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Painter and Associates Blog

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1031 Exchange

Under Section 1031 of the United State Tax Code when property held for productive use in a trade or business or for investment is exchanged for the same kind of property, the capital gains can be deferred. This transaction is called an exchange because one property is being exchanged for another.

Taxes are allowed to be deferred because legislators reasoned that when a property owner has reinvested the proceeds from one sale into another property, no funds have been generated on which to levy taxes: The taxpayer's investment is still the same, only the form has changed.

As with many tax questions, claiming a 1031 exchange can be complicated, and you must properly comply with several requirements. Section 1031 requires that a qualified intermediary (QI) facilitate the property exchange. The QI cannot be the taxpayer or anyone the taxpayer has a business or family relationship with previous to the exchange. However, an attorney and/or law firm may qualify.


To ensure you are deferring taxes lawfully and not evading taxes, which is against the law, consult with an attorney at Painter & Associates. Our attorneys can help with the following issues with 1031 exchanges:

  • Which types of property qualify for a “like-kind” exchange
  • Which types of business can make the exchange
  • If the purpose of the exchange is valid
  • The time limits on how many days a property can be relinquished before the replacement property must be purchased
  • What happens when you sell the relinquished property before buying the replacement property, and vice versa
  • The kinds of exchanges that are allowed: simultaneous exchange; delayed exchange; reverse exchange; and personal property exchange

Again a 1031 Exchange defers the payment of taxes; it is not a tax-free transaction; however, there may be substantial tax advantages and estate planning advantages to using a 1031 exchange. Our attorneys can advise you on the tax consequences of exchanging property versus selling it and realizing capital gains immediately.

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2018 Tax Law Changes and Impact on Operating Agreement

 If your LLC has two or more partners and is taxed as a partnership, it is highly advised to consult an attorney to determine whether or not you should amend your LLC’s Operating Agreement in response to changes in the tax law that have gone into effect.

The Bipartisan Budget Act of 2015 (“BBA”) significantly changed the rules governing IRS audits of all business entities taxed as partnerships. The purpose of these changes is, of course, to make it easier for the IRS to audit partnerships with its existing resources.

However, despite these changes, the BBA allows small partnerships to elect to opt-out of the new audit rules and reduce the liklihood of an audit. In order to be eligible to opt-out of these new rules, the partnership must have less than 100 partners and consist only of “eligible partners,” i.e., individuals, estates of deceased partners, S corporations, C corporations, and foreign entities that would be treated as C corporations under existing law. Ineligible partners such as other partnerships, single-member LLCs, estates that are not estates of a deceased partner, trusts, and any other person that holds an interest on behalf of another person will make an entity ineligible to opt-out of new rules; hence consideration must now be given as to whether the “ineligible partners” should become members of an LLC in the first place.

Painter & Associates anticipate that most of our existing LLC clients that are eligible to opt-out will want to do so and, therefore, must amend their Operating Agreement. Also, consideration at this time should be given as to whether Operating Agreements should bar Ineligible Partners from becoming members of their LLCs.

If a partnership that does not opt-out or or otherwise subject to the new rule, is audited and required to pay additional tax for a prior tax year (the “Reviewed Year”), Members may find themselves paying more (or less) than their pro-rata share of the partnership’s tax for the Reviewed Year—especially if Members have left, been added, or had their percentage interests change since the Reviewed Year.

However, under the new law, if the LLC elects to “push-out” the partnership’s tax liability for an Adjusted Year to the Members—including former Members who were Members during the Reviewed Year—the Members will pay their share of the tax based on their respective percentage interests for the Reviewed Year.

LLCs that desire to “push-out” a Member’s tax liability must amend their Operating Agreements to ensure that Members during a Reviewed Year are contractually bound to pay their share of the additional tax, whether or not those Members are current Members or not, or whether their percentage interests have changed in the interim.

Also an audit in prior tax years can cause accounting inequities that are unfair to the current partners; thus, it may be desirable for an LLC taxed as a partnership to amend its Operating Agreement to permit the Manager to take action that can offset or remedy any inequities.

Finally, and perhaps most significantly, the BBA requires that business entities taxed as partnerships appoint a “Partnership Representative” in place of the “Tax Matters Partner.” Under the new law, the Partnership Representative has more authority to take tax positions on behalf of the entity than the Tax Matters Partner did. To address this, LLCs taxed as partnerships should consider amending their Operating Agreements to describe the extent of the Partnership Representative’s authority and to provide direction to the Partnership Representative as to the tax positions he or she should take (e.g., whether to “opt-out” or “push-out” as described above).

