Minimum Wage Increases Are Being Considered Across the Country

Posted on February 21, 2019 by Debra Barcuch

The minimum wage remains a popular issue for legislators on a federal, state and local level. Recently, a bill was introduced in both the U.S. House and the U.S. Senate titled the “Raise the Minimum Wage Act of 2019.” Since 2009, the federal minimum wage has remained $7.25 per hour. However, many states and localities have increased their minimum wage rates above the federal minimum wage.

According to a fact sheet about the proposed law, under the bill, the federal minimum wage rate would gradually increase over the next six years to $15 per hour. It includes a provision that would adjust the federal minimum wage thereafter to median wage growth. The bill also proposes tipped employees receive the full federal minimum wage by eliminating the tip credit. Additionally, it proposes to repeal the sub-minimum wage rates currently allowed for youth workers and individuals with disabilities.

Illinois Law Passed

As Congress mulls over the federal minimum wage, states continue to examine their minimum wages. In Illinois, for example, Governor J.B. Pritzker signed a law on February 19 that would increase the minimum wage from $8.25 per hour to $9.25 per hour on January 1, 2020. The law provides annual increases until the minimum wage reaches $15 per hour on January 1, 2025. The legislation provides employers with 50 or fewer full-time equivalent employees a credit against tax withheld beginning January 1, 2020 and would be reduced beginning January 1, 2021. The bill also includes a penalty of $100 per employee for failure to maintain required records.

What’s Happening in Other States?

Meanwhile, some other states are considering increases or making changes. Here are some examples.

Texas. A bill has been introduced that would increase the minimum wage from $7.25 per hour to $15 per hour.

Arizona. Legislation introduced a bill that seeks to exempt baseball players from minimum wage requirements. It would align with a federal law that exempts minor league players from the federal minimum wage. The bill has had a second reading. Another bill proposes a youth wage equal to the federal minimum wage, currently $7.25 per hour, for a worker who is: 1) under age 22; 2) works no more than 20 hours per week or who works excessive hours of employment for irregular and intermittent periods, and 3) enrolled as a full-time student. Arizona’s current minimum wage is $11 per hour.

Arkansas. A bill proposes to exempt certain workers from the current state minimum wage of $9.25 per hour. The proposed legislation would exempt employers with fewer than 50 employees (currently, fewer than four employees). Additionally, the bill would exempt schools including public and private universities, not-for-profit organizations and exclude workers under age 18 from the minimum wage rate.

California. On February 11, the Pasadena City Council approved a minimum wage increase of $14.25 per hour for employers with 26 or more workers and $13.25 per hour for small employers (25 or fewer workers), effective July 1, 2019. The rate increases to $15 per hour ($14.25 per hour for small employers) on July 1, 2020, then $15 per hour for small employers on July 1, 2021. Thereafter, the ordinance requires the minimum wage to be adjusted annually based on the regional Consumer Price Index (CPI). The current Pasadena minimum wage is $12 per hour. The ordinance must be drafted and requires two readings prior to enactment.

Connecticut. Governor Ned Lamont announced a minimum wage increase among several proposals aimed at working families. Lamont’s plan would increase the minimum wage from $10.10 per hour to $11.25 per hour in 2020, with scheduled annual increases of $1.25 per hour until it reaches $15 per hour in 2023. The details of the proposal were submitted to the legislature along with the proposed budget.

Delaware. Legislation has been introduced that seeks to eliminate the training and youth minimum wage, beginning in 2020. Employers can currently pay a training wage to an employee who is 18 years old or older, during the first 90 consecutive calendar days of employment, at a rate up to 50 cents less than the state minimum wage rate. The current state minimum wage is $8.75 per hour.

Hawaii. The state is considering a minimum wage increase from the current $10.10 per hour. The House Committee on Labor & Public Employment has passed a bill that would increase the minimum wage to $11.75 per hour, effective January 1, 2020. The bill would also schedule $1 increases annually until the minimum wage reaches $17 per hour, beginning January 1, 2025. For employers that are required to provide health benefits and the employees who receive health coverage, the minimum wage would increase to $11.25 on January 1, 2020, then $12 per hour on January 1, 2021, and would increase 50 cents per hour annually until it reaches $14 per hour on January 1, 2025. Additionally, the minimum wage would thereafter be adjusted annually based on the CPI.

Idaho. Minimum wage legislation has been introduced and referred to the Ways and Means Committee. A bill would increase the minimum wage from $7.25 per hour to $8.75 per hour, effective July 1, 2019, then $10.50 per hour on July 1, 2020, and finally, $12 per hour on July 1, 2021. Thereafter, the minimum wage would increase on January 1 of each year adjusted according to the CPI. Cash tipped minimum wage would increase from $3.35 per hour to $7.35 per hour by July 1, 2021.

Kentucky. Proposed legislation would raise the minimum wage rate from $7.25 per hour to $8.20 per hour, effective July 1, 2019, with gradual scheduled increases until the minimum wage reaches $15 per hour on July 1, 2026. The bill would also raise the cash minimum wage for tipped employees and would allow local governments to establish minimum wage ordinances that exceed the state minimum wage.

Maryland. A bill proposes gradually raising the minimum wage rate to $15 per hour by July 1, 2023. In 2014, Maryland passed legislation that provided for a gradual increase to the current minimum wage rate of $10.10 per hour.

Michigan. In September 2018, a ballot initiative was approved and was headed to the November 6, 2018 booths that would increase the minimum wage from $9.25 per hour to $10 per hour, effective January 1, 2019. The initiative included scheduled annual increases until the minimum wage reached $12 per hour in 2022. A separate initiative was approved regarding paid leave. In response, the legislature passed a bill mirroring the initiative, which subsequently was amended in December 2018. The amended bill raised the minimum wage from $9.25 per hour to $9.45 per hour, effective March 29, 2019, with annual scheduled increases until the minimum wage reaches $12.05 per hour by 2030. State Senator Stephanie Chang formally requested that the Michigan Attorney General, Dana Nessel, review the constitutionality of the legislature’s “adopt and amend” method. Specifically, Chang argues, that under Article II, Section 9 of the Michigan Constitution, the legislature must either enact or reject an initiative petition and that an amendment is prohibited. Nessel has agreed to evaluate the request and has asked interested parties to submit written comments by March 6, 2019 to miag@mi.gov, ATT: Opinions Division, so that they may be considered in the evaluation.

Missouri. A bill has been introduced and read for a second time in the House that would repeal the minimum wage increase, which went into effect Jan. 1, 2019 as approved by voters. The current minimum wage is $8.60 per hour, previously $7.85 per hour.

Nevada. Governor Steve Sisolak, in his State of the State address, called upon state lawmakers to introduce legislation to increase the minimum wage from $8.25 per hour to an unspecified amount.

New Hampshire. Proposed legislation would increase the minimum wage from $7.25 per hour to $10 per hour, effective Jan. 1, 2020, and beginning Jan. 1, 2022, the rate would increase to $11 per hour for employers who offer at least 10 paid sick days to employees or $12 per hour for employers who don’t.

New Mexico. A bill proposes to increase the minimum wage from $7.50 per hour to $10 per hour on July 1, 2019. The minimum wage would increase to: 1) $11 per hour on July 1, 2020; and 2) $12 per hour on July 1, 2021. Thereafter, the minimum wage would receive a cost of living adjustment annually. The legislation would eliminate the tip credit for tipped employees.

