption level. If the president is re-elected, the decision of what to do with the promissory note could be delayed until 2025.  Gifts by one spouse to a lifetime trust for the benefit of the other spouse is another planning option. However, this does not remove the assets from both spouses’ taxable estates like the SLAT does. Gifts to trusts for the benefit of the settlor’s children and future generations — not benefitting the settlor’s spouse. This trust could be generation skipping and could also be taxed to the grantor. Gifts to any of these types of trusts do not have to be with business assets. The gifts could be of investment assets, cash or any other type of transferable asset. Unfortunately, IRAs, annuities and other like assets cannot be transferred by gift during one’s lifetime.  Gifts into trusts for the benefit of the trust beneficiaries also provides asset protection for those beneficiaries and that should not be overlooked.  Finally, taxpayers who have already engaged in significant transfer planning in recent years (in response to earlier tax law changes) may have significant promissory notes still outstanding from earlier sales to grantor trusts. Those promissory notes, or some portion of them, can be forgiven by Dec. 31, 2020, to use the excess exemption.  Other estate-planning moves that should be considered before year-end Annual exclusion gifts: the limit for 2020 is $15,000 Medical bills of family members: pay directly to the medical provider, not to your family member for their use in paying their bill Tuition of a child or grandchild: pay directly to the educational institution Grantor retained annuity trust (GRAT): fund with an asset with a value that has been depressed by the current situation, but which has the potential to return to historic values; GRATs work well when the transferred assets grow at a rate greater than the current section 7520 rate (0.4% in October) Depressed value assets: make an outright gift to your children Personally owned life insurance policies: transfer into irrevocable trusts to remove the value of the policy from the taxable estate Higher interest rate notes: refinance those notes that have been created from prior transactions; current AFR rates for October 2020 are 0.14% for the short term (three years or less); 0.38% for midterm (four to nine years); and 1.12% for long term (more than nine years) Intrafamily loans: consider making new loans or refinancing existing loans to take advantage of the low AFR rates; this is not a transfer technique, but it is designed to slow the growth of assets in your estate if you loan money and take back a note with these low interest rates  Comparing the current income tax rates to estate and gift tax rates, the income tax basis of the assets used to make gifts is now more important than before. Gifting higher basis assets is more beneficial than lower basis assets because of the current step-up in basis that can occur on death with lower basis assets included in the estate. Basis needs to be considered in any gift strategy. However, transactions with grantor trusts may continue to give the donor flexibility to address this issue. In addition, if business assets are used in a succession planning situation, consider whether that asset will be sold in future generations when discussing the impact of basis. Finally, the possible elimination of the step-up in basis rules would change our thinking again on all transfers. Please consult your estate tax advisor before deciding which assets to gift.  Finally, there are states with their own estate tax regimes and those states usually do not have the same federal exemption level of $11.58 million. Only one state has a gift tax for lifetime gifts. Planning needs to also factor in the impact of lifetime giving in excess of those state exemptions. As long as the state does not require you to include those prior gifts in the state’s taxable estate calculation, you can move more asset value to heirs during lifetime with gifts than if you wait until death to transfer those assets. Again, consult your estate tax advisor.  -- 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.

Estate and gift tax-planning is significant during 2020 presidential election.

