Category Archives: Blog

2021-22 Tax Planning Guide

September 14, 2021

Our 2021-22 Tax Planning Guide is now available. Although most of the provisions of the Tax Cuts and Jobs Act (TCJA) went into effect a few years ago, that 2017 law is still having a significant impact on planning for income and deductions. Our guide covers many topics, including tax planning basics, retirement and estate planning. If you have questions or if you would like additional information on any of the topics covered, please contact us.

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What is a QOF?

July 13, 2021

Anyone selling a business interest, real estate or other highly appreciated property could get hit with a substantial capital gains tax bill. One way to soften the blow — though it ties up the funds long term — is to “roll over” the gain into a qualified opportunity fund (QOF). This article explains how QOFs work and their potential benefits.

A QOF is an investment fund, organized as a corporation or partnership, designed to invest in one or more Qualified Opportunity Zones (QOZs). A QOZ is a distressed area that meets certain low-income criteria, as designated by the U.S. Treasury Department.

Currently, there are more than 9,000 QOZs in the United States and its territories. QOFs can be structured as multi-investor funds or as single-investor funds established by an individual or business. To qualify for tax benefits, at least 90% of a QOF’s funds must be QOZ property, which includes:

QOZ business property. This is tangible property that’s used by a trade or business within a QOZ and that meets certain other requirements.

QOZ stock or partnership interests. These are equity interests in corporations or partnerships, with substantially all their assets in QOZ property.

Final regulations define “substantially all” to mean at least 70%.

What are the Benefits?

If you recognize capital gain by selling or exchanging property, and you reinvest an amount up to the amount of gain in a QOF within 180 days, you’ll enjoy several tax benefits:

• Taxes will be deferred on the reinvested gain until the earlier of December 31, 2026, or the date you dispose of your QOF investment.
• There will be a permanent reduction of the taxability of your gain by 10% if you hold the QOF investment for at least five years — and an additional 5% if you hold it for at least seven years.
• If you hold the QOF investment for at least 10 years, you’ll incur tax-free capital gains attributable to appreciation of the QOF investment itself.

The only way to obtain these benefits is to first sell or exchange a capital asset in a transaction that results in gain recognition. You then would reinvest some or all of the gain in a QOF. You can’t simply invest cash.

You or your heirs will eventually be liable for taxes on some or all of the original gain. Consider ways to avoid those taxes, such as holding the original property for life or doing a tax-free exchange.

How do you Report QOF Gains?

In February 2020, the IRS issued guidance on reporting gains from QOFs. It gives instructions on how to report the deferral of eligible gains and how to include those gains when the QOF investment is sold or exchanged.

Taxpayers who defer eligible gains from such property (including gains from installment sales and like-kind exchanges) by investing in a QOF must report the deferral election on Form 8949, “Sales and Other Dispositions of Capital Assets,” in the deferral tax year. And taxpayers selling or exchanging a QOF investment must report the inclusion of the eligible gain on the form.

We Can Help!

The rules surrounding these QOFs are complex. Give us a call to further explore the idea.

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The Proper Care and Feeding of Your S Corporation

June 3, 2021

The S corporation continues to be a popular entity choice, combining the liability protection of a corporation with many of the tax benefits of a partnership. But these benefits come at a price: S corporations must comply with strict requirements that limit the number and type of shareholders, prohibit complex capital structures, and impose other restrictions. This article explains the requirements and advantages of an S corporation status and what needs to be done to avoid S corporation termination.

Advantages of S Corporation Status

Like a traditional corporation, an S corporation shields its shareholders from personal liability for the corporation’s debts. At the same time, it provides many (though not all) of the tax benefits associated with partnerships.

The most important tax benefit is that an S corporation, like a partnership, is a “pass-through” entity, which means that all of its profits and losses are passed through to the owners, who report their allocable shares on their personal income tax returns. This allows S corporations to avoid the double taxation that plagues traditional C corporations, whose income is taxed at the corporate level and again when distributed to shareholders.

S corporations, unlike partnerships, lack the flexibility to allocate profits and losses among their shareholders without regard to their relative capital contributions. But S corporations have one important advantage over partnerships: Shareholders need not pay self-employment taxes on their shares of the profits, provided they receive “reasonable” compensation.

S Corporation Requirements

To qualify as an S corporation, Form 2553 — Election by a Small Business Corporation — must be filed with the IRS. In addition, the corporation must:

• Be a domestic (U.S.) corporation,
• Have no more than 100 shareholders (certain family members are treated as a single shareholder for these purposes),
• Have only “allowable” shareholders (see below),
• Have only one class of stock (generally, that means that all stock confers identical rights to distributions and liquidation proceeds; differences in voting rights are permissible), and
• Not be an “ineligible” corporation, such as an insurance company, a domestic international sales corporation or a certain type of financial institution.

Allowable shareholders include individuals, estates and certain trusts. Partnerships, corporations and nonresident aliens are ineligible. A trust is an allowable shareholder if it’s domestic and qualifies as one of the following:

• A grantor trust, provided it has only one “deemed owner” who’s a U.S. citizen or resident and meets certain other requirements,
• A testamentary trust established by a shareholder’s estate plan,
• A voting trust,
• A qualified subchapter S trust (QSST) — that is, one 1) that distributes all current income to a single beneficiary who’s a U.S. citizen or resident, and 2) for which the beneficiary files an election with the IRS, or
• An electing small business trust (ESBT) — to qualify, 1) all of the trust’s potential current beneficiaries (PCBs) must be eligible S corporation shareholders or nonresident aliens (NRAs), 2) no beneficiaries may purchase their interests, and 3) the trustee must file a timely election with the IRS. Generally, PCBs are persons who are entitled to distributions or may receive discretionary distributions.

Be aware that grantor and testamentary trusts are eligible shareholders for only two years after the grantor dies or the trust receives the stock.

Avoiding Termination

Preserving S corporation status requires due diligence. Among other things, you should:

• Continually monitor the number and type of shareholders, scrutinize the terms of any trusts that hold shares, and ensure that QSSTs or ESBTs have filed timely elections,
• Include provisions in buy-sell agreements that prevent transfers to ineligible shareholders,
• If shares are transferred to an ESBT, make sure all PCBs are eligible shareholders or NRAs, and
• If shares are held by grantor or testamentary trusts, track the two-year eligibility period and make sure trusts convert into QSSTs or ESBTs or transfer their shares to an eligible shareholder before the period expires.

Also, avoid actions that may be deemed to create a second class of stock, such as making disproportionate distributions.

Don’t Take Your Eye Off the Ball

If your business is organized as an S corporation, it’s critical to monitor your shareholders and activities continually to avoid inadvertent termination of your company’s S corporation status. At worst, termination means the loss of substantial tax benefits. At best, it means going through an expensive, time-consuming process to seek relief from the IRS and, if successful, have your S status restored retroactively. Contact us with any business entity questions.

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