North Dakota. Proposed legislation would prohibit cities, counties, townships, school districts, and other local governments from passing an ordinance that would require an employer to pay any or all of the employees a wage rate not otherwise required under state or federal law.

Pennsylvania. Governor Tom Wolf advocates raising the minimum wage from $7.25 per hour to $12 per hour effective July 1, 2019, with gradual 50 cent increases until the minimum wage reaches $15 per hour in 2025. Wolf noted that the state minimum wage hasn’t seen an increase in a decade. A proposed law has been introduced that would raise the cash minimum wage for tipped employees from $2.13 per hour to $3.95 per hour. Beginning July 1, 2020, the cash minimum wage would increase to the greater of 70% of state minimum wage or 70% the federal minimum wage.

Rhode Island. Governor Gina Raimondo, in her State of the State address, called for an increase to the minimum wage. Her proposal would increase the minimum wage from $10.50 per hour to $11.10 per hour on January 1, 2020.

South Carolina. The state currently doesn’t have a minimum wage law. A proposed law would provide a base minimum wage $8.75 per hour, effective January 1, 2020. It would increase to $9.75 per hour by 2021 and $10.10 per hour by 2022. It also provides for the state minimum wage to be adjusted annually based on the CPI.

Texas. A bill has been introduced that would increase the minimum wage from $7.25 per hour to $15 per hour.

Virginia. Proposed legislation that sought to increase the minimum wage from $7.25 per hour to $10 per hour, effective July 1, 2019 and gradually increase the minimum wage to $15 per hour by 2021 was defeated in the Senate. Additionally, a bill that sought to permit localities to pass local minimum wage ordinances was also defeated.

Wyoming. Proposed legislation, which sought to increase the minimum wage from $5.15 per hour to $8.50 per hour and called for scheduled annual increases of 25 cents per hour from July 1, 2019 until June 30, 2025, passed the House Labor committee but was defeated in the House.

Making Smart Mergers and Acquisitions under Today’s Tax Law

Posted on February 20, 2019July 22, 2024 by Debra Barcuch

Many businesses will pay less federal income taxes in 2018 and beyond, thanks to the Tax Cuts and Jobs Act (TCJA). And some will spend their tax savings on merging with or acquiring another business. Before you jump on the M&A bandwagon, it’s important to understand how your transaction will be taxed under current tax law.

3 Favorable TCJA Changes for Businesses

The Tax Cuts and Jobs Act (TCJA) contains several provisions that will lower federal income taxes for businesses. Here’s an overview of three pro-business changes.

1. Tax Rate Changes

The TCJA permanently reduced the corporate federal income tax rate to a flat 21% for tax years beginning after 2017.

For 2018 through 2025, the TCJA also lowered the individual federal income tax rates on income from pass-through business entities. These include sole proprietorships, limited liability companies (LLCs), partnerships and S corporations. For those years, the maximum individual federal rate is 37%. However, the 3.8% net investment income tax (NIIT) may also apply to passive business income recognized by individual taxpayers.

Important: The federal income tax rates are unchanged for long-term capital gains recognized by individuals. The maximum rate is 20%, but the 3.8% NIIT may also apply.

2. New Deduction for Income from Pass-Through Business Entities

For tax years beginning in 2018 through 2025, the qualified business income (QBI) deduction is potentially available to individual pass-through entity owners. The deduction can be up to 20% of an owner’s share of passed-through QBI. This break expires at the end of 2025, unless Congress extends it.

Numerous rules and restrictions apply to the QBI deduction. For example, above certain income levels, the deduction may be limited or eliminated for service businesses and businesses that haven’t paid enough in W-2 wages or invested enough in fixed assets. Contact your tax pro to determine whether you qualify for this tax break.

3. Expanded First-Year Depreciation Breaks

The TCJA allows 100% first-year bonus depreciation for qualifying property placed in service between September 28, 2017, and December 31, 2022. The bonus depreciation percentages are scheduled to gradually phase out as follows:

80% for property placed in service in calendar year 2023,
60% for property placed in service in calendar year 2024,
40% for property placed in service in calendar year 2025, and
20% for property placed in service in calendar year 2026.

Bonus depreciation is scheduled to expire at the end of 2026, unless Congress extends it.

Important: For certain property with longer production periods and aircraft, the bonus depreciation cutbacks are delayed by one year. For example, the 100% bonus depreciation rate applies to such property that’s placed in service before the end of 2023, and the 20% rate applies to property that’s placed in service in calendar year 2027.

In addition, the TCJA permanently increases the maximum Section 179 deduction to $1 million for qualifying property placed in service in tax years beginning in 2018. That amount will be adjusted annually for inflation.

The Sec. 179 deduction phaseout threshold has also been permanently increased to $2.5 million, with annual inflation adjustments.

For tax years beginning in 2019, the maximum deduction is $1.02 million, and the phaseout threshold is $2.55 million.

As under prior law, Sec. 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual allowance. There’s no separate limit for real property expenditures, so Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar.

Stock vs. Asset Purchase

From a tax perspective, a deal can be structured in two basic ways:

1. Stock (or ownership interest) purchase. A buyer can directly purchase the seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes. This is commonly referred to as a “stock sale,” although some sales may involve partner or member units.

The now-permanent flat 21% corporate federal income tax rate under the TCJA makes buying the stock of a C corporation somewhat more attractive for two reasons. First, the corporation will pay less tax and, therefore, generate more after-tax income. Second, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold. These considerations may justify a higher purchase price if the deal is structured as a stock purchase.

In theory, the TCJA’s reduced individual federal tax rates may also justify higher purchase prices for ownership interests in S corporations, partnerships and LLCs treated as partnerships for tax purposes. Why? The passed-through income from these entities also will be taxed at lower rates on the buyer’s personal tax returns. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and they could be eliminated even earlier, depending on future changes enacted by Congress.

2. Asset purchase. A buyer can also purchase the assets of the business. This may be the case if the buyer cherry-picks specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC (SMLLC) that’s treated as a sole proprietorship for tax purposes.

Under federal income tax rules, the existence of a sole proprietorship or an SMLLC treated as a sole proprietorship is ignored. Rather, the seller, as an individual taxpayer, is considered to directly own all the business assets. So, there’s no ownership interest to buy.

Important: In certain circumstances, a corporate stock purchase can be treated as an asset purchase by making a Section 338 election. Ask your tax advisor for details.

Divergent Objectives

Business buyers and sellers typically have differing financial and tax objectives. While the TCJA doesn’t change these basic objectives, it may change how best to achieve them.

Buyers typically prefer asset purchases. A buyer’s main objective is usually to generate sufficient cash flow from the newly acquired business to service any acquisition-related debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

For legal reasons, buyers usually prefer to purchase business assets rather than ownership interests. A straight asset purchase transaction generally protects a buyer from exposure to undisclosed, unknown and contingent liabilities.

In contrast, when an acquisition is structured as the purchase of an ownership interest, the business-related liabilities generally transfer to the buyer — even if they were unknown at closing.

Buyers also typically prefer asset purchases for tax reasons. That’s because a buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price.

Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets. Expanded first-year depreciation deductions under the TCJA make asset purchases even more attractive, possibly warranting higher prices if the deal is structured that way. (See “3 Favorable TCJA Changes for Businesses” at right.)

In contrast, when corporate stock is purchased, the tax basis of the corporation’s assets generally can’t be stepped up unless the transaction is treated as an asset purchase by making a Sec. 338 election.