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Taxpayers that are patiently waiting for schedules K-1 should have them by (or shortly after) September 15, 2020, which will leave another month to make an investment into a qualified opportunity zone fund (QOF) to reduce their income tax bill before the individual extended tax filing deadline. Either way, the taxpayer will part with funds on October 15, 2020. A QOF puts those funds towards an opportunity zone (OZ) investment, rather than it going straight to the government.  Example: A taxpayer with a long-term capital gain of $1 million will have a federal capital gain tax liability of $200,000 (20%). If the gain is from the sale of marketable securities, the tax is $238,000 (inclusive of the 3.8% net investment income surtax). By rolling the $1 million gain into a QOF, the capital gain is deferred, and reported on the 2026 tax return with a 10% discount at $900,000(1). In essence, the deferral functions similar to an interest-free loan to make the investment in the QOF. If you live in a state that conforms to federal tax rules, the amount of your deferral and discount benefit will be greater.  In addition, the most significant opportunity zone benefit, particularly from an investment in real estate, is realized by holding the opportunity zone fund investment for at least 10 years. An investment in real estate generates significant depreciation deductions, which shields income from that investment from ordinary income taxes. If the depreciation exceeds taxable income from the investment, the excess depreciation deduction can be used to shield income from other passive investments. In other words, an investor may be able to use losses from a QOF investment to offset income from other passive investments. Ordinarily, depreciation deductions are recaptured when the real estate investment is sold, thus making the deduction from depreciation a timing difference. However, depreciation deductions from a QOF investment are not recaptured and become a permanent tax savings. Additionally, appreciation in the market value of the OZ real estate is not taxed – another permanent tax savings(2).  Example: A taxpayer makes a $1 million investment in a QOF. Over the 10 year holding period, the investor is allocated $900,000 of depreciation deductions, which shield the taxpayer from $356,400 of federal income taxes (39.6%). At disposition, the QOF investment returns $2.2 million, the market appreciation of $1.2 million is not taxed, saving the investor another $240,000 in federal taxes (20% capital gain rate), for a total of $596,400 permanent tax savings. The permanent savings will be greater for taxpayers residing in a state that conforms to federal tax rules.  Timing is critical – revised OZ investment “windows” Capital gains have to be invested in a QOF within a prescribed period of time in order to qualify for opportunity zone benefits. Gains reported on a K-1 from a partnership or LLC have a unique set of rules, because investors may not know how much gain is allocable to them as of the transaction date or until they receive their K-1. Also, COVID-19-related tax relief favorably impacted the OZ investment window for 2020. The table below summarizes the timing to make a qualifying investment in a QOF: Capital gain not reported on a  K-1 – 180 days from the date of the transaction Capital gain reported on a K-1(3) 180 days from the date of the transaction; or 180 days after the final day of the reporting   entity’s tax year (typically December 31 for flow-through entities); or 180 days from the original tax return due date   of the reporting entity (March 15 for entities with a December 31 year-end) COVID-19 OZ timing update - if a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020 to invest that gain into a QOF.This also means that a taxpayer could amend a return filed by July 15, 2020 (or one filed by October 15, 2020) if they elect to invest into a QOF before December 31, 2020.  Timing example one: Stock positions sold on February 17, 2020 would normally have a QOF re-investment expiration date of August 15, 2020. However, coronavirus relief extends the expiration date to December 31, 2020. Timing example two: A capital gain from a sale on April 28, 2019 that is reported on a K-1 (entity has a fiscal year-end of December 31) to a taxpayer normally offers three windows in which to make a QOF investment: April 28, 2019 plus 180 days to October 25, 2019; and/or December 31, 2019 plus 180 days to June 28, 2020; and/or March 16, 2020 plus 180 days to September 12, 2020. However, coronavirus relief also extends the expiration date to December 31, 2020. As we approach October 15  The permanent tax savings from making an investment in a QOF that invests in real estate can be substantial. We are poised to help you evaluate vetted QOF investment options to help you make a well-informed choice before paying substantial capital gain taxes. For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

Taxpayers that are patiently waiting for schedules K-1 should have them by (or shortly after) September 15, 2020, which will leave another month to make an investment into a qualified opportunity zone fund (QOF) to reduce their income tax bill before the individual extended tax filing deadline. 

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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.

