How the Tax Cuts and Jobs Act affects you

As we approach the tax season we are starting to get more clarity on the Tax Cut and Jobs Act (TCJA or sometimes referred to as “The Keep CPA’s and Lawyers well employed Act”).  I recently attended an excellent event specifically focused on Private Investment Fund Accounting and Taxes and wanted to share a few key takeaways from that event that may be relevant to you and your business.  Some of the changes particularly relevant to SBRE entrepreneurs include:

  • Deduction for Qualified Business Income
  • New limitations on Business Interest Expense
  • Best practice for footnotes and disclosures

Deduction for Qualified Business Income: One key provision of the TCJA is the 20% deduction for Qualified Business Income (QBI) in calculating net taxable income for individuals, estates and trust, which takes the federal tax rate from 37% to 29.6% (subject to various factors). This deduction was put in place by Congress to discourage people from switching entity types in response to the drop in the corporate tax rate.  QBI is generally the net income from a qualified trade or business; investment income is excluded, except for REIT ordinary dividend income.

It is important to note that a qualified trade or business may not be a specified service trade or business (SSTB), the definition of which can be found here. There is, however, a de minimus exception for taxpayers with taxable income below certain thresholds who may still claim the 20% deduction even if the income is from a SSTB. Depending on your business model this means that you may only be taxed on 80% of your share of net income!

New Limitations on Business Interest Expenses: Another key provision for businesses is the limitation on business interest expense, which is limited to the sum of the taxpayer’s business interest income, plus 30% of the taxpayer’s adjusted taxable income, which approximates EBITDA (until 2022) and EBIT thereafter.  This limitation does not apply to a “small business,” generally defined as a partnership or corporation with average annual gross business receipts over a rolling three-year period of $25M or less. There is a special provision that allows real estate businesses to opt out of these interest deduction limitation rules if they adopt the “Alternative Depreciation System,” a concept your tax service provider can help you with.  At the State tax level, most states have adopted the Federal standard, although many states have deferred adoption dates. Depending on your entity structure and use of leverage, you may not want to take this exception.

Best practice for footnotes and disclosures: The conference I attended also included audit and investor focused discussions, and discussions around current topics of interest to regulators. Key issues included:

  • Desire for transparency, consistency and clarity from investors when it comes to audited financial statements (make it simple for investors to understand by including charts and graphs in lieu of verbiage)
  • Ensure all footnotes are consistent with the Fund documents
  • Related parties are becoming more of a hot topic – disclose what is happening (loans, guarantees, family ownership, board seats, etc.)
  • Consistency in valuation approach
  • Disclosure of subsequent events such as redemptions (actual and requested), contributions, related party activity, and significant changes in asset performance

As always, you should consult with your duly licensed CPA to ensure that you are applying these rules appropriately for your fund. Although Redwood is not a CPA, we can help you understand how these issues may be treated, as well as ideas about which issues you should raise with your CPA. If you have any questions don’t hesitate to reach out to us if you have any questions.

 

Erica England, C.P.A

Redwood’s Chief Accounting Officer Erica England C.P.A. has 10+ years of experience working in the private equity industry and is always happy to discuss how Redwood could help you with your fund administration needs. Feel free to reach out to Erica at erica.england@redwoodrea.com to learn more.

 

 

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.
Posted in Tax

Tax Season is Near – let us help you prepare!

In preparation for the 2019 tax season Erica England, Redwood’s Chief Accounting Officer, reached out to Beeta Lecha, Senior Tax Manager at Spiegel Accountancy, to get some tips for ensuring a smooth, stress-free tax season for you and your investors who will be anxious to get their K-1’s as soon as possible. Her article that follows is a great resource that discusses:

  • The impact of the recent Tax Cuts and Jobs Act legislation
  • Management of expectations and due dates
  • Steps to reduce the pressure of busy season

Click here to read how to Prepare for Audit and Tax Season

Of course, each client’s situation is unique, and the tips discussed by Beeta may or may not apply to you.  You should also not rely on her article as legal or accounting advice but should consult with your own attorneys and CPAs about the issues she discusses.

Please feel free to reach out to Beeta at beeta@spiegelcorp.com or on 925.949.5687, or Erica at erica.england@redwoodrea.com if you have any questions you would like to discuss.  Thank you for your continued support of Redwood and for allowing us to be part of your success!

 

 

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post, the attachment, or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.
Posted in Tax

Biggest tax break for real estate investors since the 1031 exchange

Erica England, Redwood’s Chief Accounting Officer, recently attended a capital raise and technology webinar where one of the presenters mentioned the Opportunity Zone tax reduction that is part of the Tax Cuts and Jobs Act. This program is replete with new opportunities from which you may benefit. We reached out to our colleague Dustin at Berkowitz Pollack Brant CPA’s, with whom we share several mutual clients, to get his view on how this program has already affected his clients and what untapped opportunities lie ahead.

Dustin provided an excellent summary of how the program works including,

  • Opportunity to roll virtually any appreciated asset into a defined Opportunity Fund and defer capital gains taxes
  • Potential to avoid gains on sale of Opportunity Fund properties
  • Potential to realize a step-up in the basis of original investments

Click on the link to read the summary:  Opportunity Zones

Fairway America’s, CEO, Matt Burk has referenced another informative article about this subject.  Click here to read and learn.

Please feel free to reach out to Dustin at dgrizzle@bpbcpa.com or Erica at erica.england@redwoodrea.com if you would like to learn more and thank you for your support of Redwood.

 

 

Neither Fairway America nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this email or the related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving materials may rely on them as a substitute for appropriate professional advice. Fairway America strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.
Posted in Tax