If your LLC is taxed as partnership, contact Painter & Associates, LLC to discuss whether or not your Operating Agreement should be updated for your protection.

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Qualified Business Income Deduction

One of the most significant additions to the Tax Cuts and Jobs Act (“TCJA”) was the addition of the Deduction for Qualified Business Income.  TCJA substantially lowered the corporate tax rate from 35% to just 21%. Many members of Congress, however, realized businesses run by smaller companies including sole-proprietors, independent contractors and pass-through businesses (such as LLCs and partnerships) should also receive lower taxes.

Thus, Congress implemented the Qualified Business Income Deduction.  Initially, this deduction was limited to “non-personal” service business.  Ostensibly, this made ineligible certain industries such as law, accounting, health, brokerage services, financial services and real estate agents and brokers, to name a few.

To address this issue, Congress at the last minute, allowed these "personal" service businesses to take advantage of the Deduction for Qualified Business Income subject to phase outs at certain income levels. 

Under TCJA, the exception provides that if the business owners’ taxable income is less than $157,500 for single filers and $315,000 for married filers, then the taxpayer is eligible for the full 20% deduction.  Above this level, the deduction is phased out over the next $50,000 in taxable income for single persons and $100,000 for married filers. Even then, a second exception may be available subject to 50% of W2 wages paid by the business or 25% of the W2 wages paid by the business plus 2.5% of the depreciation costs basis of tangible property at end of year.

 

Please contact Painter & Associates to review and set-up your business so that you can take advantage of the TCJA.

 

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The Tax Cuts and Jobs Act- Implications for Homeowners Part III

The Tax Cuts and Jobs Act (“TCJA”) signed into law by President Trump, was the largest overhaul of the U.S. Tax Code since 1986.  These changes impacted almost all aspects of American life including home ownership. Over the last few posts we have detailed what has stayed the same and what has changed. In this post, we specifically look at those changes that may have an impact on those going through a divorce and how to account for changes in child credits, child deductions and spousal support.

   

Child Credit

TCJA increased the child tax credit to $2,000 from $1,000 for children 16 years of age and younger. The income phase out was significantly increased to $500,000 for all filers.

Student Loan Deduction

Retains current law of allowing deductibility of loan debt up to $2,500 subject to phase outs for income.

Spousal Support

TCJA eliminates spousal support deductions for all divorces and separations executed after December 31, 2018.  Also, any changes to pre-2019 agreements after December 31, 2018 can lose its deduction unless the modification agreement specifically states that the TCJA does not apply to the post-2018 modification.

Of course, for pre-2019 spousal support to qualify for an above the line deduction specific requirements must be met such as:

  1. Spousal support contained in written agreement
  2. Payment must be to or on behalf of spouse/ex-spouse
  3. Payment cannot be state to not be Alimony
  4. Ex-spouse cannot live in same house or file jointly
  5. Payment must be made in cash or cash equivalent
  6. Cannot be Child Support
  7. Payer’s return must include Payee’s social security number
  8. No obligations for Payments to Continue after Recipient’s Death

Contact Painter & Associates to help you navigate the TCJA and its implication of your divorce and dissolution

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The Tax Cuts and Jobs Act- Implications for Homeowners and Real Estate Investors Part II

The Tax Cuts and Jobs Act (“TCJA”) signed into law by President Trump, was the largest overhaul of the U.S. Tax Code since 1986.  These changes impacted almost all aspects of American life including home ownership. Over the next few posts we will detail what has stayed the same and what has changed.

Deduction for State and Local Taxes

In one of the more controversial provisions of the TCJA, an itemized deduction of up to $10,000 is allowed for payment of state and local property, income and sales tax.  The limit applies to both married and single filers.  Initially, the bills in both the House and Senate removed this deduction altogether; however, it was re-inserted with caps on the deduction in the final bill.

This provision has potential substantial impact on homeowners in areas with high property taxes. 

Standard Deduction/Personal Exemptions

The standard deduction has been increased to $24,000 for those married and filing jointly and $12,000 for single filers.  This was done in large part to simplify the tax returns.  It also eliminates in many cases the need for itemized deductions except for those persons who can itemize over $12,000/$24,000 respectively.

With this increase, the personal exemptions have been repealed.

Mortgage Credit Certificates

The tax credit remains.

 

Contact Painter & Associates to help you navigate the TCJA.