Important: When an ownership interest in a partnership or LLC treated as a partnership for tax purposes is purchased, the buyer may be able to step up the basis of his or her share of the assets. Consult your tax advisor for details.

Sellers generally prefer stock sales. On the other side of the negotiating table, a seller has two main nontax objectives:

Safeguarding against business-related liabilities after the sale, and
Collecting the full amount of the sales price if the seller provides financing.

A seller may provide financing through an installment sale or an earnout provision (where a portion of the purchase price is paid over time or paid only if the business achieves specific financial benchmarks in the future).

Of course, the seller’s other main objective is minimizing the tax hit from the sale. That can usually be achieved by selling his or her ownership interest in the business (corporate stock or partnership or LLC interest) as opposed to selling the business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Important: Some, or all, of the gain from selling a partnership interest (including an interest in an LLC treated as a partnership for tax purposes) may be treated as higher-taxed ordinary income. Consult your tax advisor for details.

Balancing Act

When negotiating a sale, the buyer and seller need to give and take, depending on their top priorities. For example, a buyer may want to structure the deal as an asset purchase. Agreeing on a higher purchase price, combined with an earnout provision, may convince the seller to agree to an asset sale, which comes with a higher tax bill than a stock sale.

Alternatively, a seller might insist on a stock sale that would result in lower-taxed long-term capital gain. In exchange, the buyer might agree to pay a lower purchase price to partially compensate for the inability to step up the basis of the corporation’s assets. And the seller might agree to indemnify the buyer against certain specified contingent liabilities (such as underpaid corporate income taxes in tax years that could still be audited by the IRS).

Purchase Price Allocations

Another bargaining chip in asset purchase deals — including corporate stock sales that are treated as asset sales under a Sec. 338 election — is how the purchase price is allocated to specific assets. The amount allocated to each asset becomes the buyer’s initial tax basis in the asset for depreciation or amortization purposes. It also serves as the sales price for the seller’s taxable gain or loss on each asset.

In general, buyers generally want to allocate more of the purchase price to:

Assets that will generate higher-taxed ordinary income when converted into cash, such as purchased receivables and inventory, and Assets that can be depreciated in the first year under the expanded bonus depreciation and Sec. 179 deduction breaks. Buyers prefer to allocate less to assets that must be amortized or depreciated over relatively long periods (such as buildings and intangibles) and assets that must be permanently capitalized for tax purposes (such as land).

On the flip side, sellers want to allocate more of the purchase price to assets that will generate low-taxed long-term capital gains, such as intangibles, buildings and land. Tax-smart negotiations can result in allocations that satisfy both sides.

Need Help?

Buying or selling a business may be the most important transaction of your lifetime, so it’s critical to seek professional tax advice as you negotiate the deal. After the deal is done, it may be too late to get the best tax results.

Are You Harnessing the Power of Manufacturing Data?

Posted on February 15, 2019 by Debra Barcuch

Information is power. And today’s manufacturers are more informed — and powerful — than ever before. Owners and managers can assemble volumes of data, ranging from real-time information gleaned from machines and RFID readers on the plant floor to regular input from customer service and sales staff.

But data collection is only part of the story. Once you have all this information, what do you do with it? In broad terms, data analytics can be used to improve your business processes, refine operational efficiency and even transform your existing business model. Increasingly many manufacturers are investing large sums in analytics technology.

Upsides of Analytics

Let’s take a closer look at three specific ways analytics are likely to benefit manufacturers:

1. Enhanced cost efficiency.

Manufacturers have made great strides in reducing costs by implementing lean manufacturing and Six Sigma programs. Such approaches have enabled many companies to improve yield and quality while reducing variability and production process waste.

Nevertheless, certain manufacturing niches — for example, chemical and pharmaceutical companies — typically still experience significant variability due to production volumes and the complexity of their processes. These niches may need to take a more granular approach to identifying and correcting process flaws. Analytical tools, including ratio analysis and statistical trends, can help. Specifically, manufacturing managers may focus on historical processing data to understand relationships and patterns, then use the analysis to optimize production.

Companies may “slice and dice” real-time information from the plant floor, as well as performing sophisticated statistical assessments. For example, a biopharmaceutical manufacturer that produces two batches of a specific substance using identical processes might experience a yield variation of 50% to 100%. Such broad variability can affect both quality and quantity. However, the company can use targeted data analytics to identify key variables and enable it to eliminate waste and reduce production costs.

2. Improved productivity.

Data analytics can uncover unexpected or overlooked opportunities to maximize production efforts. Even if a manufacturer has been in business for decades and has seemingly exhausted opportunities for greater efficiency, management may find room for improvement by exploiting the information now at its disposal.

Management consulting firm McKinsey points to a mining company that discovered, from data collected from environmental monitoring and control systems, a positive correlation between worker productivity and oxygen levels in mine locations. Recognizing this factor, the company altered the oxygen levels in its underground mines, thereby increasing average yield by 3.7% over a three-month period. On an annual basis, this simple modification boosted profits by roughly $10 million to $20 million — without requiring any incremental capital investment.

3. Higher customer satisfaction.

For most companies, customer satisfaction is a top priority. However, before you can meet the needs of customers and earn their long-term loyalty, you must obtain information about customer practices and preferences.

Online surveys or questionnaires can be used to collect data from customers, and then the results can be analyzed and shared with members of the management team. It’s important to identify similarities and differences between customers. Although you can’t satisfy all of the people all of the time, you can adapt enough to meet the needs of most customers and engender broad support for your brand.

For example, German automaker BMW uses big data to analyze input from manufacturing outlets and dealerships around the world. Before full production of a car begins, BMW tests its prototypes, identifies any problems through analytics (a single prototype might have more than 15,000 data points) and makes necessary adjustments. As a result, BMW enjoys a reputation for manufacturing luxury cars that include features that customers appreciate (like laser cruise control and in-vehicle infotainment systems) and that cost less to produce and require fewer repairs.

Surviving and Thriving

Manufacturing is a competitive industry. Surviving and thriving requires your company to seize opportunities and implement reasonable cost-saving measures. It’s critical that you collect and analyze data — and use it to change your production processes, as necessary. Talk to your financial advisor and consult technology experts about how your company can profit by using the latest data analytics tools.

How Construction Firm Owners Can Make Better Use of Their Time

Posted on February 12, 2019 by Debra Barcuch

There’s a construction business commodity that’s incredibly important but often in short supply. Despite needing more of this resource, companies can’t buy it because it’s not for sale. It’s time.

Busy owners often have trouble managing time properly. In fact, the ultimate failure of some construction businesses can be traced to poor time-management habits. Even if you think you allocate time effectively, there’s probably room for improvement. After all, when you can’t get more of something, you need to make the best use of what you have.

4 Best Practices

Review these four simple and practical time-management practices and consider adopting them:

1. Delegate, delegate, delegate.

Delegation is the most important theme in time management and is, therefore, worth repeating. Letting go, especially if you tend to micromanage every aspect of your business, is hard to do. But if you allow others to pitch in, you can focus your time on the most important aspects of the job.

Delegation isn’t simply a matter of assigning crew managers to knock off tasks on your to-do list. It also involves training and mentoring so that both you and the managers feel comfortable when responsibilities are handed over.

