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SolutionSnewSletter - FirSt Quarter 2019
Artificial Intelligence Pros & Cons page 5The Windes Corporate Gallery Award page 6WE LEAD in the Community page 6Jeff Fields on the Tax Cuts and Jobs Act page 7 Samantha Graboff on How to Prepare for an Employee Benefit Audit page 7Rob Henderson on Individual Income Tax Provisions page 7Windes Welcomes New Partner Kevin Wiest page 8Robin Massingale and Guy Nicio Panelists at NAIOP University Seminars page 8
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www.windes.com
The Treasury recently released proposed regulations under Internal Revenue Code (IRC) Section 163(j), which created business interest deduction limitations. The proposed regulations generally apply for tax years beginning after December 31, 2017. Taxpayers may apply the proposed regulations until final regulations are published, as long as the rules of the proposed regulations are consistently applied.
BackgroundFor tax years beginning after December 31, 2017, the Tax Cuts and Jobs Act (TCJA) amended IRC Section 163(j) to limit a taxpayer’s business interest expense deduction to the sum of: (i) business interest income, (ii) 30% of adjusted taxable income (ATI), and (iii) floor plan financing
Required Minimum Distribution: Don’t Miss It!In general, owners of traditional IRAs and participants in qualified retirement plans who are over age 70½ must take a required minimum distribution (RMD) every year. However, non-5%-owner participants in qualified retirement plans who continue to work after age 70½ may delay their RMD until they actually retire, but only if allowed by the plan.
The first RMD may be delayed until the April 1st following the year that the distributions are required to begin. Failure to take a RMD timely triggers a 50% excise tax
Increased Gift Tax Exemptions: Limited Time Offer?In the last issue we wrote about some of the recent changes to the estate and gift tax landscape, as well as the importance of having your estate planning documents reviewed and updated to make sure you and your heirs are able to take advantage of these recent changes. In this issue, we want to further expand on the changes to the Estate and Gift Tax under the Tax Cuts and Jobs Act (TCJA), which became effective January 1, 2018.
Under the previous law, individuals could gift, during their lifetime, up to $5 million (adjusted for inflation after 2011; the
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Business Interest Deductions Clarified Under IRC Section 163(j)
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interest expense. Any business interest expense not deductible in a tax year is generally carried forward to the succeeding tax year. The limitation applies to all taxpayers, except for specific small businesses that meet the gross receipts test and certain trades or businesses.
Exceptions The business interest deduction limitations under the proposed regulations do not apply to small businesses and ‘excepted trades or businesses’ that qualify for one of the following exceptions:
• Small business exemption - A small business exemption applies for a tax year to taxpayers with an annual average of $25 million or less in gross receipts over the three prior tax years. If a small business is commonly controlled by the same owner(s) and the related-party rule under IRC Section 267 applies, the prior three years of annual average gross receipts from each entity will need to be aggregated in applying the $25 million threshold for the small business exception. In addition, the exception may also not apply if the business is considered as a tax shelter.
• Excepted trade or business - An excepted trade or business includes the trade or business of performing services as an employee, an electing real property trade or business, an electing farming business, and certain regulated utility businesses.
Electing Real Property Trade or BusinessIRC Section 163(j) does not apply to any “electing real property trade or business” (RPTB). Real estate professionals should be aware that once the election is made, it is irrevocable. This may appear attractive for highly leveraged real estate investments, but there is a trade-off which may not be advantageous. An electing RPTB must depreciate its nonresidential real property, residential rental property and qualified improvement property using the alternative depreciation system. This would have the effect of disqualifying certain assets from accelerated depreciation (e.g., bonus depreciation) and longer depreciable useful lives. As a result, one must carefully consider the benefit of making this election in lieu of accelerated depreciation.
A trade or business includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
Additional proposed regulations provide the following rules for defining the term “real property” for purposes of the types of trades or businesses that qualify as “real property trades or businesses:”
• Generally, “real property” means land, buildings, and other inherently permanent structures that are permanently affixed to land, but not assets that serve an “active function,” such as an item of machinery or equipment (e.g., HVAC system, elevator or escalator).
• Provides definitions of the terms “real property operation” and “real property management,” but reserves definitions for real property “development,” “redevelopment,” “construction,” “reconstruction,” “acquisition,” “conversion,” and “rental.” An example clarifies that a taxpayer’s ownership and operation of a luxury hotel may constitute a “real property operation” and thus be an eligible RPTB.
