Proposed Rules on Qualified Opportunity Zones

Date October 22, 2018
Categories
Article Authors
HBK CPAs & Consultants

The Internal Revenue Service has just released its first installment of the much anticipated proposed rules relating to Qualified Opportunity Zones (QOZ) that will help investors use a new tax incentive created by 2017 Tax Cuts and Jobs Act. QOZs are underdeveloped areas that have been certified by the federal government allowing for special tax breaks to promote investment in these nearly 9,000 U.S. regions. These proposed rules would govern investments made in QOZs to provide various tax advantages to investors in two ways. First, capital gains placed in certified opportunities zone funds will be deferred and not be taxed through the 2026 tax year, or until the time in which the investment is sold, whichever occurs first. Second, gains from these QOZ investments are “permanently” shielded from income taxes if such investments are held for at least 10 years. Otherwise, gains from the initial investments in qualified opportunity funds will be discounted by up to 15% if held for 7 years and 10% for 5 years. The proposed rules state that any type of capital gains including from marketable securities are eligible for this preferential tax deferral. Additionally, the opportunity to invest in these qualified opportunity funds is available to individual taxpayers, business entities, REITs and estates and trusts. The proposed rules also clarify how to calculate substantial improvements in the property. and The rules state that taxpayers do not need to include the value of the land for the purpose of calculating how much the law requires they spend on qualifying renovations, or refurbishments of the property. For example, if a taxpayer paid $10 million for a warehouse and land, with the building being valued at $500,000, the fund must spend at least what the building is valued, or $500,000 as opposed to the total $10 million purchase price, in renovations. This exclusion of land value for the purposes of determining substantial improvements made within a QOZ applies to both tangible property, such as equipment, and realty. This will create an increased importance as to the qualified valuations performed on property located in within the boundaries of a QOZ. Additionally, investors will have 180 days from the sale of stock or businesses to place the proceeds from those sales in opportunity funds to qualify for these tax breaks. The Internal Revenue Service (IRS) also stated in these proposed rules that funds have 30 months from when the money is placed in them to perform the required renovations. The Treasury also created a 70-30 rule that measures whether a given business counts as having “substantially all” of its assets in an opportunity zone. Under that rule, as long as 70% of a business’s tangible property is in a zone, the business doesn’t lose its ability to qualify for the tax break. In the proposed regulations, Treasury does ask for input on a couple of technical questions, such as what happens if a business abandons property in an opportunity zone and how to treat movable property, such as vehicles, that may possibly spend part of their time outside the QOZ. While these rules have provided some of the answers to questions on the minds of taxpayers, some additional items still remain unanswered.
  • Will grace periods will be permitted related to the proceeds of large scale asset sales?
  • Will the emerging cannabis and gambling industries will be permitted benefit from these tax advantages?
  • What benefits will be able to be yielded by lessees of QOZ properties?
  • Will partnerships and partners need to invest as a singular unit or if partners are permitted to invest their portions of asset sales individually into their own qualified opportunity zones?
The Treasury is expected to announce additional guidance on opportunities zones before the end of the year and are currently under review by the IRS. In the meantime, taxpayers can rely on the proposed regulations while the IRS solicits comments and considers changes in the final version. Since this is a developing area, HBK will continue to provide updates on the QOZ issue as it becomes available. Committing capital to a QOF is an option with many variables and it is a decision investors/taxpayers should weigh carefully. If there are any questions on this, please contact your local HBK team representative to discuss further. For more details or other related questions, please contact a member of the HBK Tax Advisory Group.
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IRS Issues New Guidance on the Deductibility of Business Meals

Date October 4, 2018
Article Authors

UPDATE: PLEASE NOTE THAT THE IRS ISSUED CHANGES TO THIS RULING. PLEASE SEE THE NEW ARTICLE DATED OCTOBER 2, 2020 FOR DETAILS ON THE UPDATES.

When the Tax Cuts and Jobs Act (TCJA) was issued, we noted that there were several areas of the new law that needed clarification. One of those addressed the deductibility of expenses for meals and entertainment. While the TCJA clearly denied deductions for entertainment, the treatment of the cost of meals associated with entertainment was not as well defined.