The risk of poor delegation is that tasks won’t be performed to your expectations and you’ll be tempted to claw them back. Not only is this demoralizing for managers, but it’s a waste of your time. Try to set aside the mantra “if you want something done right, you’ve got to do it yourself,” and recognize that different people may accomplish goals differently.

2. Set priorities.

It’s not always easy to identify what’s truly “urgent” and what can wait. Often, what seems to be extremely important at first glance can be postponed, at least for a while. Consider establishing a system to label activities that warrant your immediate attention and those that are important, but not critical.

For example, you might allocate tasks to lists labeled “top priority,” “second priority” or “third priority.” Pay attention to where you’re spending precious time. If you find yourself continually diving into the third group while the top priority list is full, you’re probably not using time efficiently. You may even be harming your company.

3. Don’t procrastinate.

Are you the type of person who waits until the last minute to accomplish tasks? Maybe this behavior has worked for you in the past, or you believe that you work better under pressure. For most procrastinators, however, such bad habits eventually catch up with them and harm the quality of their work.

Look deep inside to understand what drives your procrastination. It may not simply be laziness. It’s possible you’re afraid of disappointing clients, workers or other stakeholders. Or perhaps you’re in the wrong business.

Be honest about the reasons for your procrastination and then try to fix them by setting small goals. For instance, aim to cross off three items on your top priority list each day. Gradually increase the number of items until you feel you’re using your time productively.

4. Block out distractions.

Distractions can also trip up contractors trying to make the most of their time, for example:

Technology in the form of email, texts and social media accounts. Consider dealing only with work-related communications during business hours, and forward less-important messages to your managers to handle. Let friends and family members know when they shouldn’t contact you (unless there’s an emergency).
Meetings that waste time and are counterproductive. Before you sit down, ensure that the meeting is, in fact, necessary, set a firm agenda for it and conclude the meeting as soon as you’ve covered the agenda items.
Recreational habits such as watching TV or playing video games. Everybody needs occasional breaks, but you should restrict sports-watching and gaming to 15 or 30 minutes stretches, then force yourself to get back to work.

Thanks to new technologies, it’s possible to automate some tasks — such as allocating costs to your accounting system and getting job-site status reports — so that they don’t take up as much of your time.

Find What Works for You

For most people, effective time management is personal. What works for one construction business owner might not be effective for another. But if you’re struggling to meet completion dates and your habits are negatively affecting clients, you owe it to your yourself and your company to tackle the time-management issue head-on.

IRS Offers QBI Deduction Safe-Harbor Rule for Rental Real Estate

Posted on February 12, 2019 by Debra Barcuch

The IRS recently issued guidance on the new deduction for up to 20% of qualified business income (QBI) from pass-through entities under the Tax Cuts and Jobs Act (TCJA). It aims to clarify when the QBI deduction is available for income from rental real estate enterprises.

The QBI deduction is allowed only for income from a business. But the term “business” isn’t defined in the statutory language. When the TCJA became law, it was unclear whether a rental real estate activity could count as a business for QBI deduction purposes. Here’s how the new guidance helps clarify the issue.

Defining a Business under the QBI Regulations

What does the term “trade or business” mean for QBI deduction eligibility purposes? It refers to an activity that’s a trade or business under Section 162 of the Internal Revenue Code, which allows deductions for business-related expenses.

Unfortunately, determining what constitutes a trade or business for Sec. 162 purposes requires parsing old court decisions. Under case law, a rental activity will generally be a Sec. 162 trade or business unless the property owner just collects the rent without doing much else, such as under a triple net lease arrangement.

However, IRS regulations stipulate that the licensing of tangible or intangible property that doesn’t qualify as a Sec. 162 trade or business can still be treated as a trade or business for QBI deduction purposes. How? The property must be rented or licensed to a trade or business conducted by the individual or a pass-through entity that’s commonly controlled.

Basics of the QBI Deduction

The QBI deduction is potentially available to eligible noncorporate owners of pass-through business entities for tax years beginning in 2018 and extending through 2025. The deduction is scheduled to disappear after 2025, unless Congress extends it.

For QBI deduction purposes, pass-through entities are defined as:

Sole proprietorships,
S corporations,
Single-member limited liability companies (LLCs) with one owner that are treated as sole proprietorships for tax purposes,
Partnerships, and
LLCs that are treated as partnerships for tax purposes.

The QBI deduction is complex and involves a number of rules. For example, the deduction:

Is only available to individuals, estates, and trusts. (We refer to all three as “individuals” to keep things simple.)
Doesn’t reduce an individual’s adjusted gross income (AGI). In effect, it’s treated the same as an allowable itemized deduction.
Doesn’t reduce net earnings from self-employment for self-employment tax purposes.
Doesn’t reduce net investment income for purposes of the 3.8% net investment income tax (NIIT).

Income from the trade or business of being an employee doesn’t count as QBI. Also excluded from QBI are reasonable salaries collected by S corporation shareholder-employees and guaranteed payments received by partners (or LLC members treated as partners for tax purposes) for services rendered to partnerships (or LLCs) or for the use of capital by partnerships (or LLCs).

Important: The QBI deduction can also be claimed for up to 20% of an individual’s income from qualified real estate investment trust (REIT) dividends and up to 20% of qualified income from publicly traded partnerships (PTPs).

Potential Limitations

Above specified income levels, the QBI deduction for income from an eligible business can’t exceed the greater of:

50% of W-2 wages paid by the business, or
25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified depreciable property used in the business.

In addition, the QBI deduction is phased out for income from specified service businesses. Examples include doctors, lawyers, accountants, actuaries, actors, singers, consultants, athletes, investment managers, stock traders and any other trade or business where the principal asset is the reputation or skill of one or more of its employees.

For 2018, these limitations are phased in when the business owner has taxable income (calculated before any QBI deduction) above certain levels. These income limits are indexed annually for inflation. Here are the income-based phase-in thresholds for 2018 and 2019:

	2018 Phase-In Range	2019 Phase-In Range
Married filing jointly	$315,000-$415,000	$321,400-$421,400
Married filing separately	$157,500-$207,500	$160,725-$210,725
Other taxpayers	$157,500-$207,500	$160,700-$210,700

These limitations are phased in over a taxable income range of $50,000, or $100,000 for married couples who file joint returns.

Under another limitation, an individual’s allowable QBI deduction can’t exceed the lesser of:

20% of QBI from qualified businesses plus 20% of qualified REIT dividends plus 20% of qualified publicly traded partnership (PTP) income, or
20% of the individual’s taxable income calculated before any QBI deduction and before any net capital gain amount (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).

New Guidance for Rental Real Estate Enterprises

The IRS recently issued Notice 2019-7 to clarify when the QBI deduction can be claimed for income from rental real estate enterprises. The notice includes a safe-harbor rule for determining whether a rental real estate enterprise can be treated as an eligible business for QBI deduction purposes.

If a rental real estate enterprise fails to qualify for the safe-harbor rule, it can still be treated as a business for QBI deduction purposes if it meets the general definition of a business set forth in the QBI regulations. Unfortunately, that definition isn’t very clear. (See “Defining a Business under the QBI Regulations” above.)

For purposes of eligibility for the safe-harbor rule, a rental real estate enterprise is defined as an ownership interest in real property held for the production of rents and may consist of an ownership interest in multiple properties.

To rely on the safe-harbor rule, the individual or pass-through entity must own the interest directly or through an entity that’s disregarded for federal income tax purposes. Such entities include single-member LLCs that aren’t treated for tax purposes as separate entities apart from their owners.