Business Interest Deductions Clarified Under IRC Section 163(j)
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on the amount of the underpayment. The penalty tax is payable by the taxpayer or, if deceased, the beneficiary. However, the Internal Revenue Service (IRS) can waive the penalty if the taxpayer can show that any shortfall in the amount of the RMD is due to reasonable error and if adequate steps were taken to remedy the violation. A taxpayer can request a waiver of the penalty by following these steps:
1. Take the missed required minimum distribution as soon as it is discovered.
2. File IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. The penalty tax is not required to be paid with the form.
3. Attach to IRS Form 5329 a statement explaining the shortfall and the steps taken to rectify the error. The IRS offers no formal definition on what constitutes a “reasonable error,” but some acceptable explanations might include: illness, a death in the family or a change in address that disrupted essential communication regarding the required minimum distribution.
Following submission of IRS Form 5329, the IRS will review the information and respond. While there is no guarantee, there is a good chance the IRS will waive the penalty tax.
Failure to take an RMD from a qualified retirement plan can result in plan disqualification. The plan sponsor can file an application with the IRS under their Voluntary Correction Program (VCP) to report the missed RMD and request a waiver of the excise tax on behalf of the affected participants and beneficiaries.
Since RMD failures are not uncommon, it is important that plan sponsors take appropriate steps to monitor the age of all participants who are approaching age 70 to avoid missing any RMD. Taxpayers should take the necessary steps to make sure the correct distribution occurs each year. It is good practice to take an inventory of every retirement account that is subject to the RMD rules at the beginning of each year.
If you have any questions or would like more information, please contact Connie Lee at [email protected] or 844.4WINDES (844.494.6337).
Required Minimum Distribution: Don’t Miss It!
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Connie Lee, CPC, QPA, QKASenior Manager Employee Benefit Services
These proposed regulations contain an example in which a partner in a partnership that engages in a real property trade or business is treated as engaging in the partnership’s activities, further suggesting that the partner may elect to treat its partnership interest as an electing RPTB.
The proposed regulations provide much-needed clarification to the real estate industry regarding the application of IRC Section 163(j).
If you have questions or would like more information, please contact Ed Fazio at [email protected] or 844.4WINDES (844.494.6337).
Ed Fazio, CPA, MST, CM&AASenior ManagerTax & Accounting Services
Business Interest Deductions Clarified Under IRC Section 163(j)
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Increased Gift Tax Exemptions: Limited Time Offer?
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2017 amount was $5,490,000). The TCJA more than doubled this amount to an astounding $11.4 million (as adjusted for inflation) per individual for the 2019 tax year. This means that a married couple can gift up to $22.8 million of assets before being subject to the gift tax. Thus, there is an extraordinary opportunity to transfer family wealth to succeeding generations and avoid the estate tax.
The temporary nature of this increased exemption raised a very common question: What happens to individuals who make gifts in excess of the $5 million amount and die after 2025 when the exemption reverts to $5 million? Will the gifts in excess of the $5 million be “clawed back” into the estate and create an unfavorable tax situation?
To illustrate the problem, assume taxpayer “X” made a gift of $8 million in 2019, when the exemption amount was $10 million (not adjusted for inflation to keep the example simple). Taxpayer “X” dies in 2026, when the exemption amount is $5 million, having a taxable estate of $4 million. Based on a literal application of the current law, the estate tax would be approximately $2.8 million, which is equal to a 40% estate tax on $7 million (specifically, the $7 million being the sum of the $4 million taxable estate and $3 million of the 2019 gift sheltered from gift tax by the increased exemption amount). In effect, this would impose estate tax on the portion of the 2019 gift that was sheltered from gift tax by the increased exemption amount allowable at that time.
The good news is the IRS recently issued proposed regulations which allow the estate of a deceased taxpayer an adjustment that eliminates any negative impact for taking advantage of the temporary increase in the exemption amount.
The significance of these proposed regulations is two-fold. First, it clarifies the position of the Internal Revenue Service that taxpayers should not be negatively impacted by taking advantage of the temporary increase in the exemption amount. Second, and perhaps more importantly, it provides a framework and foundation for the Internal Revenue Service to decrease the estate and gift tax exemption.
Taxpayers have become accustomed to ever-increasing estate and gift tax exemption amounts, allowing procrastinators the same benefit as diligent planners. However, the political winds seem to be shifting, as the foundation has been laid for a decrease in the exemption.
We recommend taking advantage of these increased exemption amounts sooner, rather than later. While the current increased exemption is scheduled to remain in effect through 2025, that day can be moved up at any time; therefore, we do not recommend waiting.
If you have questions or would like more information, please contact Kevin Wiest at [email protected] or 844.4WINDES (844.494.6337).