 

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The Tax Cuts and Jobs Act- Implications for Homeowners and Real Estate Investors

The Tax Cuts and Jobs Act (“TCJA”) signed into law by President Trump, was the largest overhaul of the U.S. Tax Code since 1986. These changes impacted almost all aspects of American life including home ownership. Over the next few posts we will detail what has stayed the same and what has changed.

Exclusion for Sale of Principal Residence and Deduction of Mortgage Interest.

To begin with, the TCJA retains the exclusion of gain on a sale of a principal residence. This allows taxpayers to exclude the first $250,000 ($500,000 if married filing jointly) from the sale of a principal residence so long as eligibility requirements are met.  Both the original House and Senate would have changed this.

Further, the TCJA still allows deductions for mortgage interest, but the final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after December 14, 2017. Also, homeowners that refinance mortgage debt after 12/14/17 up to $1million can still deduct mortgage interest so long as the new loan does not exceed the loan being refinanced.

The TCJA also repeals the allowance for a deduction of interest paid on home equity debt through 12/31/25; however, the deduction is still allowed if the loan proceeds are used to substantially improve the home itself.  In other words, interest on home equity loans to finance the purchase of cars, education, etc. is no longer deductible.

For second homes, interest remains deductible subject to the $1million/$750,000 limits set forth above.

These and other changes to the U.S. Tax Code have significant implications on numerous everyday legal issues our clients encounter, including real estate transactions, probate, estate planning, divorce and business planning.

Our next blog post will address the deduction for State and Local Taxes, Standard Deduction and Personal Exemptions. Contact Painter & Associates to help you navigate the TCJA.

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How Will the Tax Cuts & Jobs Act Affect Your Business?

Although highly-debated, controversial and sometime without a policy justification the new Tax Cuts and Jobs Act signed into law by President Trump lets owners of certain passthrough entities deduct 20% of specific types of income earned by those businesses.  In doing so, Congress was attempting to mollify concern that only big corporation, "C-corps," would benefit from tax cuts. 

However, not all income is deductible for passthrough entities.  For example, "reasonable compensation" paid to owners is not eligible for deduction. Rather, only earnings from capital is meant to get relief.  Further, passive income is also ineligible for the deduction to stop passthroughs from being used as a tax-shelter. 

Moreover, if an owner's taxable income is too high, the deduction becomes subject to several limitations.  For instance, the deduction phases out for joint filers with taxable income between $315,000 and $475,000; for individuals $157,500 and $207,500.  Additionally, taxable income above these limits coming from firms providing services such as law, accounting, medicine and other professional activities is not eligible for the deduction.  

New to the bill, however, is a 20% deduction for qualified dividends paid by real estate investment trusts, qualified publicly traded partnership income and cooperative dividends.  Additionally, special rules apply to agricultural or horticultural cooperatives. 

Experts are interested into how the IRS will police and define these new laws and rule.  Several have already commented that tax planning may include setting up numerous companies to shift profits and income to the more tax-favored business.  One way is to have the operations split from the physical location and have the operations side of the business pay above average market-price in rents to a newly formed real estate investment trust.

As businesses, accountants and lawyers delve into and work with the new law, many new tax planning strategies will develop.  Work with an attorney at Painter & Associates to develop the best tax planning strategy for your business.

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Trump's Tax Cuts and Jobs Act Junks Alimony Deduction

President Trump's tax overhaul bill reaches just about every aspect of American life-including divorce actions.

The new tax law scraps a 75-year old provision that allows a deduction for alimony payments.  Currently, the spouse paying alimony is allowed to deduct such payments from taxes and the spouse receiving such payments must include monies received through alimony as taxable income. This deduction allowed for strategic financial planning for those persons going through divorce to attempt to cope with the expenses in running two separate households.   

Under President Trump's new tax reform bill, beginning with separation agreement signed on or after January 1, 2019 the deduction for alimony payments will no longer be allowed.   

Thus, if you are thinking about divorce and spousal support may be an issue and you want to take advantage of the spousal support deduction, you have until December 31, 2018 to enter into a separation agreement to take advantage of the deduction.   

Of course, if you are the spouse that may be receiving alimony payments, there is incentive to wait until after January 1, 2019 to enter into a separation agreement.

Note, however, that spousal support may effect child support payments as calculated under Ohio law.   

To effectively evaluate the financial implications of this change in the tax law, contact an attorney at Painter & Associates to assist you with this and all other matters related to divorce law. 

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