Taxpayers must either treat:

Each property held for the production of rents as a separate enterprise, or
All similar properties held for the production of rents as a single rental real estate enterprise.

Commercial and residential real estate can’t be treated as part of the same enterprise. Taxpayers also aren’t allowed to vary their treatment of properties from year to year, unless there’s a significant change in facts and circumstances.

Eligibility Requirements

To be eligible for the safe harbor, the taxpayer must pass an hours-of-service test. For tax years beginning before January 1, 2023, at least 250 hours of rental services must be performed each year in the enterprise.

For tax years beginning after December 31, 2022, the 250-hour test can be met in any three of the five consecutive tax years that end with the current tax year. But if the enterprise has been held for less than five years, the 250-hour test must be met for each post-2022 tax year.

For tax years beginning after December 31, 2018, eligible taxpayers must maintain separate books and records for each rental real estate enterprise to keep track of each enterprise’s income and expenses. Taxpayers must also maintain contemporaneous records (including time reports, logs, or similar documents) to establish:

Hours spent on rental services for the enterprise, and
Descriptions of all rental services performed, including the dates and who performed the services.

For purposes of meeting the hours-of-service test, rental services include:

Advertising to rent or lease real estate,
Negotiating and executing leases,
Verifying information contained in prospective tenant applications,
Collecting rents,
Managing daily operations,
Performing routine maintenance and repair of property,
Purchasing materials, and
Supervising employees and independent contractors.

Rental services can be performed by owners, employees, agents and independent contractors. Rental services do not include financial or investment management activities, such as:

Arranging financing,
Procuring property,
Studying and reviewing financial statements or reports of operations,
Planning, managing or constructing long-term capital improvements, and
Traveling to and from properties.

Real estate used as a residence by the taxpayer (including an owner or beneficiary of a pass-through entity) for any part of a tax year isn’t eligible for the safe-harbor rule. Real estate rented or leased under a triple net lease also isn’t eligible. With a triple net lease, the tenant or lessee, in addition to paying rent and utilities, agrees to pay taxes, fees and insurance, and to be responsible for property maintenance.

Ready, Set, Go

The Notice 2019-7 guidance on the eligibility of rental real estate enterprises for the QBI deduction isn’t final. But it can be relied upon until final rules are issued by the IRS. Meanwhile, taxpayers should be aware that complying with the recordkeeping requirements in Notice 2019-7 may be a challenge. Your tax advisor can help you set up procedures to meet the challenge.

Should You Switch Your Business to C Corporation Status?

Posted on February 12, 2019 by Debra Barcuch

Thanks to the Tax Cuts and Jobs Act (TCJA), the federal income tax rate on C corporations is now a flat 21%, for tax years beginning in 2018 and beyond. Under prior law, C corporations were subject to graduated tax rates ranging from 15% to 35%. This is a permanent change, as long as Congress doesn’t reverse it.

By comparison, the maximum federal income tax rate for an individual taxpayer’s income from sole proprietorships and so-called “pass-through” entities (including partnerships, limited liability companies and S corporations) has been reduced to 37% under the TCJA. Starting in 2026, the individual federal income tax rates are scheduled to return to the pre-TCJA levels (which maxed out at 39.6%).

Based on these tax rate considerations, what’s the optimal structure for your business now? Many business owners are asking if they should switch to C corporation status. The answer varies from business to business. But there’s more to consider than just federal income tax rates. And C corporations also have certain tax disadvantages that you need to understand before you can decide.

Double Taxation

Income earned by a C corporation can potentially be taxed twice:

At the corporate level, and
At the shareholder level when corporate profits are paid out as taxable dividends.

Under current law, dividends received by individual shareholders and trusts and estates are taxed at a maximum federal rate of 20%. But dividends have been taxed at much higher rates in the past. And there’s no guarantee that the tax rate on dividends won’t be higher in the future, if Congress changes the tax law.

In addition, dividends can be hit with the 3.8% net investment income tax (NIIT). This effectively raises the maximum federal rate to 23.8% under current law.

Double taxation can also arise indirectly if you sell your C corporation shares for a profit. The corporation’s income is taxed once at the corporate level and undistributed profits can be indirectly taxed again at the shareholder level — in the form of capital gains tax when your shares are sold.

Under current law, the maximum federal income tax rate on long-term capital gains from shares held for more than one year is 20%. However, the 3.8% NIIT may also apply.

The double taxation threat generally makes it a bad idea to use a C corporation to own appreciating assets, such as real estate and patents. When the corporation sells an appreciated asset, it can trigger tax at the corporate level and again at the shareholder level if the sales proceeds are distributed as 1) dividends, or 2) liquidation proceeds if the company is disbanded after the asset sale. Double taxation can also arise if undistributed asset sale profits contribute to selling your shares for a gain.

So, the fundamental tax planning objectives for C corporations haven’t changed under the TCJA. Corporate business owners should still try to avoid double taxation, if possible.

Excess Accumulated Earnings

One way to avoid double taxation is to keep all corporate profits and gains inside the corporation. However, if you do that, your corporation runs the risk of being exposed to the accumulated earnings tax (AET).

The AET is a corporate-level tax assessed by the IRS (as opposed to a tax that is paid voluntarily with a corporate tax return). The IRS can assess the AET when:

Accumulated earnings exceed $250,000 for a C corporation (or $150,000 for a personal service corporation), and
The corporation can’t demonstrate economic need for the “excess” accumulated earnings.

When the AET is assessed, the rate is the same as the current maximum 20% federal rate on dividends received by individuals.

Important note: When a business owes the AET, it’s in addition to the regular corporate federal income tax.

Personal Holding Companies

The personal holding company (PHC) tax is another corporate-level tax that’s intended to prevent C corporations from avoiding double taxation by keeping all profits and gains inside the business. PHC status is determined annually.

So, a corporation can inadvertently fall into the PHC trap if it wasn’t considered a PHC in previous years. Essentially, the tax planning objective to avoid the PHC tax is to maximize the odds that your corporation will fail one of two tests — or both.

1. Income test.

To fail the income test, a corporation’s PHC income must be less than 60% of its adjusted ordinary gross income (AOGI).

PHC income equals the portion of AOGI that consists of dividends, interest income, royalties, annuities, rents, taxable distributions from estates and trusts, and income from personal service contracts.

A corporation’s ordinary gross income is income from operations minus 1) gains from the sale or disposition of capital assets (typically investment assets), and 2) Section 1231 assets (business assets that are taxed similarly to capital assets).

AOGI is ordinary gross income adjusted for certain rental property expenses, certain expenses allocable to revenues from oil and gas and mineral production, and other items.

2. Ownership test.

A corporation passes this test for a particular tax year if more than 50% of its stock value is owned directly or indirectly by five or fewer individuals during any part of the second half of that tax year.

Ownership by five or fewer individuals can potentially occur at any time during the second half of a year. So, the test can’t be based solely on year-end ownership percentages if there have been ownership changes during the second half.

Sometimes the ownership structure will result in the corporation passing the ownership test. When that happens, the shareholders may be able to adjust their ownership percentages during the first half in order to fail the test during the second half.

Most closely held C corporations will find it easier to fail the income test than the ownership test. And, if you fail the income test, you can ignore the ownership test.

A corporation that passes both tests is a PHC that’s currently taxed based on its undistributed PHC income. This is calculated by making various adjustments to the corporation’s regular taxable income and deducting any dividends paid. The remainder is subject to the 20% PHC tax.