Kevin Wiest, CPA, MSTPartnerTax & Accounting Services
“X”s Estate in 2026 Exemption Used for Gift Made in 2019 Subtotal Less Exemption* Taxable Estate for Tax Computation Tax Rate Estate Tax
AFTER Proposed Regulations
BEFOREProposed Regulations
Result of change: A decrease in the Estate Tax of $1,200,000
* Pursuant to the new Proposed Regulations, in general, the exemption amount in the year of death will be the larger of the exemption in the year of death, or the exemption used in computing the taxpayer’s post 1976 taxable gifts.
4,000,000 8,000,000
12,000,000 ( 8,000,000 )
4,000,000 40%
1,600,000
4,000,000 8,000,000
12,000,000 ( 5,000,000 )
7,000,000 40%
2,800,000
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Kevin Wiest, CPA, MSTPartnerTax & Accounting Services
Artificial Intelligence Pros & Cons
Artificial Intelligence pros and cons should be a top priority as Artificial Intelligence (AI) capabilities rapidly evolve. AI has already secured its place throughout our digital world, and is now a growing force within the information security landscape.
ProsSecurity products increasingly rely on AI for detection of unauthorized activity or misappropriation of confidential data. Machine learning, a subset of AI, enables a computer program to learn patterns as it ingests data, leading to a remarkably fast analysis of huge amounts of information. This analysis may reveal anomalies that in turn may be indicators of a hacker’s unscrupulous activity.
ConsEverything that is good about AI and machine learning can be exploited by hackers for their own destructive, personal agendas. Considering the increased analytic power inherent in AI, it is possible to use AI and machine learning routines to make hacking more efficient. For example, researchers have demonstrated that malicious email phishing can be more successful with AI optimization. Other possibilities include improvements in response rates to misleading social media posts or using AI to guess passwords based on publically available information.
AI-powered defense may be the only way to battle AI-augmented hacking. Researchers at Webroot, a leading cybersecurity and anti-malware software provider, surveyed 400 U.S. cybersecurity professionals, finding that 87% are using AI to protect their organizations, while 91% of the same group believe hackers will use AI to improve their attack.
It is reasonable to think that protective AI will soon battle destructive AI for control of the cybersecurity world. As hackers employ AI to create increasingly effective threats, cyber defenders must include AI in their counterstrategies. Today’s best practices for effective information security include automation. Soon, the inclusion of AI as a defensive component will likely be necessary.
If you have questions or would like more information, please contact us at [email protected] or 844.4WINDES (844.494.6337)
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Windes in the Community
The Windes Corporate Gallery Award
The Windes Corporate Gallery Award recognizes exceptional artists enrolled in the Student Arts program at California State University, Long Beach (CSULB), and is presented semiannually to a student in the program.
Our awardee is Briana Miyoko Stanley with her piece, “1.9.18.” Briana is a graduate student at CSULB, working towards her Masters of Fine Art in Drawing and Painting. She graduated Cum Laude with a Bachelor of Arts in Art from Westmount College in Santa Barbara. Briana has also studied in New Zealand, and her work has been included in a multitude of exhibitions throughout California.
WE LEAD in the Community
WE LEAD (Women’s Executive Leadership Education and Development) is a leadership and mentoring program for Windes employees that encourages the retention and advancement of women to positions of leadership through education, business development opportunities and the establishment of a solid support network. The group hosted a “Women Helping Women” networking event benefitting Working Wardrobes of Orange County, where founder and CEO Jerri Rosen spoke about her mission to help women of domestic violence and how the organization has grown to become what it is today.
Working Wardrobes assists men, women, veterans, and young adults overcoming difficult challenges – alcohol and substance abuse, domestic violence, incarceration, homelessness, catastrophic illness, and traumatic financial loss through mentoring and educational programs that provide workforce readiness in an atmosphere of dignity.
In addition to donations received at the event, Windes employees brought gently used professional attire and accessories to the office for donation. The response was phenomenal, with nearly 500 items donated, along with a cash donation of $1,000.
Managing Partner John Di Carlo with Briana in front of her award-winning work in the Windes lobby, Long Beach.
Windes Marketing Manager Carolyn De Baca loading donations into Working Wardrobe’s truck.
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Windes Leadership
Jeff Fields on the Tax Cuts and Jobs Act Jeff Fields, Tax & Accounting Partner, presented at the Commercial Real Estate 2018 Forecast sponsored by NAI Capital, Northern Trust, and Windes at the Pacific Club in Newport Beach. Jeff explained the impact of the Tax Cuts and Jobs Act on leased real estate and discussed advanced strategies for tax planning.
Jeff is the Partner-in-Charge of the firm’s Orange County offices and focuses on serving closely held businesses and their owners, real estate investors, and corporations. Jeff’s experience ranges from consulting Fortune 500 companies to providing comprehensive tax services to family-owned businesses and corporations.