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Authored by Mark Heroux, Colin Walsh, Tom Bishop, Otis Damron and Manny Muriel COVID-19 has drastically changed how tax practitioners represent their clients in dealing with the IRS. Working remotely creates a host of challenges for resource-constrained IRS professionals. Moreover, the IRS released several initiatives and programs designed to provide relief to taxpayers. These programs include the People First Initiative, various revenue procedures and frequently asked questions (FAQ) on irs.gov. In light of these developments, we recommend that clients consider the following. 1. Consult with professionals before amending Form 1065 Partnerships subject to the centralized partnership audit regime (CPAR) generally must file an administrative adjustment request (AAR), rather than file an amended return. However, Rev. Proc. 2020-23 gives CPAR partnerships the option to file amended returns before Sept. 30, 2020. In most cases, CPAR partnerships should utilize this revenue procedure. AARs are complex and, perhaps most importantly, we have confirmed the IRS Office of Chief Counsel takes the position that AARs create nonrefundable credits. A nonrefundable credit could produce a disastrous result for clients, whereby some partners could lose the benefit from their share of the additional deductions. 2. Get ahead of the July 15, 2020, deadline Under the People First Initiative, the IRS stopped nearly all collection efforts. The IRS will currently not issue levies or liens, and will not send cases to third-party collection agencies. However, IRS revenue officers are still working. Taxpayers with large outstanding liabilities should view this as an opportunity to establish favorable installment agreements or offers in compromise. At a minimum, taxpayers should begin to gather the documentation (e.g., personal financial statements and supporting documentation) that IRS revenue officers will demand post-July 15. 3. Prepare for your PPP audit Coronavirus Aid, Relief, and Economic Security (CARES) Act Section 1100, the Paycheck Protection Program (PPP), provided $349 billion in relief in the form of forgivable loans to small businesses for job retention and certain other expenses. The PPP requires loan proceeds be used to pay payroll costs, interest on mortgages, rent and utilities. The PPP allows the potential for interest and principal to be fully forgiven if businesses spend the proceeds on these expenses within the earlier of 24 weeks from receipt or Dec. 31, 2020, and use at least 60% of the forgiven amount for payroll. This relief was intended for eligible borrowers with fewer than 500 employees; however, after the implementation of the PPP, it was revealed that many businesses had found loopholes in the law. Treasury Secretary Mnuchin stated the IRS and Small Business Administration will audit loans in excess of $2 million and will be prosecuting any instances of fraud. It is estimated there are 26,000 PPP loans in excess of $2 million. Upon request, companies will have to demonstrate the basis for its PPP loan eligibility certification. The Treasury Department is scheduled to issue guidance on the criteria the government will use to determine need for the loans.  4. IRS Criminal Investigations (IRS-CI) IRS-CI special agents continue to investigate allegations of criminal tax fraud and related financial crimes, which include PPP or Economic Impact Payment (EIP) related fraud. The IRS-CI, Federal Bureau of Investigation and other federal law enforcement agencies have already started pursuing those bad actors who have taken advantage of the PPP system. IRS special agents are still conducting limited field interviews and enforcement operations. If contacted for an interview or receive a subpoena, please reach out to Baker Tilly for assistance.  5. Anticipate delays in IRS examinations IRS revenue agents continue to conduct examinations. However, IRS revenue agents are unable to conduct in-person interviews. IRS revenue agents are also unable to receive physical documentation from taxpayers. Many responses to Information Document Requests are too voluminous to transmit via facsimile, and most IRS revenue agents cannot accept responses via email. We have seen delays in IRS examinations, resulting in requests for extensions of the assessment statute of limitations. 6. Solicit assistance from the Taxpayer Advocate Services (TAS) COVID-19 has caused significant delays at all levels of the IRS. These delays affect refund claims, EIN applications, processing of amended returns and many more submissions. TAS is an independent organization within the IRS that can help with procedural difficulties. We recommend filing Form 911 to solicit help from TAS for pressing matters, e.g., a corporation that faxed IRS Form 1139 to claim a quick refund. Nonetheless, Baker Tilly has been able to utilize its network of contacts within the IRS to overcome many of these obstacles.  7.  Contemplate where the IRS will focus its resources post-July 15 In speaking with high-level IRS professionals, we have some insight into what issues the IRS will focus on as activity returns to normal. For the IRS’ Small Business/Self-Employed Division, these issues include, but are not limited to, CPAR examinations, PPP audits, taxpayers that cannot afford to repay the employer’s deferred employment tax liability, examinations of carryback claims filed pursuant to the CARES Act, and taxpayers that file for bankruptcy. IRS-CI will look at PPP, EIP, bankruptcy and related fraud in addition to its 2020 investigative priorities. 8. Consider entering the IRS’ revised voluntary disclosure program On April 30, 2020, Bank Hapoalim, Israel’s largest bank, and Bank Hapoalim Ltd., its Swiss subsidiary, pleaded guilty to conspiring with U.S. taxpayers and others to hide more than $7.6 billion in over 5,500 secret Swiss and Israel accounts and the income generated from these accounts. The banks have agreed to pay more than $874 million to the U.S. Treasury. The IRS will now begin to examine the records from the thousands of accounts with an eye toward compliance with the Report of Foreign Bank and Financial Accounts (FBAR) and to ensure all income was reported. An uptick in civil examinations and investigations related to these accounts should be expected. Now may be the time for some taxpayers to avail themselves to the IRS’ revised voluntary disclosure program to avoid criminal prosecution if the failures to report were willful. 9. File submissions electronically whenever possible Much of the IRS’ workforce is working remotely and recently the agency recalled more than 10,000 employees to perform “mission-critical duties” such as processing paper tax returns, check payments, opening mail and operating taxpayer assistance services. As a result of the shutdown, the IRS was unable to process mail and was forced to divert much of the mail to storage trailers. Taxpayers can anticipate lengthy delays for any paper-filed submissions. As such, taxpayers should use electronic resources if possible. For instance, amended returns that can be electronically submitted should be used when they can. However, if paper filing is required, taxpayers are encouraged to send correspondence using the U.S. Postal Service’s certified mail with return receipt requested.  View more insights from our guide to tax planning during and after COVID-19
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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.