Important note: When a business owes the PHC tax, it’s in addition to the regular corporate federal income tax bill.

The PHC tax is designed to encourage corporations that are classified as PHCs to pay out earnings as taxable dividends to shareholders. So, paying dividends can reduce or eliminate the tax.

However, those dividends must be reported as income on the shareholders’ tax returns, and probably taxed at the maximum 20% rate for individual shareholders. If so, it’s basically a wash from a federal income tax perspective. The trick is to avoid exposure to the PHC tax in the first place, usually by managing to fail the income test.

Should Your Business Operate as a C Corporation?

Be aware that, if you do choose to operate as a C corporation to take advantage of the new 21% corporate federal income tax rate, the IRS may target C corporations and give more attention to the AET and the PHC tax under the TCJA. So, avoiding these taxes and providing thorough documentation should be a key planning goal for corporations in the future.

There’s no one-size-fits-all business structure. The best structure depends on your circumstances. Your tax advisor can help you put the pieces of the puzzle together to derive the best answer for your specific situation.

2018 Income Tax Withholdings: Too Much, Too Little or Just Right?

Posted on February 9, 2019 by Debra Barcuch

Did you withhold enough money from your regular paychecks in 2018? If you withheld too little — or, didn’t pay enough estimated taxes if you’re self-employed — you could have an unpleasant surprise when you file your 2018 return.

Tax Law Changes

The Tax Cuts and Jobs Act (TCJA) has made several significant changes to the tax rules for individuals for 2018 through 2025. As a result, many taxpayers who previously itemized deductions are expected to claim the standard deduction, starting in 2018.

Specifically, the TCJA:

Almost doubles the standard deduction to $12,000 for single filers, $24,000 for joint filers, and $18,000 for heads of households.
Limits the itemized deduction for state and local taxes combined to $10,000 per year. This applies to any combination of 1) state and local property tax, and 2) state and local income tax (or state and local general sales taxes if you chose to deduct them instead of state and local income taxes). Previously, these amounts were fully deductible by most taxpayers who itemized deductions.
Potentially reduces the itemized deduction for mortgage interest. The interest deduction for new acquisition debt is limited to interest paid on the first $750,000 of debt, down from $1 million. (Pre-TCJA home acquisition debts of up to $1 million are grandfathered under prior law.) In addition, the deduction for interest paid on up to $100,000 of home equity debt is generally repealed (unless the home equity debt is used to buy, build or substantially improve the home secured by the debt, in which case it can be treated as acquisition debt subject to the $750,000 limit).
Eliminates itemized deductions for most miscellaneous expenses, such as investment advisory fees and unreimbursed employee business expenses.
Eliminates personal and dependent exemption deductions.
Increases the child tax credit — which generally applies to dependent children under age 17 — to $2,000, and the income phase-out thresholds to $200,000 for singles and heads of households and $400,000 for married couples who file jointly. So, many more households will be eligible for the increased credit.
Introduces a new $500 credit for other qualified dependents, including a qualifying 17- or 18-year-old, a full-time student under age 24, a disabled child of any age, and other qualifying (nonchild) relatives if all the requirements are met.

Withholding Basics

Employers are required to withhold taxes from the paychecks of employees. Likewise, self-employed individuals and retirees and others with investment income or retirement account withdrawals must make quarterly estimated payments.

If you fail to comply with the requirements, you could be liable for an estimated tax underpayment penalty, in addition to the tax liability.

The due dates for the quarterly estimated payments for a tax year are:

April 15,
June 15,
September 15, and
January 15 of the following year.

These dates are adjusted for weekends and holidays.

Safe Harbors

In general, you can avoid an estimated tax underpayment penalty using any one of these three safe harbor rules:

You pay at least 90% of the current year’s tax liability. This requires you to make a calculated guess of your current tax situation.
You pay at least 100% of the prior year’s tax liability. (Or you pay at least 110% of the prior year’s tax liability if your adjusted gross income for the prior year exceeded $150,000.) This safe harbor is usually the easiest one to use because you know the exact amount of your previous tax liability.
You pay at least 90% of the current year’s “annualized income.” The annualization method often works well for certain individuals, such as independent contractors, who receive most of their income on a seasonal basis.

IRS Relief

On January 16, the IRS announced that it will waive the estimated tax penalty for any taxpayer who paid at least 85% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90% to avoid a penalty.”We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” said IRS Commissioner Chuck Rettig. “We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

Contact Us

Contact your tax professional to discuss your specific situation and what you can due to remedy any shortfalls to minimize any penalties and interest. Your tax advisor can help you sort through the provisions of the TCJA that will affect your tax situation and address other withholding objectives in the coming years.

Could Medicare Premiums Lower Your Taxes?

Posted on February 5, 2019 by Debra Barcuch

Health care is a top concern for many Americans, especially people who are age 65 and older. While these individuals qualify for basic Medicare insurance, they may need to pay additional premiums to get the level of coverage they desire.

Those premiums can add up to a substantial annual sum, especially if you’re married and both you and your spouse are paying them. But the silver lining is that paying those premiums may help your tax situation.

Medicare Basics

For starters, many people are unclear about Medicare health insurance programs and options. Here’s a brief overview.

Medicare Part A.

This coverage is commonly known as hospital insurance. It covers inpatient hospital care, skilled nursing facility care and some home health care services.

Part A is free to people over age 65 who paid Medicare taxes for 40 or more quarters during their working years. They’re considered to have already paid their Part A premiums via Medicare taxes on wages and/or self-employment income.

People who didn’t pay Medicare taxes for enough months while working generally must pay for Part A coverage. The premium amount depends on how many quarters the individual paid taxes into the program.

If you paid Medicare taxes for 30 to 39 quarters during your working years, the 2019 Part A premium is $240 per month ($2,880 for the full year).
If you paid Medicare taxes for less than 30 quarters, the 2019 Part A premium is $437 per month ($5,244 for the full year).
The same Part A premiums apply to a spouse who paid Medicare taxes for less than 40 quarters while working.

Medicare Part B.

This coverage is commonly called Medicare medical insurance. It mainly covers doctors and outpatient services. Medicare-eligible individuals must pay monthly premiums for this benefit. The premium amount depends on the individual’s modified adjusted gross income (MAGI) for two years earlier.

For example, your 2019 premiums depend on your 2017 MAGI. This term refers to the adjusted gross income (AGI) amount plus any tax-exempt interest income.

To get Part B coverage, you have to pay a base premium, which is $135.60 per month ($1,627 for the full year) for 2019. Plus, higher income individuals must pay a surcharge.

For 2019, the Part B surcharge applies to:

Singles with 2017 MAGI in excess of $85,000, and
Married individuals who filed 2017 joint returns with MAGI in excess of $170,000.

Surcharges accrue on a graduated schedule. That is, the more MAGI you earned in 2017, the higher your Part B costs will be for 2019. Including the surcharge (if you owe it), the 2019 Part B monthly premiums for each covered person can be $189.60 ($2,275 for the full year), $270.90 ($3,251 for the full year), $352.20 ($4,226 for the full year), $433.40 ($5,201 for the full year) or $460.50 ($5,526 for the full year).

The maximum premium for 2019 applies to:

Singles with 2017 MAGI in excess of $500,000, and
Married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medicare Part D.

This option is for private prescription drug coverage. Base premiums vary depending on the plan you select. Higher-income individuals must pay a surcharge in addition to the base premium.