Jeff Fields, CPA, MST Partner, Tax & Accounting Services
Rob Henderson on Individual Income Tax ProvisionsRob Henderson, Tax & Accounting Partner, spoke to the Orange County Section of the Institute of Electrical and Electronic Engineers Product Safety Engineering Society. Rob’s presentation covered the newly enacted business and individual income tax provisions in the Tax Cuts and Jobs Act, along with strategies that businesses in the electrical and electronic engineering sector can utilize to minimize their tax burden.
Rob specializes in providing tax advisory, accounting, and compliance services to middle-market businesses and their owners, with emphasis on assisting clients to plan for and manage their income tax liabilities.
Samantha Graboff on How to Prepare for an Employee Benefit AuditSamantha Graboff, Audit & Assurance Senior Manager, was a featured speaker at the Orange County Chapter of the Western Pension & Benefits Council’s 11th Annual ABCs of Pension Plans Seminar in Irvine on January 24. The Orange County Chapter of the Western Pension & Benefits Council promotes an exchange of information and ideas among employee benefits professionals.
Samantha’s presentation focused on preparing for, ensuring, and completing an employee benefit plan audit. Samantha specializes in audit and consulting services to employee benefit plans of private, public, and nonprofit plan sponsors, including 401(k), 403(b), profit-sharing, and employee stock ownership plans. Samantha Graboff, CPA
Senior Manager, Audit & Assurance Services
Rob Henderson, CPA, MSTPartner
Tax & Accounting Services
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Windes Leadership
SOLUTIONS is published quarterly for the clients, business associates, and friends of Windes. The information presented in this newsletter is intended as general information and may not apply in every case. Please contact Windes, Inc. for specific advice about your particular situation. Comments Email: [email protected]
Member of:American Institute of Certified Public Accountants (AICPA)AICPA Employee Benefit Plan Audit Quality CenterAICPA Governmental Audit Quality CenterAmerican Society of Pension Professionals and Actuaries (ASPPA)California Society of Certified Public Accountants (CalCPA)Center for Public Company Audit Firms of the AICPAESOP AssociationNational Center for Employee OwnershipNational Institute of Pension Administrators (NIPA)Public Company Accounting Oversight Board (PCAOB) RegisteredWestern Pension and Benefits Council Orange County
EditorJeffrey H. Parsell, CPA
Editorial BoardTherese S. Cheevers, APA, ERPACarolyn K. De BacaKeith K. HigginsCraig M. Ima, MBABella P. Wang, CPA, MST
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Robin Massingale and Guy Nicio Panelists at NAIOP University Seminars
Robin Massingale, and Guy Nicio, Windes Tax & Accounting Partners, were panelists at two separate NAIOP University (NAIOP-U) seminars on Opportunity Zones, a new nationwide community development program established by Congress in the Tax Cuts and Jobs Act to encourage long-term investments in certain areas.
NAIOP is a leading organization for developers, owners, and related professionals in industrial, office, and mixed-use real estate. The NAIOP SoCal Chapter, serving Orange and Los Angeles Counties, encompasses over 1,000 members, and through NAIOP-U, offers educational workshops to its southern California chapter members. Robin participated at an Orange County workshop, while Guy spoke at a Los Angeles event.
Robin specializes in taxation and accounting for closely held companies and their owners. She works with business owners on tax planning and projections as well as assisting with accounting matters to meet the individual needs of the owners. Guy possess technical expertise and knowledge in the areas of federal and multi-state income taxes for businesses and individuals, income tax audit representation, payroll and payroll taxes, sales and use taxes, personal property taxes, and accounting. Both Robin and Guy serve a wide variety of clients in the real estate and construction industries.
Robin Massingale, CPA, MST, is pictured on the left.
Windes Welcomes New Partner
We are pleased to announce that Kevin H. Wiest has joined the partnership of Windes. Kevin is based out of our newest Orange County office located at 2603 Main Street in Irvine. Kevin joins Windes with nearly 20 years of professional experience at an established regional public accounting firm where he was a practice leader in its estate and trust services practice.
Kevin’s professional focus is helping high-net-worth individuals and their families minimize taxes through his comprehensive knowledge of individual income tax, estate and transfer taxes, fiduciary income tax, gift tax, generation skipping transfer tax, as well as postmortem planning, and estate and trust administration.
Kevin has a Bachelor of Arts in Business Administration from California State University, Fullerton, with a concentration in Accounting and received a Master of Science degree in Taxation from Golden Gate University. He is a member of the American Institute of Certified Public Accountants (AICPA) and the California Society of Certified Public Accountants (CalCPA).
Kevin Wiest, CPA, MSTPartner
Tax & Accounting Services
Guy Nicio, CPA, MST, is pictured second from the left.