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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

Over the last several weeks, shockwaves ripped through the financial markets sparked by “shelter in place” orders, business closings, and skyrocketing unemployment due to COVID-19. The Dow plummeted 8,500 points from March 4, 2020, to March 23, 2020, and bounced back nearly 4,000 points three days later—serving as a stark reminder that market timing is not a sustainable reinvestment strategy. Understandably, investors are concerned about their positions, and are rightfully re-examining their asset allocation model.  Traditional allocation models recommend a mix of fixed income and equities to fit risk tolerances and investment objectives (e.g., a model portfolio of 60% equities and 40% fixed income for moderate-risk investors). However, these models stem from a period in which alternative investments were largely unavailable to high net worth investors. With the advent of the internet and legislation promoting formation of private capital, including crowd funding and Rule 506(c) under Regulation D, investors now have unprecedented access to alternative investments. So what can individual investors adopt from allocation models previously only accessible to institutional investors? University endowments are among the largest and most sophisticated investors, and consistently achieve high risk-adjusted returns by following a diversified asset allocation model that includes equities, fixed income and alternative investments, such as real estate, commodities, natural resources and hedge funds.  In the article “Investing Like the Harvard and Yale Endowment Funds,” Chart 3: Top Five Endowments Asset Allocation over time depicts the evolution of asset allocation by top endowment funds, where allocation to real estate and alternatives has increased 25%, increasing from 36% to 44% in the last two decades.  Given an individual investor’s relatively newfound access to alternative investments, they may want consider shifting towards a 50/30/20 equity/fixed income/real estate and alternatives model to achieve higher risk-adjusted returns. Furthermore, the recent massive market sell-off triggered significant capital gains for many investors that sold long-held positions with a low tax basis, so now is the time to reevaluate portfolio diversification, and not be tempted by timing the market to “ride it back up.”   Rebalance with real estate To cushion the blow of selling in a falling market and generating taxable gains, investors may be served well to consider a real estate investment located in an opportunity zone (OZ). This alternative investment can also provide broader asset allocation to diversify holdings and shield all future gains from taxation when disposed after the required holding period. Investors have 180 days to consider alternative investments in OZs and position themselves for the right real estate investment for their portfolio. 
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COVID-19 has created investment uncertainty. Investors are re-examining their portfolio strategies to increase diversification, particularly in real estate using opportunity zones (OZ) for tax efficiency.

The value of asset allocation and portfolio diversification in tumultuous times

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.

Dealerships

Depository & Lending

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Construction coronavirus resources