Now the IRS has issued Notice 2018-76 (The Notice) indicating that taxpayers will be allowed to deduct half the cost of meals, but only if they meet the following requirements:

  1. The expense is an ordinary and necessary expense under §162(a) that is paid or incurred during the taxable year in carrying on any trade or business;
  2. The expense is not lavish or extravagant for the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present when the food or beverages are purchased;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bill, invoice, or receipt. The entertainment disallowance rule may not be circumvented by inflating the amount charged for food and beverages.

The Notice provides the following three examples regarding meals associated with entertainment:

Example 1. Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B. The baseball game is entertainment, and the cost of the game tickets is a nondeductible entertainment expense. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2. Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages. The basketball game is entertainment, and the cost of the game tickets is a nondeductible entertainment expense. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment nondeductible entertainment expense. Therefore, C may not deduct any of the expenses associated with the basketball game.

Example 3. Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. As in Example 2, the basketball game is entertainment, and the cost of the game tickets, other than the cost of the food and beverages, is nondeductible. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense. Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.

As with most broad legislation, sections of the new tax law can be confusing. What’s clear is that your returns for 2018 will have to comply with all provisions of the law as interpreted by the IRS. If you have questions or concerns about the new law and how it might affect you, please contact your HBK tax advisor.

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Hurricane Victims May Qualify for Tax Relief

Date September 19, 2018
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HBK CPAs & Consultants

The IRS is granting more time for eligible victims of Hurricane Florence to complete certain tax-related tasks, including filing tax returns, making tax payments and other time-sensitive tasks. This relief is available to those in areas designated by the Federal Emergency Management Agency as qualifying for individual assistance.

Currently, this includes the North Carolina counties of Beaufort, Brunswick, Carteret, Craven, New Hanover, Onslow, Pamlico and Pender.

For details and an updated list, please visit: IRS Tax Relief Information

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Ohio Domicile Tax Updates: The “Bright Line” Tests

Date July 19, 2018
Categories

House Bill 292, which was signed into law on June 14, 2018, implements changes to Ohio’s “bright line” residency tests. Taxpayers that have abodes in Ohio or spend time in the state, but claim non-residency status will be impacted by these changes.

Effective for tax years beginning January 1, 2018, the following taxpayers will now be presumed NOT to be an Ohio resident under the revised “bright line” tests:

  1. An individual is presumed to NOT be domiciled in Ohio for the entire taxable year if the individual has less than 213 contact periods with the state. These contact periods in Ohio do not need to be consecutive. A “contact period” occurs when a person whose abode is outside Ohio spends time in Ohio during two consecutive days while away overnight from that abode.
  2. The taxpayer files the Ohio Form IT-DA with the tax commissioner by October 15 following the close of the tax year. This form is an affidavit that states the taxpayer is not an Ohio resident and meets the qualifications under penalty of perjury.
  3. The taxpayer has to have at least one abode outside of Ohio that they are not using for business purposes subjecting to depreciation.
  4. The taxpayer does not have a valid current Ohio driver’s license.
  5. The taxpayer does not claim any homestead exemptions on their home in the state of Ohio.
  6. Finally, the taxpayer is not receiving reduced tuition at a state institution/college due to being an Ohio resident.

These changes have been enacted as a result of the 2015 Ohio Supreme Court Case, Cunningham v. Testa. The Ohio Supreme Court reversed the determination by the Board of Tax Appeals (BTA) and found that the taxpayer failed to rebut the presumption of Ohio domicile in light of filing an Ohio homestead exemption in the same year he had filed an affidavit of non-Ohio domicile.

Not meeting these bright line tests does NOT necessarily preclude someone from being a nonresident; however, the taxpayer would need to prove otherwise that they were in fact not domiciled in Ohio.