For 2019, the Part D surcharges depend on your 2017 MAGI, and they increase based on the same scale as Part B surcharges. The good news is that the 2019 surcharges are slightly lower than for 2018, except for those in the highest income category. The 2019 monthly Part D surcharge amounts for each covered person can be $12.40, $31.90, $51.40, $70.90 or $77.40.

Medigap.

Medicare Parts A and B don’t cover all health care expenses. Coverage gaps include co-payments, co-insurance and deductibles. So, some people opt to buy a so-called “Medigap” policy. This is private supplemental insurance that’s intended to cover some or all gaps.

In most states, insurance companies can sell only standardized Medigap policies that offer the same basic benefits. Some policies offer additional benefits for an additional cost. Premiums vary depending on the plan you select.

Important note: Before you travel outside the United States, find out whether Medicare will cover you while you’re away. Generally, the coverage is limited or nonexistent. If you don’t have coverage when traveling overseas, you can purchase supplemental policies to cover medical expenses incurred outside the United States, including evacuations.

Medicare Advantage.

Federal Medicare benefits may be provided through Part A and Part B coverage or through a so-called “Medicare Advantage plan” offered by a private insurance company. Medicare Advantage plans are sometimes called Medicare Part C.

Medicare pays the insurance company to cover your Medicare Part A and Part B benefits. The Medicare Advantage insurance company then pays your claims. A Medicare Advantage plan may also include prescription drug coverage (Medicare Part D), and it may cover dental and vision care expenses that are not covered by Medicare Part B.

Medicare Advantage Plans can include:

HMOs that only cover medical service providers that are in the plan’s network,
PPOs that encourage you to use in-network providers, and
Private fee-for-service plans that generally allow you to go to any medical service provider that accepts the plan’s payment terms.

When you enroll in a Medicare Advantage plan, you continue to pay Medicare Part B premiums to the government. You may need to pay a separate additional monthly premium to the insurance company for the Medicare Advantage plan, but some Medicare Advantage plans don’t charge an additional premium. The additional premium, if any, depends on the plan you select.

Important note: Medigap policies don’t work with Medicare Advantage plans. So, people who join a Medicare Advantage plan should discontinue their Medigap coverage.

Tax Deductions for Medicare Premiums

Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your individual tax return.

For 2018, you could deduct medical expenses only if you itemized deductions and only to the extent that total qualifying expenses exceeded 7.5% of AGI. For 2019, the itemized deduction threshold for medical expenses increases to 10% of AGI, unless Congress extends the 7.5% hurdle.

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2019, the standard deduction amounts are $12,200 for single filers, $24,400 for married joint-filing couples and $18,350 for heads of households. So, fewer individuals will claim itemized deductions.

However, having significant medical expenses (including Medicare health insurance premiums) may allow you to itemize and collect some tax savings.

Important note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.

For More Information

Contact your tax advisor if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. Your advisor can help determine the optimal overall tax-planning strategy based on your personal circumstances.

How to Combine Home Sale Gain Exclusion with a Like-Kind Exchange

Posted on February 2, 2019 by Debra Barcuch

Over the years, real estate has proven to be a lucrative investment for many households. And, in some parts of the country, current market values have surpassed levels seen prior to the 2008 financial crisis.

If your principal residence has appreciated significantly in value, you may be subject to capital gains tax when it’s sold. If your gain will be too big to be sheltered by the federal home sale gain exclusion, you might consider a tax-deferred Section 1031 like-kind exchange. However, this strategy isn’t for everyone, and executing it requires some proactive planning.

Timing is Critical

Substantial tax savings can be reaped on the sale of a highly appreciated principal residence when you can combine the home sale gain exclusion and Section 1031 like-kind exchange breaks. To cash in, a former principal residence must be properly converted into a rental property; then it must be swapped for replacement property in an exchange, as described in the main article.

This strategy can’t be done overnight. Without explicitly saying so, IRS guidance on like-kind exchanges has apparently established a two-year safe-harbor rental period rule. A shorter rental period might work, but it could be challenged by the IRS.

Time is also limited on the rental period. That is, a former principal residence can’t be rented out for more than three years after you vacate the premises. To qualify for the home sale gain exclusion, a property must have been used as the taxpayer’s principal residence for at least two years during the five-year period ending on the exchange date.

Avoid Tax with the Home Sale Gain Exclusion

If you have a capital gain from the sale of your principal residence, you may qualify to exclude up to $250,000 of that gain from your federal taxable income, or up to $500,000 of that gain if you file a joint return with your spouse.

To qualify for this exclusion, you must meet both the ownership and use tests. In general, you’re eligible for the exclusion if you’ve owned and used your home as your main residence for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different two-year periods. However, you must meet both tests during the five-year period ending on the date of the sale.

Generally, you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

Defer Tax with a Like-Kind Exchange

If your gain exceeds the $250,000/$500,000 home sale gain exclusion, you might consider combining the exclusion tax break with a Sec. 1031 like-kind exchange. With proper planning, you can accomplish a tax-saving double play with full IRS approval.

This strategy is available to homeowners who can arrange property exchanges that satisfy the requirements for both the principal residence gain exclusion break and tax deferral under the Sec. 1031 like-kind exchange rules. The kicker is that like-kind exchange treatment is allowed only when both the relinquished property (what you give up in the exchange) and the replacement property (what you acquire in the exchange) are used for business or investment purposes.

That means you must show that you have converted your former principal residence into property held for productive use in a business or for investment before you make the exchange. According to IRS guidance, such a conversion takes two years.

Important note: The Tax Cuts and Jobs Act disallows Sec. 1031 like-kind exchange treatment for exchanges of personal property (not real estate) that are completed after December 31, 2017. However, properly structured exchanges of real property completed after that date still qualify for tax-deferred Sec. 1031 treatment.

The Mechanics

According to the IRS, the principal residence gain exclusion rules must be applied before the Sec. 1031 like-kind exchange rules when you’re able to combine both breaks.

In applying the Sec. 1031 rules, “boot” (meaning cash or property other than real estate received in exchange for your relinquished former personal residence) is taken into account only to the extent the boot exceeds the gain that you can exclude under the home sale gain exclusion rules.

In determining your tax basis in the replacement property, any gain that you can exclude under the principal residence gain exclusion rules is added to the basis of the replacement property. Any cash boot that you receive is subtracted from your basis in the replacement property.

The gain that’s deferred under the like-kind exchange rules is also effectively subtracted from your basis in the replacement property. But that’s OK, because you’ve successfully deferred what would have been a taxable gain upon the disposition of your former personal residence.

Let’s Look at an Example

To illustrate how this strategy works, suppose you and your spouse have owned a home for several years. Your basis in the property is $400,000. But, it’s worth $3.3 million today, so you’re rightfully worried about the tax hit when you sell.

Rather than sell now, you decide to convert your home into a rental property. You rent it out for two years, and then exchange it for a small apartment building worth $3 million plus $300,000 of cash boot (paid to you to equalize the values in the exchange).

When the property is sold in 2021, you realize a $2.9 million gain on the exchange. That’s equal to the sale proceeds of $3.3 million (apartment building worth $3 million plus $300,000 in cash) minus your basis in the relinquished property of $400,000.

On your joint federal income tax return for the year of the exchange, you exclude $500,000 of the $2.9 million gain under the principal residence gain exclusion rules.