Mobility and transportation company coronavirus resources

Manufacturing and distribution coronavirus resources

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

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

Coronavirus recovery and growth resources

Estate and gift planning amid COVID-19

Authored by John Loew The significant income tax benefits afforded to opportunity zone (OZ) investors create numerous gift and estate tax planning considerations. The OZ incentive allows investors to gift their interest in a qualified opportunity fund (QOF) to a grantor trust enhancing the available tax benefits, particularly in light of doubling the lifetime gift exemption that was made available to taxpayers as a result of the Tax Cuts & Jobs Act (TCJA). If lifetime gifting is warranted, this strategy maximizes the tax-deferral benefit of a QOF investment for both investors and their heirs, potentially resulting in the best combined estate and income tax outcomes. Opportunity zone benefits  The OZ incentive, created by the TCJA, is designed to stimulate new investment in designated communities. Virtually anyone with capital gains can receive federal tax benefits by investing those gains in a QOF, which in turn invests in real estate projects or operating businesses located within the more than 8,000 qualified OZs across all 50 states and U.S. territories. A QOF investment offers three potential tax benefits: First, the tax on the original capital gain is deferred and reported on the 2026 tax return, or in the year the investment in the QOF is sold, if earlier.   Second, 10% of the deferred gain is forgiven for QOF investments held for five years, and 15% is forgiven if the investment is held for seven years by Dec. 31, 2026.   Third, the tax basis of an OZ investment held at least 10 years is deemed its fair market value on sale. The result is that all taxable gain on the OZ investment is permanently eliminated, which is the most valuable attribute of the OZ incentive. Estate planning benefits Individuals generally have two different types of assets: Income in respect of a decedent (IRD) assets are generally income tax favored during a person’s lifetime, like an IRA, 401(k) account, annuity, note receivable from the sale of an asset or, now, the deferred gain portion of a QOF investment related to an OZ. Non-IRD assets are stocks, bonds, or real estate that would generate income taxed as capital gain when sold. This type of asset gets a step-up in basis if held until the owner’s death. Non-IRD assets can be gifted during a donor’s lifetime, but the donor’s income tax basis carries over to the recipient. Consequently, any unrealized gain inherent in that asset passes to the recipient. The recipient, therefore, recognizes capital gains when the asset is sold. If the asset is not gifted during the donor’s lifetime, but received by a beneficiary as the result of a transfer by will or trust, the asset gets a step-up in basis at the decedent’s death to the date of death value. However, if applicable, the estate will pay a tax on the stepped-up value of the asset. In sum, non-IRD assets are awarded favorable income tax treatment at the expense of estate taxes. IRD assets, in contrast, are given a favorable income tax treatment during the holder’s lifetime (e.g., a deferral of current recognition for any income build-up) until payments are received from the asset. Under the proposed OZ regulations, the original deferred capital gain is treated as an IRD asset.  IRD assets often cannot be gifted in a tax efficient manner because the IRS does not allow the income from the asset to be assigned to another taxpayer. In other words, the transferring of ownership during the holder’s life, even if allowed under the current law, would accelerate the recognition of income. A QOF investment generally cannot be gifted to another taxpayer without triggering immediate recognition of the original deferred gain, termed an “inclusion event.” However, a QOF investment may be gifted to a grantor trust without triggering an inclusion event.  Proper planning If an investor properly plans for the ultimate disposition of IRD assets to the next generation, the OZ income tax deferral on the original gain remains in place past the investor’s death until reported on the 2026 tax return. The regulations also clarified that the QOF can be transferred at death and the OZ tax benefits are maintained. Since there is no step-up for the original gain that was deferred until 2026, the potential for the tax-free appreciation benefit on the QOF investment remains intact.   For example, an investor that will clearly have a taxable estate could gift their QOF investment to a grantor trust, thus removing the OZ investment from their taxable estate using tax basis instead of fair market value. Upon the grantor’s death and distribution of the QOF investment from the trust, their heir(s) will assume the original tax basis of the QOF investment (no step-up on death), but the tax basis of the QOF will step-up upon disposition by the heirs, if held 10 or more years (measured from the date of the QOF investment by the grantor). Significantly, the heir receives a step-up in basis at the time the asset is sold and not at the decedent’s death. As such, the heir pays no tax on capital gains, even if the QOF interest is held and appreciates in value subsequent to the decedent’s death. Note: The deferred tax on the sale of the original asset will still be reported in 2026 (with the 10% or 15% discount, if applicable). If the grantor is living at that time, the tax can be paid with personal funds, thereby further reducing assets within their taxable estate. If the grantor dies prior to 2026, the resulting tax liability would either fall on the recipient of the QOF, if it is transferred out of the trust, or become the responsibility of the trust if it continues as the holder of the QOF. Caution: There is an instance where the transfer of QOF assets at death can become an inclusion event for purposes of federal taxes. This instance can occur if the QOF investor identified a specific amount to be provided to an heir upon the investor’s death, say $1 million. If the executor for the estate knows a QOF investment is valued at $1 million and fulfills that specific bequest by transferring that investment to the heir, the act will trigger recognition of income on that investment. Anytime an IRD asset is passed on to satisfy a bequest of a specific dollar amount, acceleration of the income is triggered. To avoid this, you can pass on the OZ related investment by name instead of making a dollar amount bequest.  Lifetime transfer planning The preferred way to handle a transfer of a QOF asset during an investor’s lifetime is a transfer into an intentionally defective grantor trust (IDGT). In this type of trust, the grantor is responsible for paying taxes on the income the trust generates, but trust assets are not counted as part of the owner's estate. With an IDGT, the value of the grantor's estate is reduced by the amount of the asset transfer into the trust. The individual can gift or make a combined gift and sale of assets to the IDGT in exchange for a promissory note of some length, such as 10 or 15 years. The note will pay enough interest to classify the note as above market, but the underlying assets are expected to appreciate at a faster rate. The beneficiaries of the IDGT will receive assets that have grown without reductions for income taxes, which the grantor has paid. If structured properly, the IDGT can be an effective estate-planning tool allowing a person to lower his or her taxable estate while gifting assets to beneficiaries at a locked-in value. The trust's grantor can also lower his or her taxable estate by paying income taxes on the trust assets, essentially gifting extra wealth to the beneficiaries. Because of the ability provided by a QOF to shelter post-acquisition appreciation from capital gains after 10 years, these investments, when coupled with an IDGT, can provide a way to layer long-term transfer tax and income tax efficiency inside a multi-generational trust. The ability to exclude post-acquisition capital gains from gross income is a powerful planning tool when coupled with a trust that is excluded from the parent’s estate because the downside to transferring assets out of parent’s estate—the loss of the stepped-up basis at death—is off-set for QOF interests held by the trust for the requisite 10 years. For example, compare a 2019 gift of $5M of partnership units with zero tax basis into an IDGT versus $5M of capital gains deployed into a QOF, which is subsequently gifted to the IDGT.  Assume further a sale of both investments in 2030 for $10M.  In the case of the partnership units, the entire $10M will be subject to capital gains tax in 2030.  In the case of the QOF, the initial $5M of deferred gain will be subject to capital gains tax on 85% of the gain in 2026.  In year 2030, upon sale, however, the remaining $5M of appreciation avoids tax entirely because of the step-up on assets held ten years in a QOF.  With the QOF investment, one avoids the tax on $5.75M of capital gains. Using a tax rate of 20%, this represents a savings of $1.15M. Neither the termination of grantor trust status when the grantor dies nor the distribution by the trust to a beneficiary after the grantor’s death results in the inclusion of the originally deferred gain. In each instance, the OZ tax deferral and the potential for tax-free appreciation continue as a benefit for the recipient. However, termination of the grantor trust status during the lifetime of the grantor would be an inclusion event triggering recognition of the original deferred gain. Conclusion An investment in a QOF may be suitable for older investors when part of a sophisticated estate planning strategy. Investors should think of the QOF investment as “patient capital” or as a “generational asset,” as the tax-free appreciation of the QOF investment is available only after a 10-year hold. Historically, non-IRD assets received a great income tax result (via step-up when the owner dies) but a poor estate tax result (because fair market value is applied for estate tax purposes, rather than tax basis). If structured properly, the QOF gives the best of both worlds. As the result of the complexity of pairing QOF investments with trust instruments, investors should rely on the guidance of both their accountants and attorneys to properly structure a QOF with a trust to provide the maximum return with the least amount of tax liability for both the investor and their heirs.
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.