The presumptions of being domiciled or not being domiciled in Ohio does not apply to an individual changing domicile from or to Ohio during a year. If you were to change domicile from Ohio to “Other State” in the middle of a year, you will be considered to be domiciled in Ohio for that portion of the tax year before the change and not domiciled after the change. The law is not clear on the standards to be applied for a change in domicile in a year. The number of days for the presumptive test is not prorated. At this point, we expect Ohio will apply a facts-and-circumstances test to a part year.

Previously, the presence of depreciation on an out-of-state abode, having an Ohio driver’s license, or claiming a homestead were not deal breakers for the presumption of non-Ohio residency. However, taxpayers that have been treating themselves as nonresidents may now be at risk of damaging this presumptions and putting their status as nonresidents in question. Anyone in this situation should contact their advisor immediately to implement changes that would help mitigate these risks.

The following actions can be viewed as evidence of domicile. Due to the changes in House Bill 292, and the results of previous case law, the following recommendations are all appropriate actions to take when changing residency as opposed to simply relying on “bright line” tests.

  1. File a “Other State” Declaration of Domicile with the local County Clerk’s office
  2. Rent a home in “Other State”
  3. Buy a home in “Other State”
  4. Do not claim homestead exemption for Ohio residence
  5. Spend less than 213 days in Ohio
  6. Maintain a log of time spent out of Ohio
  7. Obtain “Other State” driver’s license and surrender Ohio license
  8. Register automobiles in “Other State”
  9. Notify the Ohio Board of Elections that you are no longer eligible to vote
  10. Change voter registration to “Other State” and actually vote
  11. File for “Other State” homestead exemption when purchasing a “Other State” home
  12. File Federal income tax returns using the “Other State” address
  13. Have “Other State” bank accounts
  14. Close Ohio safe deposit boxes
  15. Open “Other State” safe deposit box
  16. Change Last Will and Testament to show a “Other State” resident
  17. If Ohio social clubs and country clubs are maintained, change the memberships to nonresident status
  18. Join “Other State” country club and social clubs, if desired
  19. Have credit card bills addressed to “Other State”
  20. Establish a business office in “Other State”
  21. Consider establishing a business entity under “Other State” law for your business activities
  22. Mail payroll checks to “Other State”
  23. Have some doctors in “Other State”
  24. Use “Other State” domicile on passports, contracts, deeds, and hotel registrations
  25. Use “Other State” address for correspondence, credit card charges, Social Security Administration and for all other purposes

Many taxpayers with residencies in Ohio may have questions related to these updates. For more information, please contact Nicholas Demetrios, CPA, MBA and Principal in the Tax Advisory Group of HBK CPAs & Consultants at NDemetrios@hbkcpa.com or 330-758-8613.

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An Individual Taxpayer’s Guide to Tax Reform

Date July 10, 2018
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HBK CPAs & Consultants

The 2018 Tax Cuts and Jobs Act, the first major tax overhaul in over three decades, will impact different households in different ways. Two of the most talked about changes brought about by tax reform involve the increase in the standard deduction and the elimination of the personal exemption. While these changes are independently significant, viewing them together will help you understand their overall effects.

Standard Deduction Increase
Most notably, the 2018 tax reform law increases the standard deduction to $12,000, $18,000, and $24,000 for “single,” “head-of-household” and “married filing jointly” filers, respectively. This is great news for taxpayers who claimed the standard deduction in years past. The almost doubling of the 2017 standard deduction will decrease their taxable incomes by $5,650, $8,650 or $11,300, depending on their filing status.

However, taxpayers itemizing deductions in excess of the new threshold amounts will not be able to capitalize on the increases. The large pool of Americans itemizing deductions that are greater than the prior standard deduction but less than the new standard deduction may in fact be negatively impacted – and the negative effects tie directly to the elimination of the personal exemption.

An End to Exemptions
Prior to 2018, tax filers could decrease their taxable income by $4,050 for each dependent. The Tax Cuts and Jobs Act eliminates that personal exemption deduction. The change will affect certain households substantially, while others will not be affected. Consider the following examples:

  • John is a single man with no dependents who has been claiming the standard deduction. For 2018, he will see an increase in his standard deduction of $5,650 and a decrease in his personal exemption of $4,050. In total, these changes will net him a $1,600 decrease in taxable income.