Because the relinquished property was investment property at the time of the exchange (due to the two-year rental period before the exchange), you can defer the remaining gain of $2.4 million under the Sec. 1031 like-kind exchange rules.

You aren’t required to recognize any taxable gain, because the $300,000 of cash boot you received is taken into account only to the extent it exceeds the gain you excluded under the principal residence gain exclusion rules. Since the $300,000 of boot is less than the $500,000 excluded gain, you have no taxable gain from the boot.

Tax results from the exchange can be summarized as follows:

Amount realized: $3,300,000

Less basis of relinquished property: ($400,000)

Realized gain: $2,900,000

Home sale gain exclusion: ($500,000)

Deferred gain under Sec. 1031: $2,400,000

Your basis in the apartment building (replacement property) is $600,000 ($400,000 basis of relinquished former principal residence plus $500,000 gain excluded under principal residence gain exclusion rules minus $300,000 of cash boot received). Put another way, your basis in the apartment building equals its fair market value of $3 million at the time of the exchange minus the $2.4 million gain that’s deferred under the like-kind exchange rules.

Important note: Tax on the gain has only been deferred, not avoided. You’ll owe tax on the $2.4 million gain when the property is eventually sold (unless you execute another like-kind exchange, which further defers the tax hit). However, if you hang on to the replacement property (the apartment building in the example) until you die, the deferred gain will be eliminated thanks to the date-of-death basis step-up rule.

Under that rule, the basis of the building is stepped up to its fair market value as of the date of your death (or the alternate valuation date, which is six months after you die). So, your heirs could sell the building shortly after you pass away and owe little or no tax on the sale. They would owe tax only on postdeath appreciation, if any.

Right for You?

Under the right circumstances, combining the home sale gain exclusion with a tax-deferred Sec. 1031 like-kind exchange can save significant taxes if you plan to sell a highly appreciated principal residence. If you think this strategy might work for you, consult your tax advisor to discuss the right time to convert your home into a rental property. He or she can help execute this strategy under current tax law.

OSHA Log Posting Tips

Posted on February 1, 2019July 19, 2024 by Debra Barcuch

Injury and illness reports aren’t generally fascinating reading material. Even so, the Occupational Safety and Health Administration (OSHA) requires most businesses to fill out detailed reports of work-related injuries and illness, and to post them conspicuously. From February 1 through April 30 the logs (known as OSHA Form 300 logs) for the prior calendar year must be displayed in an area where employees can view them.

Depending on the size of your company and the industry you’re in, you may qualify for an exemption. The details are outlined below.

Company Size and Industry

If you had more than 10 employees at any time throughout the year, even if your head count was 10 or fewer for 11-1/2 months, you’re subject to OSHA’s recordkeeping and reporting requirements.

Traditionally, companies in the retail, insurance, finance and real estate sectors have been considered exempt. Since 2015, however, OSHA has used a more elaborate industry classification system to determine “low-hazard” exemption status based on the North American Industry Classification System (NAICS). To find your business’s industry code, visit the NAICS site.

In addition to industries that have long been required to report to OSHA, there’s a list of “partially exempt” industry sectors. And there’s a list of sectors added since 2015, all of which must maintain injury and illness logs. If you’re in doubt about whether your industry is covered by OSHA, contact your area OSHA office to be sure. Also, even if you’re off the hook with federal reporting, check with your state to determine what, if any, state reporting and posting standards you must adhere to.

Reporting Basics

If you’re new to tracking OSHA reports, here’s a quick reminder of what you need to know. The basic recordkeeping and reporting requirements for companies that fall under the requirement involve these three forms:

Log of Work-Related Injuries and Illnesses OSHA Form 300 (and others listed below), which you can find on OSHA’s website.

Summary of Work-Related Injuries and Illnesses (OSHA Form 300A), and

Injury and Illness Incident Report (OSHA Form 301).

With a little luck, you won’t have any work-related injuries or illnesses to include on those forms, but you’ll still need to keep and post the log even if it’s empty. On the positive side, “no news” is good news.

OSHA Form 300 logs can be highly detailed. In addition to a basic description of an injury or illness, you must also provide the number of days away from work, or working with modified duties. “Modified duties” is considered a work restriction, even if the employee’s job is only changed in a minor way.

What should you do with Form 300 logs once they’re complete? Don’t send them to OSHA, but don’t dispose of them. You could later undergo an OSHA inspection and must be able to show you’ve properly maintained logs or face penalties.

Serious Cases

If you’ve never had a serious injury or illness at your business, you might be unaware that such cases need to be promptly reported directly to OSHA, either by telephone or using an online form on OSHA’s website.

Here are the specific deadlines you need to know:

Reportable events must be logged within a week.

Events that involve inpatient hospitalization, amputation or eye loss (both of which presumably would also involve an inpatient hospitalization), within 24 hours.

Fatalities must be reported within eight hours.

Common Reporting Errors

Until you become familiar with keeping OSHA logs, it cab be easy to miss details. Here’s a list of common reporting errors to avoid in the event your records are inspected.

Failing to have a company executive certify the accuracy of data reported on forms.

Failing to report medical treatment (other than basic first aid, which is exempted).

Not using or including an employee’s description of the illness or injury.

Not reporting incidents that involve temporary or contract workers,

Misclassifying an illness as an injury. Incidents cumulative in nature (for example, noise-induced hearing loss) are generally considered as “illnesses.” In contrast, an injury involves a single exposure or event.

Not reporting an incident because the employee didn’t report it to you until several days afterwards.

Using work days instead of calendar days to report the number of days away from work or days worked under restrictions necessitated by the injury or illness.

Last Words

Given the detailed reporting that OSHA requires, you may wonder if all that work benefits your company in any way, apart from the avoidance of penalties. Consider this: The practice of reviewing your own records of reported injuries or illnesses can provide insight on patterns or conditions that you need to address to improve the safety of your workplace. That’s always a win.

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Illinois Law Passed

What’s Happening in Other States?

3 Favorable TCJA Changes for Businesses

1. Tax Rate Changes

2. New Deduction for Income from Pass-Through Business Entities

3. Expanded First-Year Depreciation Breaks

Stock vs. Asset Purchase

Divergent Objectives

Balancing Act

Purchase Price Allocations

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Upsides of Analytics

1. Enhanced cost efficiency.

2. Improved productivity.

3. Higher customer satisfaction.

Surviving and Thriving

4 Best Practices

1. Delegate, delegate, delegate.

2. Set priorities.

3. Don’t procrastinate.

4. Block out distractions.

Find What Works for You

Defining a Business under the QBI Regulations

Basics of the QBI Deduction

Potential Limitations

New Guidance for Rental Real Estate Enterprises

Eligibility Requirements

Ready, Set, Go

Double Taxation

Excess Accumulated Earnings

Personal Holding Companies

1. Income test.

2. Ownership test.

Should Your Business Operate as a C Corporation?

Tax Law Changes

Withholding Basics

Safe Harbors

IRS Relief

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Medicare Basics

Medicare Part A.

Medicare Part B.

Medicare Part D.

Medigap.

Medicare Advantage.

Tax Deductions for Medicare Premiums

For More Information

Timing is Critical

Avoid Tax with the Home Sale Gain Exclusion

Defer Tax with a Like-Kind Exchange

The Mechanics

Let’s Look at an Example

Right for You?

Company Size and Industry

Reporting Basics

Serious Cases

Common Reporting Errors

Last Words

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