The significant income tax benefits afforded to opportunity zone (OZ) investors create numerous gift and estate tax planning considerations. How can a qualified opportunity fund investment work into your estate planning strategy?

Incentives Advisory 

Using opportunity zone investments to super charge estate planning

Authored by Christine Faris
As we move into the final quarter of 2019, Congress has proposed landmark legislation that would have significant impact in the areas of employee benefits and executive compensation. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 would expand opportunities to increase retirement savings by, for example, repealing the maximum age for IRA contributions, delaying the age for required minimum distributions to age 72, and requiring part-time employees to participate in their employer’s 401(k) plan. In addition, the Tax Cuts and Jobs Act enacted in December 2017 included many provisions that affect the tax treatment of executive compensation and employee benefits. With all of that said, the following topics of interest will be important for you to consider both for year-end tax planning and for 2020: 1. Health reimbursement arrangements (HRA): New HRA rules provide employers with additional flexibility in offering employee health coverage as well as more choice of coverage to employees without the previous requirement that the HRA be integrated with an employer-sponsored group health plan. This is accomplished by creating two new types of HRAs: individual coverage HRA and excepted benefit HRA. With an individual coverage HRA, HRA funds may be used to purchase individual health insurance coverage or Medicare. An employer may fund an excepted benefit HRA up to $1,800 per year to reimburse employees for excepted benefits such as dental and vision benefits.  2. Roth recharacterization: Converting a traditional IRA to a Roth IRA provides the taxpayer with the opportunity to hedge against future higher income tax rates. At the time of the conversion to the Roth IRA, the taxpayer pays income tax on the value of the account, and future increases in value would not be subject to income tax enabling the taxpayer to have tax-free withdrawals in retirement. A Roth recharacterization reverses the Roth IRA conversion. There are several reasons for doing this:  a.      The value of investments in the converted Roth IRA declined since the date of the conversion  b.      Higher-than-expected taxable income and/or the additional income from the Roth IRA conversion resulted in a bump to a higher federal income tax bracket  c.      Taxable income in retirement will likely be lower than expected, reducing the potential benefits of a Roth IRA’s tax-free distributions  d.      Not enough cash on hand to pay the taxes resulting from the conversion