    John is positively affected by these two tax reform changes.

  • Jack and Mary file “married filing jointly” and have two dependents. In years past, they have itemized deductions at $20,000. For 2018, Jack and Mary once again have $20,000 in deductions, which does not meet the requirement for itemizing. Therefore, they will have to take the new standard deduction of $24,000. But they will lose $16,200 in personal exemptions: a net $12,200 increase in taxable income.

    Jack and Mary are negatively affected by these two tax reform changes.

Use the following charts to determine, based on your 2017 deductions, how the first two changes of the tax reform could affect your household for the 2018 tax year*.

Single 1 exemption 2 or more exemptions
STANDARD Positive effect Negative effect
Married Filing Joint 2 exemptions 3 or more exemptions
STANDARD Positive effect Negative effect
Married Filing Joint 2 exemptions 3 or more exemptions
Itemized over $15,900 Negative effect Negative effect
Married Filing Joint 2 exemptions 3 or more exemptions
Itemized between $12,700 and $15,900 Positive effect Negative effect
Single 1 exemption 2 or more exemptions
Itemized over $7,950 Negative effect Negative effect
Single 1 exemption 2 or more exemptions
Itemized between $6,350 and $7,950 Positive effect Negative effect

*Figures are based solely on the standard deduction and exemption changes and do not take other tax reform changes into account.

Recommendations
If you have itemized in years past, but will now benefit from the standard deduction, there are some things to consider:

  1. Reconsider your reason for charitable donations:
    Everyone loves a cheerful giver, but if you have been donating to charitable organizations just to get a tax benefit, you may want to reconsider.
  2. Unreimbursed employee expenses:
    If you have unreimbursed job travel, union dues or job expense costs, consider asking your employer to reimburse these costs. While you may have accumulated these costs in the past for a tax benefit, you will not receive the benefit in 2018 if you take the standard deduction. Additionally, the Tax Cuts and Jobs Act eliminates miscellaneous itemized deductions, subject to a “2 percent floor.” (You can deduct certain expenses – unreimbursed job expenses, investment expenses, tax preparation fees, etc. – that exceed 2 percent of your adjusted gross income.) This may lead taxpayers with significant miscellaneous expenses who have previously itemized deductions to take the standard deduction in 2018.
  3. No need to prepay:
    In an effort to increase itemized deductions, you may have prepaid real estate taxes in years past. Under the standard deduction, there would be no incentive to prepay those items in 2018.

Other considerations
Child Tax Credit Changes
As noted earlier, taxpayers with multiple dependents are most negatively affected by the personal exemption elimination. To offset this disadvantage, the new law increases the child tax credit from $1,000 to $2,000. The Tax Cuts and Jobs Act also created a $500 credit that can be taken for any non-child dependent. A dependent must be under the age of 17 to be considered a “child” for child tax credit purposes. The income phase out for this credit does not start until $200,000 of taxable income for single taxpayers and $400,000 for married taxpayers filing jointly. Additionally, parents can receive up to $1,400 as a refund if the credit is larger than their federal income tax liability.

It is important to remember that while the standard deduction and exemption changes affect taxable income, the child tax credit decreases, dollar for dollar, the tax that you owe.

Other Itemized Deduction Limitations
If you are trying to determine whether you will be itemizing or taking the standard deduction for 2018, you will want to consider two additional Tax Cuts and Job Act changes.

  1. State and Local Tax Cap: Under the tax reform, taxpayers can only deduct $10,000 in state and local income.
  2. Mortgage Interest Deduction: If you purchased a home after December 16, 2017, you can only deduct the interest on up to $375,000 (single) or $750,000 (married filing jointly) of mortgage debt. Additionally, most interest deductions on home equity debt have been eliminated.

Staying informed and making appropriate decisions during the tax year will help prepare you for tax time next spring. While it is beneficial to stay in the know, you don’t have to do it alone. An HBK tax advisor is ready to help guide you along the way with a personalized tax projection.

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