A taxpayer may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, however, the taxpayer cannot later unwind the conversion through a recharacterization.  3. Employer Credit for Paid Family and Medical Leave: The TCJA created a new general business tax credit for employers that voluntarily offer up to 12 weeks of paid family and medical leave annually to qualifying employees. The amount of the tax credit is 12.5% if the leave benefit amount equals 50% of normal pay. The credit increases in 0.25% intervals, up to a maximum of 25%. The credit is a specified credit that may reduce the alternative minimum tax. It is available to employers regardless of their number of employees. To qualify for this temporary credit, the employer must have a written policy and provide at least two weeks’ annual paid family and medical leave at a minimum of 50% of the employee’s wages. Unless extended by Congress, it applies only with respect to wages for an eligible family and medical leave paid in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2020. 4. Qualified transportation fringe benefits: Qualified transportation fringe benefits include qualified parking (parking on or near the employer’s business premises, or on or near a location from which the employee commutes to work by public transit) and the associated expenses, transit passes and vanpool benefits. A for-profit employer who offers its employees qualified transportation fringe benefits as pre-tax benefits is no longer allowed a corresponding tax deduction. A tax-exempt employer who offers these benefits may have a corresponding increase in its unrelated taxable income.  5. Bicycle commuting expenses: The TCJA also suspends the $20 per month employee tax exclusion for reimbursement of bicycle commuting expenses. Therefore, employer reimbursements for bicycle commuting expenses are taxable to the employee and subject to payroll and income tax withholding. This provision is effective for amounts paid or incurred between Jan. 1, 2018, and Dec. 31, 2025. 6. Executive compensation (for-profit companies): Effective Jan. 1, 2018, the TCJA expanded the scope of the $1 million executive compensation deduction limitation. In addition to publicly traded corporations, it now applies to nonpublic companies with publicly traded debt. The covered employee group was broadened to include the CEO and CFO and the three highest-paid officers (other than the CEO or CFO), and to eliminate the last-day-of-the-year requirement. Under the new rules, once a covered employee, always a covered employee regardless of employee status or death. The TCJA also eliminated the performance-based compensation exception to the $1 million deduction limitation. However, the changes to the performance-based exception will not apply to compensation payable under a written binding contract which was in effect on Nov. 2, 2017, provided the contract is not materially modified after that date.  7. Executive compensation (tax-exempt organizations): The TCJA added a new excise tax at the corporate tax rate of 21% on excess executive compensation by applicable tax-exempt organizations as well as nonpublic companies that have public debt. The tax is applicable to remuneration paid to a covered employee that exceeds $1 million in a tax year and excess parachute payments upon separation from employment. This new law is intended to put tax-exempt organizations in the same position as publicly held companies already subject to limits on the deductibility of high compensation amounts paid to certain executives. It also puts nonpublic companies that have public debt in an equivalent situation to that of public companies. The excise tax does not apply to remuneration made to licensed medical professionals (physicians, nurses and veterinarians), but only to the extent compensation payments relate directly to performance of medical services.  8. Student loan repayments: The Student Loan Repayment Acceleration Act was recently introduced in the Senate and would exclude employer contributions to student loan repayments of up to $10,000 from an employee’s gross income. Congress is also considering the Employer Participation in Repayment Act, which would expand the employer education assistance program by permitting employers to contribute up to $5,250 tax-free to an employee’s student loans.

In 2018, the IRS approved an employer’s proposal to offer a student loan repayment program as a component of its 401(k) plan. The ruling essentially allows employees to receive the equivalent of matching contributions without electing to make their own contributions. Although the ruling is binding only for the employer that sought the ruling, it does provide welcome guidance to employers seeking to provide employees with the opportunity to save for retirement on a tax-deferred basis while repaying their student loans. Employers who wish to add this feature may want to request their own private letter ruling from the IRS, especially if the design differs from the provisions approved in the ruling. In addition, employers that use a prototype or volume submitter plan document are limited by features that may be added and may have to change to an individually designed plan until the IRS issues regulatory guidance.
 9. Expansion of multiple employer plans (MEPs): Treasury and the Department of Labor are working together to expand the use of MEPs, also known as association retirement plans. This would enable groups of smaller employers to band together to offer a retirement plan to their employees while sharing the cost and responsibility with other employers. The IRS recently issued proposed regulations that would allow the removal of a noncompliant employer without the risk of plan disqualification when one of the participating employers fails to follow the tax-qualification requirements.  10. Hardship withdrawals from retirement plans: Hardship withdrawals from 401(k) and 403(b) retirement plans no longer require the six-month prohibition on deferrals after a participant takes a hardship withdrawal. Also eliminated is the requirement that participants first take a loan from their plan account before taking a hardship withdrawal. These provisions could help an individual with a financial need continue saving for retirement without interruption as well as not having to forgo the employer matching contribution. These provisions are effective for plan years beginning on or after Jan. 1, 2019. 11. Distributions from retirement plans: A distribution from a qualified retirement plan, such as a 401(k), is taxable in the year of receipt, regardless of whether it is subsequently cashed in a later year or not cashed at all. The taxpayer’s failure to cash the distribution check has no effect on the plan administrator’s tax withholding obligation or liability for payment of that tax, nor does it alter the reporting obligation. The distribution, including the amount of the check and the amount withheld, must be reported on Form 1099-R for the year in which it was issued. 12. Rollover of retirement plan loans: Participants who have a loan outstanding at the time of plan termination or severance from employment have a longer time frame to pay the amount of an outstanding plan loan to another qualified plan or an IRA in order to accomplish a tax-free rollover of the loan amount. If the unpaid loan balance were not repaid, it would become a taxable distribution subject to the 10% additional income tax on early distributions, unless an exception applies.  13. Required minimum distributions (RMDs): Congress is considering increasing the mandatory age to begin required minimum to age 72 from age 70½.  14. FICA taxation rules for nonqualified deferred compensation: We are still seeing numerous instances where employers are not taking into account deferred compensation for FICA at the appropriate time. Pursuant to the FICA “special timing rule,” deferred compensation is required to be taken into account at the later of the time of the performance of services and at such time when there is no longer a “substantial risk of forfeiture” in entitlement to the benefit — this is usually at such time as the benefit becomes vested. This, of course, is in contrast to the Self-Employment Contributions Act (SECA) rules that generally require the deferred compensation to be taken into account upon actual or constructive receipt of the benefit. Employers should focus on making sure deferred compensation, even if not distributed, is taken into account correctly in accordance with the special timing rule in a setting that requires payment of FICA taxes. 15. Proposed regulations interpreting deferred compensation rules: In the summer of 2016, the Department of the Treasury issued proposed regulations interpreting the deferred compensation rules, which apply to tax-exempt organizations and governmental subdivisions. These proposed regulations primarily address issues attendant with the granting and administration of “ineligible plans of deferred compensation” and are slated to become effective until following such time that final regulations have been issued. As of the time of the preparation of this letter, we have seen no activity by the current administration that would suggest these regulations will be finalized anytime soon. Therefore, for the present, we are regarding these proposed regulations as an indication of the IRS’ interpretation of certain income tax issues attendant with the application of these rules and nothing more. 16. Employer-provided vehicles: The IRS issued proposed regulations aimed at assisting employers in determining the valuation of employer-provided vehicles. The proposed regulations incorporate a higher base value of $50,000 as the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules effective for the 2018 calendar year — a substantial increase from the prior limitations of $12,800 for the vehicle cents-per-mile valuation method and $16,500 for the fleet-average valuation method. This effectively increases the number of methods that can be used in calculating the noncash compensation attributable to the personal use of employer-provided vehicles. Regardless of the valuation method chosen by an employer, the only way to distinguish between employment-related business driving and personal driving is on the basis of mileage. As such, it is recommended employers require an employee maintain a contemporaneous record with detailed entries for employment-connected business usage of the auto (time, place, mileage, business purpose). 17. Retirement plans and related tax incentives, making sense of the alternatives: Forty-five years ago, Congress passed legislation making long-term savings a priority for individual taxpayers. Over the intervening years, legislation has been enacted to expand saving plans for retirement to include healthcare and education expenses, among others. The following table summarizes the available tax-deferred savings programs:
The complexity of the current system is baffling to many taxpayers. Some savings accounts have caps on permissible savings, others have phase-out thresholds based on income levels and some seem to be duplicative. Additional changes to retirement savings plans may be forthcoming as Congress considers the aforementioned SECURE Act, which would repeal the maximum age for making tax-deductible contributions to IRAs and increase the beginning age for required minimum distributions to 72 from 70½, among many other changes. Stay tuned. View more insights in the 2019 year-end tax planning letter >  Download the 2019 year-end tax planning letter > -- 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.

Finally figure out how employee benefits and executive compensation were affected by tax reform? Well, hang on, because Congress is looking at new legislation that could cause another seismic shift. Check out our round up of benefits and compensation considerations for year-end and into 2020. 

Advantage

2019 year-end tax letter: employee benefits and executive compensation update

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.

Dental Practices

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

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How not to ruin the next generation

Working with the IRS during a pandemic

Understanding today’s global economy and opportunity it presents

The value of asset allocation and portfolio diversification in tumultuous times

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

Estate and gift planning amid COVID-19

Using opportunity zone investments to super charge estate planning

2019 year-end tax letter: employee benefits and executive compensation update

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

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